Financial Management Essay: Case Analysis Of Woolworths

Question

Task:
Students will select a company and prepare a 2000-word financial management essay, using the financial management concepts.

Answer

Executive Summary
The aim of the financial management essay is to provide an analysis of the financial and non-financial indicators of the company. Both these factors enable a stakeholder to take valid decision. To complete the study, Woolworths, a giant in the retail segment and listed on the ASX, has been selected. With the headquarters located in Belle Vista and an employee strength of more than 2,15,000 employees, the company has crafted a place for itself in the market. The group function as a major food, liquor, and retailer of merchandise (Woolworths 2020). It even has its presence in the hospitality and gaming segment. Woolworths is regarded as a major Australian trusted brand and caters to a list of more than 28 million customers (Woolworths 2020). The report aims to provide an analysis into the financial and non-financial measures of the company. The financial measures comprise of the ratio analysis of the four-segment that is profitability, liquidity, efficiency, and solvency while the non-financial measure is through the market share and the environmental factors.

Analysis
As per the analysis it is indicated that the sales of the company has increased significantly. All business apart from the hotel business reported strong number in the year. Thereby the gross profits from the continuing operation were higher however was offset due to the lower margin in the hotels. Similarly, the online reach was 5.5% which was 131 bps more than the previous year. Online growth was significant in every business due to COVID (Mitchell 2020). Digital assets were more in preference by the customers and went up by 63.8% as compared to 2019. The assets of the company stood at $2149 million which was 7.8% more than 2019 (Woolworths 2020). The increment is owing to new stores establishment and increment in the property development activity.

The total debt increased due to the lease liabilities recognition by the adoption of AASB 16. Decline in total equity was seen by $1452 and was mainly due to the application of AASB 16.

Ratio analysis

• Profitability
  As seen from the ratio analysis that the profitability of the company has been indicated through the computation of ROA, ROE, NPM, and GPM.

  The return on assets for the company has declined considerably, followed by the decline in return on equity. The return on assets dropped to 4% in 2020, followed by the drop in return on equity to 12%. The main reason for the drop in the ratio can be cited as the inability of the organization to make fuller utilization of the assets and equity in the wake of Covid 19; hence there was a fall in both the ratio (Masige 2020). The net profit margin and the gross profit margin stood at 2% and 29% & respectively. The higher GPM was offset due to the lower margins in the hotel business. With the decrease in the Net profit margin in year 2020 the return on equity has also reduced to 50% as compared with the last year, but in case of Return on equity in year 2020 is 12.00% and in year 2019 was 25.64%, the company has used the fund for the purchase of assets during the current year and the closing assets are $38472 whereas the opening assets was $23941 and therefore the return on assets has reduced to 3.87 this is due to decreased in Net profit and also due to increase in investment in asset during the year. Thus, the company should focus on reducing the indirect expense and increase the net profit and return on equity of the company to increase the stakeholder confidence and growth of the company

• Liquidity
  Further, the company's liquidity is under problem because both the current and quick ratio is weak. The current ratio stood at 0.61:1, meaning the company has less than $1 of current assets for every $1 of current liabilities. Thus the company should focus in improving the current ratio of the company by proper working capital and current asset and current liabilities management and bring to the ideal ratio. On the contrary, the quick ratio stands poor as the ratio is just 0.27:1. So, the Current ratio in year 2020 has decreased as compared to last year instead of improving. The company shall face cash crunches if the current ratio is below 2.00 times. Quick ratio is the most liquidity ratio that is in the current assets the inventory are not considered at the time of calculating quick ratio, thus quick ratio has improved a bit in year 2020 to 0.28 times as compared with last year 0.23 times. This means the liquidity of the company is under problem. The ideal quick ratio is 1.00 times so the company should focus on increasing the quick assets such as cash, bank balance, fixed deposits so that the do not face cash crunches in the business operation (Gowthorpe 2018). The company need to improve the liquidity ratio as both the current ratio and quick ratio is currently not at optimal level
• Efficiency
  There is no improvement in the overall efficiency ratios in year 2020 as compared with year 2019. Asset turnover ratio has reduced to 1.94 times in year 2020 as compared to 2.56 times in year 2019. This reduction is on account of additional asset purchased during the year. The company has used the fund for the purchase of assets during the current year and the closing assets are $38472 whereas the opening assets was $23941 thus the company purchased assets of $14532 during the year. The cash flow return on Assets is almost same as compared with last year.
• Solvency
  Lastly, the solvency of the company indicates a presence of a higher debt component because the equity debt is 3.25 and the debt ratio is 76%. The reason for the increment in the debt is linked to the recognition of the lease liabilities which was due to the adoption of AASB 16 (Woolworths 2020). At the same time, the total equity decline by $1452 and can be cited due to the initial AASB16 application. The Debt equity ratio of the company is 3.26 times in year 2020 as compared to 1.26 in year 2019, this means the company has raised huge capital from debt funding and thus the debt equity ratio has become 3.26 times which is not a favorable ratio for any company. The ideal ratio is 2:1 i.e, not exceed 200%, but in year 2020 the debt ratio is 3.26 times due to this the company interest obligation has increased and thus the net profit of the company is drastically affected that the net profit margin has come down to 3.26% in year 2020 from 11.77% in year 2019. The company debt in year 2019 was $13432 whereas in year 2020 it is $29440 this means that the company has increased debt to 100% as compared with year (Woolworths 2020)

The ideal debt ratio is said to be between 0.3 to 0.6 times thus the debt ratio in year 2020 is 0.77 times so the company should focus to reduce the debt funding and increase the funds from equity so that both the debt-equity ratio and debt ratio is maintained to the ideal ratio

Non-Financial Performance Indicators

Woolworth's market share has increased due to the enhancement of the food division in Australia. The progress was massive through the branded stores and renovations (Hoknell 2019). Owing to the Covid pandemic, the company made a significant increment in the safe and convenient method to shop. The online group sales in F20 strike at $3.5 million where achievement of 5.5% was noted. The strong online sales reflected the demand of the customers in terms of convenient shopping which was further accelerated due to the crisis of Covid-19. Further, the company undertook the renovation and provided a new look to the business (Masige 2020). The sale of groceries helped the company to overtake Aldi and Wesfarmers.

The lower production cost was the main reason that helped the company to tackle competition. The company has a strong after-sales service and is the main reason for surpassing Coles. Switching to online mode was the major initiative by the company that benefited the company in the Covid crisis and delivered happiness to customers.

Conclusion
The report strives to produce an evaluation of the financial and non-financial indicators. As per the report, the complete overview of the financial performance has been undertaken with the help of ratio analysis. As witnessed from the report, the profit for the year 2020 has dipped and is majorly due to the Covid pandemic. The dividend per share was 93 cents which indicate about the strong performance of the company. In the wake of this Covid, the group concentrated on online sales and provided the customer the desirable stuffs at the comfort of the home. Though the profit could not match the standard of 2019 yet it made significant sales and resulted in 2020. The reason why the company flourished is its customer-oriented method. It is thereby recommended for Woolworths to ensure a premium pricing strategy on the quality products. Some products are costlier as compared to the customers. Such planning will help the company to get hold of more customers.

Further, as per performance and analysis it can be commented that the company has strong fundamentals and the reason for the outstanding performance is the establishment of different division. Moreover, with the upgraded tools and techniques the company is able to provide major benefits to the customers. The dividend payment in the past 5 years is an apt example of the strong performance of the company. Hence, through the overall analysis it can be indicated that the company can deliver better result in the upcoming year when the situation is free from the Covid pandemic. The management is taking initiatives to create succession planning that helps promotion and guidance of the employees for meeting the challenges with ease. Therefore, it can be witnessed that Woolworths is highly attentive towards innovation, attraction and retaining of the workforce that motivates the workforce and helps to flourish. Hence, at this point of time, the company can be selected for the investment purpose as it has strong fundamentals, strong profitability, higher margins, better cost of doing business and better retailer.

References
Gowthorpe, C 2018, Business accounting and finance (Fourth ed.), Andover, Hampshire: Cengage

Hoknell, M 2019, Lesson from Woolworths- customer focus and measures what matters, retrieved 16 May 2020

Masige, S 2020, Woolworths Group reported a fall in profits last financial year as the pandemic slammed its hotels business, retrieved 16 May 2020 < https://www.businessinsider.com.au/woolworths-drop-in-profits-2020-financial-year-2020-8>

Mitchell, S 2020, Woolworths ramps up online and COVID-19 safety measures, retrieved 16 May 2020 < https://www.afr.com/companies/retail/woolworths-cuts-dividend-as-profits-fall-20200818-p55mzb>

Woolworths 2020, Our business 2020, retrieved 16 May 2020 < https://www.woolworthsgroup.com.au/page/about-us/our-brands>

Woolworths 2020, Woolworths 2020 annual report & accounts, retrieved 16 May 220 < < https://www.woolworthsgroup.com.au/icms_docs/195794_annual-report-2020.pdf >

Appendix

• Trend analysis

Financial summary
(A$’m)	2020	2019	Change	Trend analysis
Income Statement
Sales	63675	59984	3691	6.15%
Gross Profit	18570	17442	1128	6.47%
Net Profit	1209	2693	-1484	-55.11%
Balance Sheet
Assets	38472	23916	14556	60.86%
Liabilities	13432	13815	-383	-2.77%
Equity	9032	10101	-1069	-10.58%
Cash flow
Operating CF	4561	2948	1613	54.72%
Investing CF	-1945	-246	-1699	690.65%
Financing CF	-1612	-2917	1305	-44.74%
Net CF	1004	-211	1215	-575.83%



• Ratio Analysis

Profitability
		2020	2019
Return on Assets	Profit / Average total assets	1209 / ((38472 + 23941)/2)	2759 / ((23491 + 23391)/2)
		0.038741929	0.117699757
		3.874192876	11.77%
Return on Equity	Profit / Average equity	1209 / ((9032+10669)/2)	2759 / ((10669+10849)/2)
		0.122734887	0.256436472
		12%	25.64%
Net Profit Margin	Net profit / Sales or revenue	1209/63675	2759/ 59984
		0.018987044	0.045995599
		2%	4.60%
Gross Profit Margin	Gross profit / Sales or revenue	18570/63675	17442/59984
		0.29163722	0.290777541
		29%	29.08%
efficiency
		2020	2019
Asset turnover	Sales / Average total assets	59984 / ((38472 + 23491)/2)	59984 / ((23491 + 23391)/2)
		1.93612317	2.558935199
			2.558935199
Cashflow return on assets	Net cash from op activities / Average total assets	4561/ ((38472 + 23491)/2)	2948/((23491 + 23391)/2)
		0.147216887	0.125762553
			result times
liquidity
		2020	2019
Current Ratio	Total current assets / Total current liabilities	8125/13191	6298/8620
		0.615950269	0.73062645
			XX:1
Quick Ratio	(Total current assets - Inventory) / Total current liabilities	(8125-4434) / 13191	(6298-4280) / 8620
		0.279811993	0.234106729
solvency
Debt to Equity	Total debt / Total equity or Total liabilities / Total equity	29440/9032	13432/10484
	or Actual debt / Total equity	3.259521701	1.258974599
Debt ratio	Total debt / Total assets	29440/38472	13470/23571
		0.765231857	0.571464936
		77%	57%