Financial Analysis Essay

Executive Summary

A detailed discussion of the performance and trends of Woolworth Limited (WOW) is presented in this paper. In order to understand the current financial position of the company it becomes necessary to analyze the profitability, liquidity, long-term solvency, and cash flow of the company over a period of time. Such analysis can be made from the published financial statements. (Elliot & Elliot 2003,p.22) In the case of WOW, such an analysis reveals the following:

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§  The returns on assets and equity employed have shown a marked decline in the last two years. However, this may be due to the gestation period associated with new investments and the picture may improve in future years.

§  The gross margin has been more or less static over the years, while the net margin has shown small increases. However, there seems to be scope for improvement in these figures, which are less impressive than those of the competitors.

§  Inventory management is good and is characterized by a high inventory turnover that compares favorably with other companies in the industry.

§  The short-term liquidity position, while not being alarming, has scope for improvement.

§  The capital structure indicates that the company has reached its limit for long-term borrowing, and further increase in debt funds, without corresponding increases in equity, could signal a vulnerable long-term solvency position.

Introduction and purpose of analysis

“Financial Analysis is a diagnostic tool in assessing financing, investing and operating activities, and is an evaluation tool for managerial and other business decisions.” (Bernstein and Wild 2004, p.4.) This paper will analyze financial indicators for Woolworth Ltd. over a period of five years ending June 30, 2006 in order to assess the informational requirements of key potential users, including financial institutions, strategic investors, small investors and fund managers.  WOW will be evaluated in terms of profitability, financial stability and cash flow position.

Company and Industry Background

Company
Starting as a low price, variety retail operator, Woolworth opened its first store in 1924, and later became the first company to establish nationwide operations in the early 1960s. (IBIS World Report Retail Industry in Australia 2007) The company started diversifying into other businesses in 1983 with the acquisition of Dick Smith Electronics. Two years later, it bought into Safeway, a Victoria based supermarket chain. The 1990s saw the trend continue and strengthen as Woolworth joined the Australian stock Exchange, and forayed into a series of new business ventures that included Plus Petrol outlets NSW, Internet HomeShop service in Sydney, and Banking services in Queensland.  Continuing the trend into the new millennium, Woolworth Ltd. expanded its list of businesses with Tandy Electronics, Seventy-one supermarkets, and Internet grocery retailer GreenGrocer.com.au

Woolworth now has over 3,000 supermarket stores, plus other businesses in Australia and New Zealand and joint ventures with Tata Group in India. Woolworth Ltd is the second largest employer in Australia with over 140, 000 employees ranging in rural and regional areas (Woolworth Ltd official web site 2007).

Industry

The other major players in the industry, who are the main competitors of Woolworth include Coles group Limited, Wesfarmers Limited, and David Jones Limited. Woolworth and Coles group each have a market share of 13%. Wesfarmers with 1.5% and David Jones with 0.7% are the other two major players having a significant market share. The remaining 71.8% of the market share is divided among numerous other players that include sector-specific players such as Automotive Holdings Group, Harvey Norman, 7-eleven stores, and the Just Group,

Due to the competitive nature of the industry, price remains a key indicator. Competition based on product quality and branding has also played a big factor in the past few years (IBIS World Report Retail Industry in Australia 2007).

Analysis of Financial Report Data

Profitability and Efficiency of operations

Return on Assets

Table –1.1 (Appendix-A)

For the five years under analysis, the fixed asset position has been more or less static during the first two years. The year 2004 saw a minor increase in the assets position. However, the company has increased its fixed assets base substantially in the two years 2005 and 2006. Intangibles have also gone up substantially during these two years. The Return on Assets registered an increase from 17.9% in 2002 to 20.0% in 2003, and remained static at 20% during 2004. In 2005 and 2006, the ROA figure dropped to 14.9% and 11.4% respectively. This is perhaps understandable, as acquisition of assets does not translate into returns immediately. At the same time the additional assets have given some returns in their first year of employment, although not to the full extent, as reflected in the increase in the profits. Thus although at first sight it might appear that the company has failed to sustain its rate of earnings in the new investments, this is probably due to the gestation period that normally accompanies any new investment. Moreover, it is likely that the new assets were acquired sometime in the middle of the year, and hence cannot be expected to give full returns in the first year of operation.

Return on Equity

Table-1.2 (Appendix-A)

Unlike the Return on Assets, which has shown a steadily decreasing trend during the five years 2001-2006, the Return on Equity has been growing at an impressive rate between the years 2001 and 2005. This has been followed by a sharp dip in 2006. A look at the capital structure of the company during these years reveals that much of the asset additions up to the year 2005 have come through debt funding. The fact that the company has been able to substantially increase its Return on Equity during these years shows that the company has been leveraging debt funds to its advantage, and has been earning revenues that were much higher than the cost of the debt funds. The effect of this on the long-term solvency position, which is usually a concern in increasing debt funding, is being discussed separately. However, it is clear that the company has been efficient in managing its funds and earning high rates of returns till 2005. The Return on equity has taken a sharp dip in 2006 falling to 23.8% from 40.8% in 2005. This is because the equity base has more than doubled from around $2,000 million to more than $4,000 million. At the same time, the debt funds have also increased taking the total capital employed to a much higher figure compared to the previous year. This is also reflected in the increase in fixed assets. As already discussed in the previous chapter, the Return on Assets during the year 2006 has dipped sharply, but this is attributable to the gestation period associated with the employment of new assets. It would be too early to comment on the performance of the new assets or to come to any conclusions within a year of their employment, particularly because these assets might have been employed for only part of the year. Hence it seems safe to conclude, particularly in view of the past performance of the company, that the Return on Equity is likely to show improvement in the following years.

Gross and Net Profits Margins

Table-1.3 (Appendix-A)

Gross profit margin has been more or less steady at around 25% over the entire period of five years. The EBIT margin has grown from a little under 3.5% in 2001 to a little over 4.5% in 2006. The profit margin becomes important because it is one of the two components that determine the Return on Investment, the other being the turnover generated. A growing net margin reflects greater efficiency of operations. This shows that the company has been able to increase its returns more than proportionately from new investments. When compared to the performance of its closest competitor Coles, however, WOW seems to be lagging behind. Coles’ net margins for the years 2005 and 2006 were 5.4% and 6.1% respectively showing a healthy growth of 12.8%. (Cole Myer Annual Report 2006) For WOW the figures for the two years were 4.16% and 4.56%. These figures are much lower in absolute terms than the figures for Coles. Moreover the growth in net margin has been 9.6%. The corresponding figures for David Jones were 6.6% in 2005 and 8% in 2006 with a growth of 23%, reflecting much higher margins and growth rates. (David Jones Financial Statements 2006) This shows that while the figures for WOW are reasonable, there is scope for improvement in this area. From an investor’s point of view this signals a potential for higher growth rates provided that the company takes measures to realize this objective.

Asset-Turnover

Table-1.4 (Appendix-A)

The second component that determines the returns generated from a given asset base is the asset-turnover ratio. In the case of WOW, the Asset-turnover ratio has seen a steady decline over the years, dropping from 8.40 in 2001 to 4.22 in 2006. As discussed earlier, the drop in the last year could be because of the gestation period in realizing the full potential of the newly employed assets. However, this would not explain the long-term decline over the years. This shows that the company is failing to generate commensurate revenue from additional assets employed.

Thus the company has potential to improve both the efficiency of its operations and increase revenues from its expanded asset base.

Inventory Turnover

Table-1.5 (Appendix-A)

Inventory turnover represents the efficiency with which the organization is managing its inventory. Ideally an organization should be able to get the maximum turnover with a minimum inventory as holding higher levels of inventory eats into the profits. At the same time, a very low level of inventory carries with it the risk of stock-out situations in which the organization might lose sales because it does not have the particular item that is demanded. Hence a balance needs to be struck. The inventory-turnover ratio gives an indication of the efficiency with which the inventory is being managed. WOW’s inventory-turnover ratio ranges between 13 and 16.  This compares favorably with the figures for its major competitors. The inventory-turnover ratio for David Jones for 2006 was 6.65, while that for Coles was 12.00. As against these figures the inventory-turnover ratio for WOW for 2006 was 16.29.

The trend of the figures is also encouraging as the figure has been steadily increasing and has reached 16.29 in 2006 as against 13.31 in 2001. Thus the company’s inventory management appears to be very good.

Short-term liquidity

The short-term liquidity position shows the capability of a firm to meet its short-term payment obligations. (Neale & McElroy 2004, p.219) Failure to meet the short-term payment obligations can result in weakening of credit-worthiness and affect profitability by making purchasing terms less favorable and short-term credit costlier. The short-term liquidity of a firm can be measured through two vital ratios: Current ratio and Quick ratio

Current Ratio

Table-2.1 (Appendix-B)

This is the ratio of current assets to current liabilities. A ratio of 1 indicates that current assets are just sufficient to meet current liabilities, while a ratio less than 1 means that current assets are insufficient to meet current liabilities. The figure of current ratio has shown large fluctuations. The figure dipped to 0.66 in 2004 from 0.73 in 2001, rose slightly in 2005. There was, however, a substantial improvement in 2006 with the figure reaching 0.75. The comparative figure for Coles was at a healthier 1.05.

Equity Ratio

Table-2.2 (Appendix-B)

The equity ratio has registered a steady increase from 1.59 in 2002 to 2.16 in 2006, indicating a steadily increasing asset base against the equity capital.

Quick Ratio

Table-2.3 (Appendix-B)

The quick ratio measures the impact that inventory has on the current ratio. In the case of WOW, the ratio dipped to 0.25 in 2006 showing a heavier than desirable dependence on inventory for maintaining its liquidity. However, the figure has been steadily improving from 2001 when it was just 0.16.

Both the above ratios show that liquidity could potentially become a problem for WOW. At the same time, its inventory is being managed very well, giving it an advantage. An organization can take a certain amount of risk, and provided the day-to-day management of the affairs is sound, it should not encounter any major problem. From the track record of WOW, this definitely appears to be the case. Nonetheless, a better liquidity position should be aimed at.

Long-term Solvency

A firm that employs more long-term debt funds has the advantage of being able to earn more against its equity capital, when the going is good and the firm earns more than the cost of debt capital. However, if the profits are insufficient the company may face problems in meeting its interest payment commitments or repayment of loans when they become due. For this reason, it becomes important to strike a balance between the types of capital. (Gitman 2003, p.54) It was already seen that WOW has been managing to obtain a good return on its equity because of the judicious employment of debt capital. This section examines how safe this approach has been

The Debt-Asset ratio

Table-3.1 (Appendix-C)

The debt-asset ratio has increased from a low of 0.11 in 2001 to 0.47 in 2006. While the figure for 2006 by itself does not seem to be alarming, the trend of increasing debt-asset ratio may require careful consideration. The 2006 figure of debt-asset ratio was 0.29 for Coles, and 0.096 for David Jones. These figures show that the competition is employing a much lower ratio that is closer to the earlier figures for WOW. The increasing trend has been mainly due to the fact that WOW has depended on borrowed funds for new asset acquisition with lower increase in the equity base. As was seen earlier, this has resulted in a better return on equity. However, WOW may not be able to continue this trend further without sacrificing its long-term solvency position.

Debt-Equity Ratio

Table-3.2 (Appendix-B)

The debt-equity ratio dipped to as low as 0.08 in 2004 from 0.13 in 2002 and 0.19 in 2003. It registered a dramatic increase and crossed 1.00 in 2005 before settling at 0.89 for 2006. The latest figures show that the company has a very high quantum of debt in its current capital structure. This is not a healthy indicator for long-term solvency.  Although a norm of debt-equity ratio of up to 2:1 is not unheard of, in the case of WOW both the trend and the comparison with competition seem to indicate that the company might need to restrain its future borrowings. The debt-equity ratio for Coles was 0.44 in 2006 while the figure for David Jones was 0.07. These figures indicate that the ratio for WOW is much higher than what seems to prevail in the industry.

Times Interest Earned

Table-3.3 (Appendix-C)

This figure indicates the capability of the firm to service the interest on borrowed funds. The figure for WOW for the fiscal 2006 is a healthy 8.53 indicating that the company has a very comfortable position of earnings in relation to its interest burden. The trend has, however, been a falling one with the figure in 2002 being as high as 16.49. This is probably due to the infusion of more debt funds in recent years. This figure thus indicates a comfortable position but also signals the need for caution for further increases to debt funds.

Cash Flow from Operations to Liabilities

Table-3.4 (Appendix-C)

The ratios of operating cash flows to Total liabilities and cash flow to current liabilities are shown in Table 3.4. The figure varies from 0.98 to 1,51, and indicates that operating cash flows are sufficient to meet short-term liabilities comfortably from operating revenues without resorting to additional borrowings. This is important from the point of view of the investor who is concerned with generation of profits and revenue surpluses. The ratio with respect to the total liabilities also indicates that the company should be able to service its long-term debts over a period of time without difficulty.

Cash Flow Analysis

Operating Cash flows compared to net profits

Table-4.1 (Appendix-D)

The cash flow from operations has been higher than the net profits during the entire period of five years under analysis, but the ratio has come down over the years. This indicates that part of the increases in profit comes from cash flow is generated from other operations. This is not an encouraging trend from the point of view of an investor. However, the ratio is coming down, showing an improvement over the years.

Days Inventory

Table-4.2 (Appendix-D)

Days Inventory is a measure that gives vital information about the inventory management. The figures for the five years are shown in Table- 4.2. The number of days inventory that WOW carries on an average has reduced from 27.4 in 2002 to 22.4 in 2006, showing that the inventory management is good.

Quality of Income
Table-4.3 (Appendix-D)

Quality of income is a measure of how much the core operations contribute to the profits of the business. In a competitive situation, a high quality of income is necessary to ensure long-term success of the business. In the case of WOW, the quality of income has been steadily declining from 2002 when the ratio of funds from operations to EBITDA was 0.96. This figure has been reduced to 0.76 in 2006. This is matter of concern to the strategic investor.

Inventory compared with Trading Revenue

Table-4.4 (Appendix-D)

The average inventory carried by WOW in comparison with the operating revenues that it generates shows the efficiency of inventory management. The comparative figures are shown in Table 15. The figure has dropped marginally from 7.5% in 2002 to 6.1% in 2006. Although this shows that a slightly higher level of inventory is being used, the absolute figures are quite healthy and compare favorably with industry averages, showing that the inventory management is good.

Assessment of other relevant information
Although financial analyses provide key insights into the health of the organization, there are many non-financial factors that have an impact on the performance, which need to be taken note of, while assessing the performance of an organization. Woolworth’s principal activities include food, liquor, petrol, general merchandise, consumer electronics retailing, hotel, gaming and entertainment operations. (Woolworth Annual Report 2006) Each of these is affected by external factors.

Woolworth is operating in a highly competitive environment in which strategy becomes an important factor.  The market conditions continued to be difficult during 2006 because of tightening of discretionary spending by consumers. Higher fuel prices have had an impact on the company’s market, but WOW has turned this into an advantage through discount offers. Higher interest rates have also contributed to reduction in discretionary spending.

The primary strategy adopted by the company is aimed at increasing efficiency of operations and improving cost-effectiveness. Project Refresh and the building of new supply chain systems have contributed to this objective. The company has also been aggressive in acquiring new facilities. Technology is one of the key factors that enable better supply chain management. These systems have enhanced the ability of the company to better manage its operations and perform well in a competitive environment.

Evaluation of Market Performance

The movements in the prices of the shares of WOW and its main competitors and the trend of the P/E ratio for WOW are shown below. Woolworth’s share price shows a rising trend in the last three years. The performance of two of its competitors during this period shows a rising trend also, but the rise is sharper in the case of Woolworth. Wesfarmers has suffered a decline in its share price in the last year.

The long-term price earnings ratio shows a declining trend for Woolworth reflecting an erosion of market confidence.

Source:  Australian Securities Exchange

Source: Australian Securities Exchange

Summary and Conclusions

The financial position of WOW seems to be quite sound with a fairly high rate of return on equity. The company seems to be managing its inventory and other short-term assets efficiently. There appears to be some scope for improving its operational efficiency as indicated by the net margin. Although the trend in some areas highlight the need for caution, particularly in further borrowings by the company, the present situation both in terms of financial stability and profitability presents a fairly healthy picture.

APPENDIX A – Profitability and Efficiency of Operations Ratios

Table-1.1

Return on Assets

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002

Profit after tax and servicing income notes
1,014.60
816.2
790.5
687.8
609.5
523.2

Fixed assets and investments
4,172.10
3,425.80
3,581.90
2,758.80
2,485.00
2,366.80

Intangibles
4,759.40
2,046.40
2,011.40
572.3
555.3
545

Return on Assets (ROA) (Profits/FA+Intangibles)
0.113598
0.149154
0.14133
0.206478
0.200474
0.179683

Table – 1.2

Return on Equity

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Profit after tax and servicing income notes
1,014.60
816.2
790.5
687.8
609.5
523.2
Total equity
4,257.60
2,000.20
2,197.10
2,052.50
1,823.20
1,822.50
Return on Equity (ROE)
0.238303
0.408059
0.359792
0.335104
0.334302
0.287078

Table – 1.3

Gross and Net margins

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Operating Revenue
37,734.20
31,352.50
31,352.50
27,933.90
26,321.40
24,473.00
Gross profit margin
9,444.60
7,802.30
7,802.60
6,958.40
6,618.40
6,177.00
Gross profit margin (%)
25.03
24.89
24.89
24.91
25.14
25.24
EBIT
1,722.20
1,302.10
1,283.00
1,065.10
945.7
832.7
EBIT margin (%)
4.56
4.16
4.09
3.81
3.59
3.4

Note: All the figures in this table have been taken from the Woolworth Annual Report 2006.

Table – 1.4

Asset -Turnover

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Sales
37,734.20
31,352.50
31,352.50
27,933.90
26,321.40
24,473.00
Fixed assets and investments
4,172.10
3,425.80
3,581.90
2,758.80
2,485.00
2,366.80
Intangibles
4,759.40
2,046.40
2,011.40
572.3
555.3
545
Asset-Turnover (FA+Intangibles/Sales)
4.224845
5.729414
5.605367
8.385788
8.657501
8.404767

Table – 1.5

Inventory -Turnover

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Sales Revenue
37,734.20
31,352.50
31,352.50
27,933.90
26,321.40
24,473.00
Inventory
2,316.10
1,969.60
1,977.30
1,847.00
1,843.10
1,838.40
Inventory-turnover
16.29213
15.91821
15.85622
15.12393
14.28105
13.31212

APPENDIX B – Liquidity Ratios

Table – 2.1

Current Ratio

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Inventory
2,316.10
1,969.60
1,977.30
1,847.00
1,843.10
1,838.40
Receivables
1,174.40
611.9
689.9
423
543.1
496.6
Accounts payable
-2,778.50
-2,339.80
-2,335.60
-2,176.30
-2,078.90
-2,000.60
Other creditors
-1,838.70
-1,483.80
-1,457.80
-1,267.10
-1,186.10
-989.6
Provision for dividend(4)
0
0
0
0
0
-188.9
Current Ratio
-0.75598
-0.67515
-0.70312
-0.65923
-0.73084
-0.73448

Table – 2.2

Equity Ratio

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Total equity
4257.6
2000.2
2197.1
2052.5
1823.2
1822.5
Total Assets
9183.8
5654.4
5740.5
3389.8
3061.6
2903.9
Equity ratio
2.157037
2.826917
2.612762
1.651547
1.679245
1.593361

Table – 2.3

Quick Ratio

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Receivables
1,174.40
611.9
689.9
423
543.1
496.6
Accounts payable
-2,778.50
-2,339.80
-2,335.60
-2,176.30
-2,078.90
-2,000.60
Other creditors
-1,838.70
-1,483.80
-1,457.80
-1,267.10
-1,186.10
-989.6
Provision for dividend(4)
0
0
0
0
0
-188.9
Quick ratio
-0.25435
-0.16003
-0.18187
-0.12284
-0.16634
-0.15621

APPENDIX C – Long-term Solvency Ratios

Table – 3.1

Debt-Asset Ratio

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Net assets employed
8,057.10
4,412.30
4,614.30
2,216.40
2,182.80
2,059.80
Net repayable debt
-3,799.50
-2,412.10
-2,417.20
-163.9
-359.6
-237.3
Debt-Assets ratio
-0.47157
-0.54668
-0.52385
-0.07395
-0.16474
-0.11521

Table – 3.2

Debt-Equity Ratio

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Net repayable debt
-3,799.50
-2,412.10
-2,417.20
-163.9
-359.6
-237.3
Total equity
4,257.60
2,000.20
2,197.10
2,052.50
1,823.20
1,822.50
Debt-Equity ratio
-0.8924
-1.20593
-1.10018
-0.07985
-0.19724
-0.13021

Table – 3.3

Times Interest Earned

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
EBIT
1,722.20
1,302.10
1,283.00
1,065.10
945.7
832.7
Interest
-201.8
-104.9
-108.5
-47.3
-39.7
-50.5
Times Interest Earned
-8.53419
-12.4128
-11.8249
-22.518
-23.8212
-16.4891

Table-3.4

Operating Cash Flows to Liabilities

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Total Liabilities
8416.70
6235.70
6210.60
3607.30
3624.60
3227.50
Short-term liabilities
1126.70
1242.10
1126.20
1173.40
878.80
655.20
Cash flow from operations
1705.10
1214.40
1221.00
1219.40
1209.50
1134.70
Operating Cash Flow/Total Liabilities
0.20
0.19
0.20
0.34
0.33
0.35
Operating Cash Flow/Short-term Liabilities
1.51
0.98
1.08
1.04
1.38
1.73

APPENDIX D – Cash Flow Analysis Ratios

Table-4.1

Operating Cash flows compared to net profits

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Profit after tax and servicing income notes
1014.6
816.2
790.5
687.8
609.5
523.2
Cash flow from operations
1705.1
1214.4
1221
1219.4
1209.5
1134.7
Cash flow/Profits
1.680564
1.487871
1.544592
1.772899
1.984413
2.168769

Table-4.2

Days Inventory

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Inventory
2316.1
1969.6
1977.3
1847
1843.1
1838.4
Sales
37734.2
31352.5
31352.5
27933.9
26321.4
24473
Days Inventory
22.40346
22.92972
23.01936
24.13394
25.55835
27.41862

Table-4.3

Quality of Income

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Funds from operations
1705.1
1214.4
1221
1219.4
1209.5
1134.7
EBITDA
2244.4
1718.1
1744
1472.7
1344
1183.7
Funds from op/EBITDA
0.759713
0.706827
0.700115
0.828003
0.899926
0.958604

Table-4.4

Inventory Compared with Trading Revenue

Year
AIFRS 2006
AIFRS 2005
AGAAP 2005
AGAAP 2004
AGAAP 2003
AGAAP 2002
Inventory
2316.1
1969.6
1977.3
1847
1843.1
1838.4
Operating Revenue
37734.2
31352.5
31352.5
27933.9
26321.4
24473
Inventory/Trading Revenue
0.061379
0.062821
0.063067
0.06612
0.070023
0.07512

APPENDIX E – Manual Calculations of Specific Ratios

Asset turnover

            Operating revenue/non-current assets                       =          24473.00/(2366.80 + 545)

                                                                                  =          8.4047

Inventory turnover

            Operating revenue/current inventory             =          24,473.00/1,838.40

                                                                                  =          13.31

Profit margin on sales (before interest & tax)

            EBIT/operating revenue                                =          832.7/24,473.00

                                                                                  =          3.40%

Quality of income

            Funds from operations/EBITDA                  =          1134.7/1183.7

                                                                                  =          95.86%

Return on shareholders’ equity

   Profit after tax and income notes servicing/          =          523.2/1,822.50

   (Total Equity)

=        28.71%

Quick Ratio

            (current assets –inventory)/                =          496.6/(2000.6+989.6+188.9)

            current liabilities

                                                                       = 496.6/3179.1

                                                                       =          0.156

Note: Current Assets in this case is made of two items namely, inventory and receivables. Thus current assets – inventory = receivables.

Times interest earned

            EBIT/interest expense                                   =          832.7/50.5

                                                                                  =          16.48

Debt to equity

net repayable debt/shareholders equity         =        237.3/1,822.50

                                                                                  =        0.13%

Price earnings (based on both financial year-end and current prices)

            Market price per share/reported earnings per share  (June 2006)

                                                                                  =          19.3/0.909

                                                                                  =          21.23

Sources

Australian Securities Exchange 2007, viewed 21 May 2007 <http://www.asx.com.au/research/companies/index.htm>
Bernstein LA & Wild JJ 2004, Analysis of Financial Statements: Fifth Edition, Tata-McGraw-Hill, New Delhi.
Coles Myer 2006, Annual Report 2006, viewed 21 May 2007 <http://www.colesgroup.com.au/library/Investors/FinancialReports/2006/20061023_2006_Annual_Report.pdf>
David Jones 2006, Financial Statements 2006, viewed 21 May 2007 <http://www.davidjones.com.au/dj_oar2006/pdf/main-sect/DJ06_Financial-Report.pdf>
Elliot, B & Elliot, J 2003, Financial Accounting and Reporting, Pearson Education Limited, Essex (U.K.)
Gitman,L 2003, Principles of Managerial Finance: Brief Third Edition, Pearson Education, Inc., Boston(USA):.
IBIS World 2007, Retail Trade in Australia, (13th February 2007), viewed 21 May 2007 <http://www.ibisworld.com.au/industry/retail.aspx?indid=391&chid=1 >
Neale, B & McElroy, T 2004, Business Finance: A Value-Based Approach, Pearson Education Limited, Essex (U.K.).
Woolworths Limited 2006, Annual Report 2006, viewed 21 May 2007 <http://www.woolworthslimited.com.au/resources/final+report+2006.pdf>
Woolworths Limited 2007, Official Website, viewed 21 May 2007 <http://www.woolworthslimited.com.au/ >

 

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