Financial Ratio Analysis Of Woolworths And Reece Limited Group In Essay.

Gross Profit Margin Ratio

1. Use the Gross profit from continuing operations on page 56 of the report to calculate the gross profit margin ratio for 2015 and 2016. Is the level of profitability of Woolworths acceptable to you; if so, why, or if not, why not (e.g., what change(s) has to cause this impact on Income and expenses)?

2. Use the Profit from continuing operations before income tax expense on page 56 of the report to calculate the net profit margin ratio for 2015 and 2016. Is the level of profitability of Woolworths acceptable to you; if so, why, or if not, why not (e.g., what change(s) has occurred in the operating expenses and impairment expenses to cause this impact on this year’s profit figure)?

3. Use the Total current assets and the Total current liabilities (and the items within these categories where relevant) on page 56 of the report to calculate the (1) current ratios and (2) quick (acid test) ratios for 2015 and 2016. . Is the level of liquidity of Woolworths acceptable to you; if so, why, or if not, why not (e.g., what change(s) has occurred in the current assets to cause this impact on this year’s
liquidity)? Have recent events with Masters Home Improvement has an impact.

4. Use the Total current assets and the Total current liabilities and the items within these categories expense on page 26 of the annual report for Reece Limited Group to calculate the (1) current ratiosand (2) quick (acid test) ratios for 2015 and 2016. 

5. Use the relevant information on pages 56 and 58 for the annual report of Woolworths and pages 25 and 26 of the annual report for Reece Limited Group to calculate the (1) Days’ Sales in Inventory, (2) Inventory Turnover, and (3) Inventory Turnover in Days. You note that Woolworths operate every day except Christmas day and Good Friday from 8 am to 9 pm Mon day to Friday, with a 5.30 pm closing
times on Saturday and Sunday. Reece operates only Monday - Friday 08:00 am - 04:30 pm, Saturday 08:00 am - 12:00 pm. For comparison consistency, you decide to use 365 days as the operating period for the denominator of any calculations for both companies.

6. Use the ratios you calculated in requirement 3, 4, and 5, explain the difference in the level of liquidity of Woolworths compared to Reece Limited Group. Provide an explanation in your report to the board of directors why the level of liquidity of Woolworths acceptable to you; if so, why, or if not, why not acceptable to you.

7. Use the information on page 26 to calculate the debt to equity and debt to total assets for 2015 and 2016. Is the level of long-term solvency of Woolworths acceptable to you; if so, why, or if not, why not? (e.g., impact of changes in debt, assets and/or equity levels)?

8. Using your answers to the previous 7 questions, form an opinion as to whether you would recommend or not recommended to your employer the purchase of Woolworths’ shares. You must answer either to purchase or not to purchase based on the information you have and your conclusion using deductive reasoning that should be drawn from your 7 prior answers. Include the information and your calculations for these questions above in your analysis answers, which should then be as the basis for your conclusions and recommendations.

The report below will compare Woolworths and Reece Ltd. The report has discussed important financial ratios like solvency ratios, profitability ratios, efficiency ratio and liquidity ratios. Solvency ratios are used to measure the solvency position of the company. Liquidity ratios are used to measure the ability of the company to pay its short term debts. Similarly efficiency ratios are used to assess the efficiency of the company to operate its business. Profitability ratios are used to identify the ability of the company to earn profits.

The report will conclude with the decision whether to invest in Woolworths Ltd or the investor should not invest its money in this company.

This ratio is used to analyze the financial health of the company. It is a profitability ratio used to calculate the sales percentage in excess of cost of goods sold. Hence it can be said that this ratio measures the efficiency of the company to use its material and labour to manufacture products. Gross profit margin is also used to evaluate the business model of the company and to compare it with the competitors in the market (Morningstar, 2017).

Gross profit margin = Revenue – Cost of goods sold

Revenue

Particular	2015 ($ M)	2016 ($M)
Revenue	$58,812.0	$58,085.7
COGS	$42,950.9	$42,676.7
Gross profit margin	27%	27%

 

(Source: Annual Report)

Particular	2015 ($000’s)	2016 ($000’s)
Revenue	$2,085,128	$2,276,353
COGS	$1,397,488	$1,517,443
Gross profit margin	33%	33%

 

(Source: Annual Report)

Gross profit margin of woolworth is 27% and reece is 33% which shows that woolworth ratio is not acceptable as compared to Reece limited. 27% gorss margin ratio reflects that the company after paying its direct cost has left with 27% of its total revenue. That means the company has very high cost of operations.

This is the basic profitability ratio which measures the net revenue of the company with net sales of the company.  Net profit margin is used to evaluate and compare the profitability of competitors (Morningstar, 2017).

Net profit margin =  Net income

Net sales / Revenue

Earnings per share = Earnings attributable to equity share holders

Number of shares

Particular	2015 ($ M)	2016 ($M)
Revenue	$58,812.0	$58,085.7
Profit before tax	$3,296.6	$1,359.6
Net profit margin	6%	2%
EPS	1.79	0.82

(Source: Annual Report)

Particular	2015 ($000’s)	2016 ($000’s)
Revenue	$2,085,128	$2,276,353
Profit before tax	$238,306	$279,929
Net profit margin	11%	12%
EPS	1.66	1.93

(Source: Annual Report)

Net profit margin of woolworth has decreased considerably in 2016 to 2% as compared to 2015 which was 6%. Net Profit margin of Reece is  11% and 12% which is higher than woolworth. This shows Reece ltd is more profitable than Woolworth ltd.  however low profit margin does not shows low profits. Higher net profit margin indicates that the company is efficient in converting sales into actual profit.  This shows that Reece ltd is more effectivly operating and has good control on cost and earning higher profit as compared to Woolworth ltd.

Net Profit Margin Ratio

Earning per share is an indicator of profit which is used by the investors to evaluate the earnings of shareholders (Smith, 2015). EPS of woolworth was 1.79 and 0.82 for 2015 and 2016 respectively which indicates reduction in earning of the shareholders. EPS of Reece ltd was 1.66 and 1.93 which is higher than woolworth and indicates better earnings for shareholders.

Current ratio and quick ratio are the most common liquidity ratio used to evaluate the the abilitty of the company to pay of its short term liability (Morningstar, 2017).

Current ratio =  Current asset

Current liability

Quick ratio = Current asset - inventories

Current liability

Cash Ratio = Cash and marketable securities

Current liability

Particular	2015 ($ M)	2016 ($M)
Current asset	$7,660.9	$7,427.0
Current liability	$9,168.6	$8,992.7
inventories	$4,872.2	$4,558.5
Current ratio	0.84	0.83
Quick ratio	0.30	0.32
Cash Ratio	0.15	0.11

(Source: Annual Report)

Particular	2015 ($000’s)	2016 ($000’s)
Current asset	$756,720	$858,230
Current liability	$374,761	$420,006
inventories	$365,425	$405,900
Current ratio	2.02	2.04
Quick ratio	1.04	1.08
Cash Ratio	0.23	0.25

(Source: Annual Report)

Current ratio measures that the company has enough assets which can be used to pay off its liabiltity. Standard current ratio is one or more than one which indicates that the company has more current assets than current laibilities.  Current ratio of woolworth of 0.84 and 0.83 in 2015 and 2016 is less than 2.02 and 2.04 of reece ltd which indicates that reece has better liquidity as compared to woolworth. Woolworth does not have the standard benchmark of 1 which indicates the company is not having sufficeint funds to pay off its short term obligations.

Quick ratio indicates the avaibility of the current assets with the comaony to pay of its short term debts.  Liquid assets are those current assets which can be converted into cash cash quickly. It includes cash, marketable security etc. While current ratio compares current assets to current liabilty quick ratio compares liquid assets to current liabilities. Quick ratio of woolworth is 0.32 in 2016 as compared to 1.08 of Reece ltd in 2016, which indicates that woolworth is not having good liquidity condition.

Cash ratio is highly conservative ratio. It indicates the ability of the company to convert its cash and cash equivalents to pay off its short term liabilities. Higher the cash ratio higher is the liquidity of the company that is the company can pay off its debts faster.

Days dales in inventories indictaes the average number of days taken by the company to sell the average inventory in the specified year (Morningstar, 2017).

Days sales in inventory = Number of days in a period

Inventory turnover

Inventory turnover ratio = Cost of goods sold

Liquidity Ratio

Average Inventory

Particular	2015 ($ M)	2016 ($M)
Cost of goods sold	$42,950.9	$42,676.7
Average Inventory	$4782.7	$4715.35
Days sales in inventory	40.64 days	40.33 days
Inventory turnover ratio	8.98	9.05
Turnover ratio in days	40.64 days	40.33 days

(Source: Annual Report)

Particular	2015 ($000’s)	2016 ($000’s)
Cost of goods sold	$1,397,488	$1,517,443
Average Inventory	$345540	$385662.5
Days sales in inventory	90.25 days	92.77 days
Inventory turnover ratio	4.04	3.93
Turnover ratio in days	90.25 days	92.77 days

(Source: Annual Report)

Inventory turnover ratio indicates the number of time the invetory is sold or replaced in a given period. Lower turnover ratio indicates less sale and therefore high inventory . Lower inventory turnover ratio as compared to its compititor indicates poor management of the inventory by the company. Inventory turnover ratio of woolworth is 8.98 and 9.05 in 2015 and 2016 respectively which is higher than 4.04 and 3.93 of reece ltd in the respective year which represents that woolworth is having good inventory management as compared to Reeece ltd. Since woolworth ahs high inventory turnover ratio it indicates efficient operations and the company is able to maintain its inventory properly.

Inventory carrying cost requires major investment therefore organisation should try to reduce its inventory cost. Days slaes in inventory is an important part of companies inventory management. Since lower level of inventory will result in lower Days sales in inventory ratio, company should maintain its inventory sales. Movement of inventories should be fast to increase the cash flow and to minimise the cost of inventory holding. Days sales in inventory of woolworth ltd is 40.64 days and 40.33 days in 2015 and 2016 respectivly which shows that the company is able to sale its inventory in approx 40 days or the company has enough inventory’s which can last to next 40 days which is a good sign of movement in the inventory. Reece ltd has days sales in inventory of 90.25 days and 92.77 days which is higher than woolworth ltd. Comparing the ratio which Reece ltd it can be said that woolworth has effective inventory management as compared to reece ltd.

6. In general liquidity ratios indicates the ability of the company to meet its short term obilgations, which is also considred as a major financial health indicator. The main ratios used to indicate the liquidity condition of the company are current ratio, quick ratio and cash ratio. Current ratio of woolworths ltd and Reece ltd was 0.84 & 0.83 and 2.02 & 2.04 in 2015 and 2016 respectivley. This indicates that Reece ltd has better current ratio as compared to Woolworths ltd thus having good liquidity condition in comparison to Woolworths.

Quick ratio of Woolworths and Reece ltd 0.30, 0.32 and 1.04, 1.08 in 2015 and 2016 respectively, which indicates that Reece ltd has better  quick ratio thus Reece ltd can pay its short term obligation faster than Woolworths ltd.

Efficiency Ratio

Cash ratio of woolworths and Reece ltd were 0.15,0.11 and 0.23,0.25 in 2015 and 2016 respectively which shows that the ratio of Reece ltd is better than Woolworths indicating better liquidity position of Reece ltd.

Debt to equity = Total liabilities

Shareholder’s equity

Debt to asset = Total Debts

Total Assets

Particular	2015 ($ M)	2016 ($M)
Total liabilities/ Debts	$14,204.8	$14,720.3
Total Assets	$25,336.8	$23,502.2
Shareholder’s equity	$11,132.0	$8,781.9
Debt to equity	1.28	1.68
Debt to asset	56%	63%

(Source: Annual Report)

Particular	2015 ($000’s)	2016 ($000’s)
Total liabilities/ Debts	$534,387	$550,328
Total Assets	$1,460,599	$1,591,354
Shareholder’s equity	$926,212	$1,041,026
Debt to equity	0.58	0.53
Debt to asset	37%	35%

(Source: Annual Report)

Debt equity ratio indicates the total assets been financed by debts and share holders equity. Lower the ratio better it is, as it indicates lower risk. Higher ratio indicates high risk since the company relies more on the ecternal debts. Debt equity ratio of more than indicates that the assets are been financed by external debts more than the equity. Increasing trend of this ratio indicates high risk as the more assets of the company are financed by the outside debts.

In the given case debt equity ratio of woolworth  has increased from 1.28 to 1.68 which indicated that the more assets of the company hs been financed. In general Debt equity ratio should not be more than 2.  Debt equity Ratio of 2 indicates that the compnay has financed is assets from outside source twice from its own funds. Since woolworth has the ratio of less than 2 it is considered as company is in good solvency condition.

Debt to asset ratio indicates the total assets which are been financed by the creditors instead of investors.  This ratio is used by investors as well as creditors to evaluate the overall risk of the companies. Higher ratio indicates that the company is more leverages and hence it will have to pay high amount of intrest and finance charges out of its profit. Therefore investors look for the companies having lower debt to asset fratio.

In the given case woolworth lts has 56% and 60% debt to asset ratio in 2015 and 2016 respectively which represent that the company has financed its asset more from the borrowed fund than its own fund as compared to reece ltd which has 37% and 35% debt to assets ratio in 2015 and 2016 respwctivley.

Since  debt to equity and debt to asset ratio of woolworth ltd are in increasing trend and higher as compared to reece ltd it can be said that the company is not in good solvancy position as compared to Reece ltd.

8. After analysing the above ratios it can be concluded the liquidity ratio of Woolworth ltd is not justifiable as compared to Reece ltd. Current ratio, liquidity ratio and cash ratio of woolworths ltd are less than Reece ltd which indicates the liquidity poistion. that is the ability of the company to pay its debt is not good as compared to Reece ltd.

After comparing the profitability ratios of both the company that is net profit margin and gross profit margins of both the companies it can be concluded that profitability ratio of Reece ltd id higher than Woolworths and thus Reece ltd is earning more profits.

After analysing the leverage ratios that is debt to equity and debt to asset ratio of the company it can be said that debt equity ratio of Woolworth ltd is higher than Reece ltd which indicates the company has financed its assets more from outside borrowings than its own funds. Debt to asset ratio of Woolworths ltd is also higher than Reece ltd which is indicates that the company has higher risk that the total asset of the company may not be sufficient to pay off its debts. Which also indicates that the company is not utilizing its resources optimally.

After analyising the efficiency ratios that is inventory turnover ratio, days sales in inventory of Woolworths ltd it can be said that the company has good inventory management system as compared to Reece ltd as the inventory turnover ratio of the company is lower than Reece ltd.

Conclusion

On the basis of above analysis of ratios of both the company it can be concluded that it is not optimal to purcahse the shares of woolworths Ltd as the company in comparison to Reece ltd soes not gives better results. Hence it is advided that the emplyer should not invest its money in Woolworths Ltd.

Reference

Woolworths Group. (2016). Annual report. Assessed on 3 May from: https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf

Reece Ltd. (2016). Annual Report. Assessed on 3 May from: https://www.reecegroup.com.au/assets/Uploads/F2016-Reece-Limited-Annual-Report.pdf

Woolworths Group. (2015). Annual report. Assessed on 3 May from:

Reece Ltd. (2015). Annual Report. Assessed on 3 May from:

Morningstar. (2017). Efficiency Ratios. Assessed on 3 May from: https://news.morningstar.com/classroom2/course.asp?docId=145093&page=3&CN=sample

Morningstar. (2017). Liquidity Ratios. Assessed on 3 May from: https://news.morningstar.com/classroom2/course.asp?docId=145093&page=4&CN=sample

Morningstar. (2017). Leverage Ratios. Assessed on 3 May from: https://news.morningstar.com/classroom2/course.asp?docId=145093&page=5&CN=sample

Morningstar. (2017). Profitability Ratios. Assessed on 3 May from:  https://news.morningstar.com/classroom2/course.asp?docId=145093&page=6&CN=sample

Smith, T. (2015). What exactly do we mean by ‘shareholder value’?.  Accessed on 1 May from: https://www.ft.com/content/463abec2-9721-11e4-845a-00144feabdc0