Company Analysis: Woolworths Limited
About the paper
The paper is targeted to perform the qualitative and quantitative analysis of Australia’ largest retailer, Woolworths Limited. In this paper, we will be discussing the past five year performance of the company from qualitative as well as quantitative perspectives. As part of the qualitative part, we will be commenting on the company’s position in the industry and recent stock price movement. On the other hand, quantitative part of the report will deal with the discussion of the trends in the financial statements of the company followed by ratio analysis. The report will further proceed with the stock valuation using the dividend discount method, and will eventually be culminated with a final recommendation as whether the stock is suitable candidate for the investment portfolio or deserves a sell recommendation.
Qualitative Part
-Company Profile
Woolworths Limited is an Australian based retail company. The company is predominantly present in the geographic areas of Australia and New Zealand, and is the second largest Australian company in terms of revenue. Over the years, the company has also expanded its portfolio by offering liquor and home improvement and hardware products.By the end of 2015, the company was operating 961 supermarket stores and 1445 liquor stores , and had employed 197,000 employees.
-Stock price trend
The stock price graph above clearly depicts the bearish trend in the company during the past year. As we will comprehensively discuss in the succeeding section, during 2015, the company witnessed negative revenue growth for the first time in a decade and in the presence of high rivalry from competitors like Aldi and Coles, the company is losing on its profitability as well as the market share. These pessimistic trends are pushing the stock price of the company downwards.
Quantitative Part
-Income Statement Analysis
Analyzing the income statement, we found that during the five year term, the revenue figures of the company have surged by 2.30% on a compounded annual basis growing from A$54280 million in 2011 to $60868 million in 2015. However, the year 2015 was alarming for the company as it faced first ever revenue decline in a decade.
On the cost side, the company has done a commendable job keeping the proportion of COGS to the revenue figures under check as the same has declined from 74.03% to 78.85%. However, it is the growing proportion of operating expenses along with the declining revenue growth multiple that is eroding the profit figures of the company. Important to note, the proportion of the operating expenses to the revenue figures has increased from 20.34% to 24.84% and is thus responsible for declining operating and net profits of the company.
-Balance Sheet & Cash Flow Analysis
The balance sheet helps us in understanding the financial position of the company. Referring to the past five year balance sheet of Woolworths Limited, we found a pessimistic position with the cash figures plummeting down year-after-year, while the inventory stock is piling up. Important to note, during 2015, the cash figure did surged by 44%, however, the increase here was attributable to a cash inflow from the sale of property, plant and equipment worth A$841 million while the operating cash flow was down by 3.68%. Overall, the current assets of the company increased by 3.04% on a compounded annual growth basis for the period of five years.
As for the fixed assets, Woolworths Limited has been consistently increasing its investment in property, plant and equipment, which increased by 3.14%, while the total assets increased by 3.73% on a compounded annual basis.
On the other hand, the most notable trend in the liabilities section was the significant increase of short-term debt, which increased by 8 times during 2015 and an overall increase of 21.69% in the total current liabilities. Therefore, with the current liabilities exceeding the current assets, we can infer the negative impact on the liquidity position of the company.
Finally, on the equity side, the trend in the retained earnings amount gives a glimpse of optimism in the company as despite of the high dividend payout, Woolworths Limited is still maintaining a reserve of more than $5 billion.
Overall, the balance sheet gives a mixed view over the financial position of the company, though the trends during 2015 surely turns us skeptical relating to future performance of the company amidst increasing competition.
-Ratio Analysis
In this section, we will evaluate the past five year financial performance of the company using financial ratios:
i)Current Ratio: Current Assets/ Current Liabilities
As noted from the table above, we can see that by the end of 2014, the current ratio of the company had been surging year-after-year. However, during 2015, with current liabilities increasing at a greater percentage than the current assets, the current ratio plummeted to 0.84. Most notably, the cash reserve for 2015 was supported through the sale of property, plant and equipment worth $816 million and not through any sustainable source such as cash sales or receivable collection.
ii) PE Ratio: Year Ending Market Price/ EPS
One of the most popular investment ratio, PE ratio multiple indicates the level of optimism endowed by the investor in the company’s stock. Noted from the table above, we can see that until 2014, the PE ratio of the company had been increasing consistently. However, during 2015, on account of 28% fall in the stock price, the PE ratio decreased to 16.35, thus indicating the investors are not optimistic toward the future potential of the stock.
iii) Net Profit Margin: Net Profit/ Revnue
iv) Return on Assets: Net Income/ Total Assets
As noted from the above calculated profitability ratios, the year 2015 was indeed a bearish financial year for the company. Until 2014, the net profit margin and the return on assets were sustainable and on the increasing trend. However, during 2015, with the loss in revenue figures, the company also witnessed decreasing trend in the bottom line profits. At the same time, the return on assets also plunged own from 10.13% to 8.47%, thus accounting for lower return on asset base of the company.
v)Debt Ratio: Total Debt/ Total Assets
The debt ratio indicates the percentage of total assets being financed with debt funds. Noted from the table above, we notice the multiple falling consistently year after year. This indicates that the company prefers to operate under an environment of low leverage.
vi)Inventory Turnover: COGS/Total Inventory
The bearish trend continues to be displayed in the inventory turnover ratio, which, since 2011 is decreasing year-by-year. This signals that every year it takes more time for the company to sell its stock.The above trend confirms that despite of higher proportion of expense allocated to sales and administrative expenses, the management is unable to generate a positive response from the retail buyers.
Stock Valuation
In this section, we will perform the stock valuation using the dividend discount model. As part of this valuation process, we assume that the company will continue to grow the dividend payments by 5% every year and the required rate of return on equity is 10%:
Value of Stock= Current Dividend(1+Growth Rate)/(Required Rate- Growth Rate)
= 1.99(1.05)/(0.10-0.05)
= A$41.49
Current Price: A$20.63
Result: Undervalued
Referring to the figures above,we can see that according to the dividend discount model, the stock is relatively undervalued and has a potential for 100% growth from the current stock price level. This signals that despite of bearish financial year in the recent time,investors are still optimistic and are ready to place their money on the company, citing its positive result from the recently entered hardware business and also because the company is still a good dividend paymaster.
Recommendation: Do not invest
Considering the outcome of the qualitative and quantitative part, we hereby recommend, that investors should not invest in the stock of Woolworths Limited citing the possible further downside in the upcoming time. As we noticed during the analysis part, during 2015, the company witnessed negative revenue growth during 2015 and also lost its market share to rivals such as Aldi and Coles. As for the outcome of the stock valuation model, we believe that relying on just valuation model and that too with subjective assumptions, will not be a rational approach to follow. Our recommendation also also aligns with the majority of the analyst following the stock:
References
"Balance Sheet For Woolworths Ltd (WOW) From Morningstar.Com". Financials.morningstar.com. N.p., 2016. Web. 29 June 2016.
"Income Statement For Woolworths Ltd (WOW) From Morningstar.Com".Financials.morningstar.com. N.p., 2016. Web. 29 June 2016.
King, Mike. "ALDI Is Stealing Market Share From Woolworths Limited". Motley Fool Australia. N.p., 2016. Web. 29 June 2016.
"WOW.AX Analyst Opinion | WOOLWORTHS FPO Stock - Yahoo!7 Finance". Au.finance.yahoo.com. N.p., 2016. Web. 29 June 2016.
"WOW.AX Basic Chart | WOOLWORTHS FPO Stock - Yahoo!7 Finance". Au.finance.yahoo.com. N.p., 2016. Web. 29 June 2016.
"WOW.AX Profile | WOOLWORTHS FPO Stock - Yahoo!7 Finance". Au.finance.yahoo.com. N.p., 2016. Web. 29 June 2016.
