Report on Investment Decision in Woolworth Limited

Question: Discuss about the Report on Investment Decision in Woolworth Limited. Answer: Introduction The decision as regards investment in the stock of a company is taken by the investor after evaluating the current financial worth and future prospects of the company. In order to evaluate the financial worth of the stock, it is pertinent to analyze the financial statements along with the accompanying reports of the auditors and directors (Fabozzi Drake, 2009). In the context of this, a report has been prepared here to evaluate an option of investment in the stock of Woolworth Limited. For this purpose, the current financial statements of the company have been analyzed with the help of ratio analysis. Further, six capital analysis has also been carried in this report so as to assist the investor in making prudent decision. Moreover, the report also covers a discussion on the key issues identified from the chairmans report, managing directors report, and corporate responsibility report. Business of the Company and its Operating Activities Woolworth Limited, incorporated in the year 1924, is a company engaged in the business of retailing grocery products. The company has its presence all over the Australia and New Zealand with a wide spread network of more than 3000 grocery stores (Woolworth Limited, 2016). With an aim to provide world class experience to the customers at all levels, Woolworth Limited sells the worlds most recognized and trusted brands. The company operates through five segments such as Australian food, liquor and petrol, New Zealand supermarket, General merchandise, Hotels, and Home improvements. Different products and services are offered to the customers through these five segments by the company (Annual Report Woolworth, 2015). Australian food, liquor and petrol segment is one of oldest and the largest segments of the company. This segment trades in food, liquor, and petroleum products in different cities in Australia. The recent performance of this segment has been observed to be weak, which is depicted from the downfall in revenues of the year 2015 by 1.59%. Further, the New Zealand supermarket is engaged in the trading of food and liquor products in the New Zealand market. For this segment, the revenues of 2015 have been observed to be increasing by 5.43% over the revenues of the previous year (Annual Report Woolworth, 2015). The third segment of the company is general merchandise, though which the company engages in purchase and sale of general merchandise products predominantly in Australia. The current performance of this segment is also found to be weak like Australian food, liquor and petrol segment. The revenues of the financial year 2015 of this segment have been observed to be declining by 5.64% as compared to the last year. Further, hotel and home improvement are the two more segments that the company has classified as reportable for the financial year 2015 (Annual Report Woolworth, 2015). Both the segments operate predominantly in Australia, where the former is engaged in the provisioning of hospitality services while the later in trading of home repair products. As far as the performance of these segments is concerned, the revenues of the hotel segment of 2015 are more or less equal to the previous years revenues, but home improvement segment has picked growth. The revenues of home improvement segment for the year 2015 were observed to be up by 22.24% as compared to the previous year. The high growth in the revenues of this segment, shows the potential in the home improvement market, which the company can target for future investment (Annual Report Woolworth, 2015). Companys Progress against its Strategic Priorities The identification and setting of the strategic priorities is essential for the business to achieve continuous sustainable growth. The strategic prosperities here mean indentifying and prioritizing the aims, objectives, and activities to be undertaken by the company in the upcoming time period (Bryson Alston, 2010). The strategic priorities are set up with an objective to run the business activities in an appropriate direction for the achievement of the predefined goals. Further, strategic setting of the priorities also assists the management in achieving the business goals with ease. Therefore, considering the criticalness of the matter, the board of directors of Woolworth Limited has set up the strategic properties for the company as under: The leadership in the food and liquor to be extended (Woolworth Limited, 2016). The shareholders value is to be maximized. Areas for new growth to be explored and business to be extended. Focus on the high growth areas to be given more (Woolworth Limited, 2016). From the analysis of the revenues, it seems that the company has been continuously working for getting the leadership extended in the food and liquor (News.com, 2011). The revenues from food and liquor for the financial year were amounting to $42.10 with a growth rate of 2.3% over the previous year. Further, the company is resetting and restructuring the business model of food and liquor so as to achieve the sustainable growth and extend the leadership (Annual Report Woolworth, 2015). However, the shareholders value has been seen to be deteriorating in the recent past few years. The total market capitalization of the company for the year 2015 at the closing date was $34,692.6 million, while the same was $44,925.10 million in the year previous year (Annual Report Woolworth, 2015). In regard to the exploration of the new growth areas, it has been found that the company is focused and endeavored towards this objective. Recently, the company has found home improvement as the new area for growth. In the current year, the company has registered 22.24% growth in the revenues from home improvement segment. Thus, overall it could be articulated that the company is trying hard to achieve the targets and perform good against the set strategic priorities (Annual Report Woolworth, 2015). The Chairmans Report The Chairman of the group presented his report on behalf of the board of directors by highlighting the key financial results and significant events. The report disclosed that for the financial year 2015, the dividend for the shareholders has been increased by 1.5%. The chairmans message discloses that the year 2015 was challenging, however, now it is all set for the company to crack the performance in the upcoming year. Further, it has been observed that the decrease in the current net profit by 12.50% over the previous year is due to adjustment of the significant items (Annual Report Woolworth, 2015). Further, the report of chairman revealed that significant changes made in the composition of the board of directors as well as in the operating environment of the company. In respect of the operating environment, the company has brought in lean retail model that is expected to ease up the processes (Annual Report Woolworth, 2015). The Managing Directors Report The report of managing director (MD) provides a clear message that the company is focused on achieving the sustainable growth for the shareholders. One of the key issues found from the managing directors report is that the company is losing market in Australia. In this regard, the managing director states that the company will very soon regain the momentum and increase the market share in Australia (Annual Report Woolworth, 2015). Further, the MD states that the performance of the companys key merchandises food and liquor is to be further strengthened. Further, it has been found out that the managing director is focusing on increasing the online sale of the companys products. This increased investment in the online imitative are expected to help the company in increasing the market share at a big platform (Annual Report Woolworth, 2015). The Corporate Responsibility Report The report discloses that the company has been sustainable leader in the food and staple retailing sector continuously since past five years as declared by the Dow Jones sustainability indices. The report highlights the initiatives taken by the company in discharging its responsibilities towards people, planate, and prosperity in the year 2015 (CSR Woolworth, 2015). In regards to people, it has been observed that the total number of employees of the company have increased to 197,426. In regards to planate, the carbon emission has been reduced by 42% by the company in the year 2015. In regard to prosperity, the company has contributed to the extent of $114 billion to the economy of Australia. Further, the sustainability statement for the year 2015 shows that 91% of the targets, in regard the corporate social responsibilities, have been achieved (CSR Woolworth, 2015). Further, it has been observed that the existing sustainability strategy, which was effective for the period from 2007 to 2015, has expired this year. Thus, the board will have to reformulate the sustainability strategy for the company for a suitable time period of 10 years or less (CSR Woolworth, 2015). Key Financial Ratios for 2015 Table 1: Ratio Analysis of Woolworth Woolworth Limited Ratio 2015 2014 Change Profitability Net margin 3.51% 4.03% -0.52% Return on equity 19.20% 23.36% -4.16% Liquidity Current ratio 0.84 0.95 -0.11 Quick ratio 0.30 0.32 -0.02 Gearing Debt to Equity 1.28 1.29 -0.01 Debt Service Coverage 13.04 14.51 -1.47 From the data presented in the table given above, it can be observed that the profitability of the company is decreasing. The net margin of the company is down by 0.52% in the current year as compared to the previous year. Further, the return on equity is also down by 4.16%, which indicates diminution in the companys profitability. In order to assess the liquidity position of the company, the current and quick ratios have been computed (Tracy, 2012). The results show that the current ratio of the year 2015 is down as compared to the previous year. The current ratio of the year 2015 was observed to be 0.84 times, which was 0.95 times in the year 2014. Further, there declines was also observed in the quick ratio indicating deterioration in the liquidity position of the business. Further, in order assess the solvency position, the debt equity ratio and debt service coverage ratios have been computed. In this regard, the results depict that the company has slightly cut down the debt in t he year 2015 as compared to the year 2014. Further, the debt services coverage ratio was observed to be rising, which is a good sign for the solvency of the company. An Overall Evaluation of the Companys Value Creation or Diminution in Terms of Six Capitals Over Time The Six Capital is an integrated framework that helps in evaluation of the value creation by a company for its stakeholders. For this purpose, the framework breaks the capital down into six parts such as financial, manufactured, intellectual, human, social relationship, and natural. The financial capital focuses on the effectiveness of sourcing the funds as per the requirements of the company (ACCA, 2013). In respect of Woolworth Limited, it has been observed that the company finances its assets with a combination of debt and equity. The debt equity ratio of the company has been observed to be 1.28 times for the financial year 2015, which implies that $1.28 debt is used against $1 of equity (Table-1). A combination of debt and equity, keeping the debt within backpack capacity, is always preferred to finance the assets. From the current debt equity ratio, it appears that the company has been effective in sourcing the funds. The manufactured capital is depicted by the investment of the company in the fixed assets, which are used in manufacturing activities or operations of the business (ACCA, 2013). In regard to the manufactured capital of Woolworth Limited, it has been observed that companys total investment in property, plant, and equipment is $10,062.10 for the financial year 2015. The same was $9,600.70 in the year 2014 (Annual Report Woolworth, 2015). The addition in the investment in the property, plant, and equipment depicts that the company has added value to the worth of the shareholders. The third type of capital as per the integrated Six Capital framework is intellectual capital, which relates to the investment in research and development and accumulation of the knowledge (ACCA, 2013). In the current case, the company is engaged in trading business, thus, the scope for intellectual capital is less. However, the company has made expended money on retaining the key employees by providing them performance right plans and other employee benefits such as shared based payment plan (Annual Report Woolworth, 2015). Therefore, it could be inferred that there has been value addition in terms of intellectual capital in the company. Further, the human capital relates to the investment made by the company for the welfare of the employees. Since the employees are the primary resource for any organization, therefore, it is essential to invest for their welfare and retain them. The expenditure on the employees welfare of Woolworth amounts to $7441.40 million in the year 2015 as against $7293.80 million of the previous year (Annual Report Woolworth, 2015). This implies that the company has added value to the human capital in the year 2015. Social relationship capital is about maintaining good relationship with the suppliers, customers, stakeholders, government. In respect of Woolworth Limited, it has been observed that the company is making big investment to add value to its social relationship capital. The company is implementing lean retail model, which will provide an integration of the suppliers, customers, and employees. Further, the last but not the least is natural capital, which comprises the investments made by the company in acquiring as well as preserving the natural resources (Annual Report Woolworth, 2015). In this regard, it has been observed that the company has not made significant efforts, thus, there is no value addition. Recommendation on Investing in the Company In order to take decision as regards investment in Woolworth Limited, the analysis of the financial performance and position is to be referred. Apart from the analysis of financial performance, which is carried based on the historical financial statements, the consideration of the future growth prospects plays an important role in investment decision in the capital market (Graham and Dodd, 2008). In regard to Woolworth, the financial performance has been observed to be deteriorated during the current year. The profitability of the company has been observed to be fluctuating during the past five years as shown in the graph given below: Figure 1: Trend in Profit of Woolworth Limited Further, the trend shown by the stocks price is also analyzed with the help of the graph given below: Figure 2: Trend in Stock's Price of Woolworth From the figure presented above, it could be observed that the stocks price of Woolworth is fluctuating over the period of five years. In the current year, the price of the stock is down to $27.39 from $35.66 of the year previous year. Although, the companys financial position is deteriorating a little bit in the current and also the price of stock has moved down, but the future prospects from the company are very high. The company operates at large scale and still growing the network of retail stores in and out Australia. Further, the company is also adding new business lines and exploring new business opportunities. Considering the future prospects from the company, it could be inferred that in the long run the financial performance of the company is going to be strengthened. Moreover, Six Capital analysis carried in the above sections also depicts that the company has been able to add value to the business. Therefore, it is advised to the potential investors that taking a long term view they can make an investment in the company stock. References ACCA. (2013). Six Capital. Retrieved September 3, 2016, from https://integratedreporting.org/wp-content/uploads/2013/03/IR-Background-Paper-Capitals.pdf Annual Report Woolworth. (2015). Annual report for the financial year 2015. Retrieved September 3, 2016, from https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf Bryson, J.M. Alston, F.K. 2010. Creating and implementing your strategic plan: a workbook for public and nonprofit organizations. John Wiley Sons. CSR Woolworth. (2015). Corporate Social Responsibility Report 2015. Retrieved September 3, 2016, from https://woolworthslimited2015.csr-report.com.au/files/Woolworths_CSR_2015.pdf Fabozzi, F.J. Drake, P.P. (2009). Finance: capital markets, financial management, and investment management. John Wiley Sons. Graham, B. and Dodd, D. (2008). Security analysis: sixth edition, foreword by warren buffett. McGraw Hill Professional. News.com. (2011). Woolworths betting on booze and gambling profits. Retrieved September 3, 2016, from https://www.news.com.au/finance/woolworths-betting-on-booze-profits-as-it-looks-to-expand-hotel-empire/story-e6frfm1i-1226223987450 Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyze any business on the planet. RatioAnalysis.net. Woolworth Limited. (2016). Strategy, Objectives, and Growth Plans. Retrieved September 3, 2016, from https://www.woolworthslimited.com.au/page/Who_We_Are/Strategy_and_Objectives/ Woolworth Limited. (2016). Who we are? Retrieved September 3, 2016, from https://www.woolworthslimited.com.au/page/Who_We_Are/.