The Woolworths Company’s Financial Analysis

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Introduction

Woolworths is an Australian Mega chain of supermarkets and stores of groceries that the Woolworths Group mainly owns. The Company was founded in the early 20th century in 1924 and is currently regarded as Australia’s greatest and biggest chain that contributes to a market of over 33% shares as of 2020. Among the services that Woolworth specializes in are groceries consisting of fruits, packaged foods, meat, and vegetables. Besides, it sells magazines, beauty products, DVDs, and health products, making it a great supply of basic products to the Australian citizens and foreigners’ inclusion of tourists. Stationeries and baby and pet supplies are other exceptional products offered by the Company. Its services have been improved as it has a Woolworths Online, formerly called HomeShop, in which customers can easily click on their website, collect what they require, and get free home delivery.

Cost of the Guide

The capital and Asset Pricing Model (CAPM) refers to an idealized portrayal of how financial markets price securities and determine the expected returns on capital investments. It is regarded as a better cost of equity calculation method than the established Dividend Growth Model (DGM). The mentioned CAPM assumes that investors of the Woolworths Companies hold fully diversified portfolios. From research, the information implies that the CAPM assumes the shareholders to require a reliable return on their investment based on any systematized risk rather than the total risks…

CAPM = E(Ri) Capital Asset expected return

E (Ri) = Rf + Bi

Where:

Rf = risk free rate of interest
Bi= sensitivity
E (Rm) = Expected return of the market

CAPM is significant because it determines the fairest price for an investment based on risk potential return and other perforated factors. Its usage in calculation aids in ensuring that there is a fair value of the stock.

Table 1: CAPM Scale

Variable	Rate %	Sourced (date)	Period
Rf	6.057	22/04/2022	05/02/2021
Rm	2.83	22/04/2022	05/02/2021
Beta	0.70	22/04/2022	05/02/2021

Re Calculation

Re = D1/Po+g

Risk free rate – 1.99%
Market return – 7.08%
Equity risk premium-(7.8 – 1.99)

Re = 1.99 + 0.70

(7.8 – 1.99)Re = 6.057%

Rm = (RF + credit risk rate) (1 – T)

RF -289300000

Credit risk rate – 7,14,38,90,000

Tax – 30%Rd = (289300000 / 7143890000)

(1 – 30%)

Rm = 2.83%

Beta is the exact measure of stick risk volatility of returns reflected by measuring the fluctuations of its price changes relative to the overall market. From the information that has been shared, Beta is equivalent to 0.70

DGM Calculations

DGM = G1 + G2 +… +Gn/n

Where D1, D2 …Dn are dividends realized from the Company.

For example, in 2020 and 2021, it can be calculated as shown ¹

Table 2: DGM

Activities	2021 $M	2020 $M
Cash flows from investing activities
Proceeds and advances from the sale of property, plant, and equipment	389	261
Payments for property, plant, equipment, and intangible assets	(2,389)	(2,149)
Proceeds from the sale of subsidiaries and investments, net of cash disposed	19	34
Payments for the purchase of businesses, net of cash acquired	(209)	(81)
Payments for the purchase of investments	(35)	(10)
Proceeds from/(net advances) to related parties	12	(4)
Dividends received	13	4
Net cash used in investing activities	(2,200)	(1,945)

D1=13

D2= 4

N= 2

13+4/2

= 8.5

Calculation of Rd

Credit risk rate – 7,14,38,90,000

Tax – 30%Rd = (289300000 / 7143890000)

(1 – 30%)

Rm = 2.83%

Calculating WACC

The weighted average cost of capital for the Woolworths Company will be calculated by;

Calculating the cost of debt is determined by the interest rates that lenders pay on existing debt and the inclusion of bonds and mortgages. It is calculated by multiplying the debt’s interest expense by the inverse tax rate percentage. The resulting solution is then divided by the outstanding debt of the Company. Secondly, the Company’s equity is calculated using the capital asset pricing model. The difference between the risk-free return and the market rate return is calculated. Then the resulting solution is multiplied by the difference between market volatility and Beta measures. The initial solution is added to the product with a risk-free interest rate. The sum gives the cost of equity.²

Table 3: WACC Calculation

Weights	Low	High
Equity % of Capital	80.0%	70.0%
Debt % of Capital	20.0%	30.0%
WACC Range	4.75%	5.75%
Selected WACC	5.25%

From the table, the final weighted average cost of capital has been calculated as 5.25%

Financial Statement Analysis

The Return on Assets (ROA) is a ratio developed by the DuPont Company for its use, but other companies across the world have utilized it. The ratio measures the combined effects of assets turnover and profit margins of a company. The Woolworths Company has utilized the ratio in which its profits have been well entailed displaying the deprecation rates across the real outcomes of the business. The total assets of the Company have been; increasing daily with a proportion of more than 5%. The ratio between the Company’s assets daily is almost half of the earnings among the employees. It implies that the ratio across the months and years of the comparable products is more. The Return on Equity (ROE) measures the returns of the business.

The returns of Woolworths are more as displayed by the assets. The depreciation of the products is less, implying that it has slow but steady growth. The gross profits of a single day may seem to have reduced, but the operating profits and profits after all deductions have been made are relatively higher. The other ratio used in the calculation analysis of the Company is SaaS quick ratio. It measures the efficiency of a company’s growth by comparing the bookings and upgrades of a customer and their downgrades. From the data given about Woolworths Company, SaaS quick ratio is higher because many customers books and update their bookings. The final ratio discussed in the paper is Net Revenue Retention, which informs individuals whether their products are valuable at the current pricing. Woolworths Company has a great foundation, and the customers get themselves attached to it because of its quality products.³ As a result, the Company has retained increased amounts of revenue as discussed.

The table below summarizes group cash flows for 52 weeks, which ended in Australia on the 27^th of June 2021. It displays the return on assets and returns on equity for the commodities of Woolworths Company.

Table 4: Group cash flow. Group cash flows for the 52 weeks ended 27 June 2021

($ MILLION)	F21 (52 WEEKS)	F20(52 WEEKS)	CHANGE
EBITDA – continuing operations	4,843	4,453	8.7%
EBITDA – discontinued operations	1,428	1,224	16.7%
Significant items	59	(591)	n.m.
Group EBITDA	6,330	5,086	24.4%
Decrease/(increase) in inventories	103	(152)	n.m.
(Decrease)/increase in trade payables	(115)	632	n.m.
(Decrease)/increase in provisions	(183)	223	n.m.
The net change in other working capital and non-cash	27	278	(88.9)%
Cash from operating activities before interest and tax	6,162	6,067	1.7%
Interest paid – leases	(687)	(701)	(1.7)%
Net interest paid – non-leases	(113)	(155)	(26.9)%
Tax paid	(738)	(650)	13.5%
Total cash provided by operating activities	4,624	4,561	1.4%
Proceeds from the sale of property, plant, and equipment, subsidiaries, and investments,
net of cash disposed	408	295	38.8%
Payments for the purchase of property, plant, and equipment, and intangible assets	(2,389)	(2,149)	11.3%
Other	(219)	(91)	139.7%
Total cash used in investing activities	(2,200)	(1,945)	13.1%
Repayment of lease liabilities	(1,158)	(1,066)	8.7%
Dividends paid (including to non-controlling interests)	(1,154)	(1,199)	(3.8)%
Payments for shares held in trust	(177)	(102)	74.0%
Free cash flow after equity and lease-related financing activities	(65)	249	n.m.

Time series analysis

Over the past three years, the Company has had a different display than the current one. In 2019, Woolworths Supermarket had an average revenue turnover of 68, 290 which increased as per the 2020 results to 72,208. In 2021, the revenue turnover was 78,763, implying that it will be more than that in the next year. The ratios have greatly changed in which the Company has had increased investments compared to its liabilities. It has saved more money in the current year (2022) than in the past, implying objective achievement as a nation. The number of money individuals carried from the end of 2020 to the beginning of 2021 implied that the Company had made more profits and had great progress. The table below represents an analysis of the times series over 52 weeks for the mentioned Company.

Table 5: F21 Sales Summary

F21 sales summary ($ MILLION)	F21 (52 WEEKS)	F20(52 WEEKS)	CHANGE
Continuing operations
Australian Food	44,441	42,151	5.4%
New Zealand Food	6,652	6,823	(2.5)%
New Zealand Food (NZD)	7,146	7,192	(0.6)%
BIG W	4,583	4,106	11.6%
Other	18	–	n.m.
Sales from continuing operations	55,694	53,080	4.9%
Discontinued operations Endeavor Drinks Hotels	10,167 1,417	9,275 1,320	9.6% 7.3%
Sales from discontinued operations	11,584	10,595	9.3%
Total Group sales (including ecommerce)	67,278	63,675	5.7%
Continuing operations eCommerce sales	4,743	2,905	63.3%
Discontinued operations eCommerce sales	859	637	34.7%
Group eCommerce sales	5,602	3,542	58.1%
Continuing operations eCommerce sales penetration (%)	8.5%	5.5%	304 bps
Continuing operations – average weekly traffic to Group digital assets (million)	17.2	12.2	40.5%

The following table represents the Woolworths Company in both New Zealand and Australia.

Table 6: EBIT Summary

F21 EBIT summary ($ MILLION)	F21 (52 WEEKS)	F20(52 WEEKS)	CHANGE
Continuing operations before significant items
Australian Food	2,432	2,232	9.0%
New Zealand Food	336	358	(6.4)%
New Zealand Food (NZD)	361	378	(4.6)%
BIG W	172	39	344.9%
Group	(176)	(144)	23.6%
EBIT from continuing operations before significant items	2,764	2,485	11.1%
Discontinued operations
Endeavor Drinks	669	569	17.7%
Hotels	261	172	51.7%
Endeavour Group costs	(31)	(7)	n.m.
EBIT from discontinued operations before significant items	899	734	22.6%
Group EBIT before significant items	3,663	3,219	13.7%
Significant items	59	(591)	n.m.
Group EBIT	3,722	2,628	41.6%

Cross-sectional Analysis

The area selected for comparison with Woolworths is a size which it’s regarded as helpful in the mentioned regard. The Company is multinational business merchandise operating under 1067 stores across Australia. Woolworths Company has a more advanced foundation, implying its future is greater than its current state. Its continuous profitability will sustain, and the fact that it is linked to the farmers of Australia (origin) identifies it as stronger and more advanced in the coming future. There are other stores across New Zealand, making the entire Company ranked among the largest in the country.

Besides, the Company is a great source of employment for over 115,000 people who work in the stores, support offices, and distribution centers. It mainly ensures that its members have superior services, value, convenience, and range. As per the three discussed sizes of the Company, it is larger than many supermarkets globally, implying that its contribution to the economy is more pronounced. However, a failure to turnaround may impact the group’s profitability because of the rate fluctuations in the world market and foreign exchange. The mentioned risk of the Company can be classified as an individual risk since researchers can average it in a large portfolio.

The table below represents a profit and loss analysis of the Woolworths Companies.

Table 7: Profit and Loss Analysis

NOTE	2021 $M	RESTATED¹ 2020 $M
Continuing operations Revenue from the sale of goods and services 2.1 Cost of sales	55,694 (39,366)	53,080 (37,750)
Gross profit Other revenue Branch expenses Administration expenses	16,328 117 (9,838) (3,784)	15,330 148 (9,564) (3,888)
Earnings before interest and tax Finance costs 2.3	2,823 (613)	2,026 (671)
Profit before income tax Income tax expense 3.7.1	2,210 (604)	1,355 (417)
Profit for the period from continuing operations	1,606	938
Discontinued operations Profit for the period from discontinued operations, after-tax 5.2	533	271
Profit for the period	2,139	1,209
Profit for the period attributable to: Equity holders of the parent entity Non-controlling interests	2,074 65	1,165 44
	2,139	1,209
Profit for the period attributable to equity holders of the parent entity related to: Profit from continuing operations Profit from discontinued operations	1,606 468	928 237
	2,074	1,165
	CENTS	CENTS
Earnings per share (EPS) attributable to equity holders of the parent entity Basic EPS 4.1 Diluted EPS 4.1	165.0 164.2	92.7 92.2
EPS attributable to equity holders of the parent entity from continuing operations Basic EPS 4.1 Diluted EPS 4.1	127.7 127.1	73.9 73.5

Du Pont Analysis

The Company underwent substantial interchanges to achieve its desired decisions. The group leased various properties from the data, including warehouses, vehicles, equipment, and distribution centers, which increased its net income.⁴ The idea of leasing has proceeded in the Company to ensure that the net income received flows monthly. The group organized for more receivables and trade, which consisted of the amounts of money owed to the group by debtors. Economists collected the amount at the beginning of each month to develop the company.⁵. The group’s management was great because it took time to identify the different business units that the Board regularly viewed to allocate resources and assess performance. The units in charge of the company business offered various products and services managed separately, presenting each subgroup’s financial performance. As a result, the sub-group members worked towards achieving the best and becoming the perfect ones.

Final Comments on Woolworths

Woolworths is a great company owned by various managers who tirelessly work towards ensuring that their goals of improving people’s lives are achieved. It is the largest Company in Australia and New Zealand with the most recognizable and trusted brands in retailing, which serve millions of customers daily. Concerning the size, Woolworths covers a larger area having over 1070 stores in Australia serving the citizens. It has independent and common risks that sometimes drag it behind in its visionary advancement. The Woolworths chairman’s message is mainly linked to its slogan, displaying its concern for the Australian Citizens. The independent risks may result from the firm specified news or uncertainty, while the common risks may exist due to the market-wide news. There exist various capital projects included in the annual report displaying all the details required. Some of the projects have shown announcements of investments in the entire Company, like acquiring new premises and machinery in the business.

The independent risk can also be referred to as a unique risk, commonly called systematic risk. The first risk of the great Woolworths Company is financial constraints impacting its market sustainability and profitability. It is a developed company that systematically addresses its shortcomings or risks consistently. Its services have been improved as it has a Woolworths Online, formerly called HomeShop, in which customers can easily click on their website, collect what they require, and get free home delivery. The assets of the business returns are more than the liability, implying that it makes profits with ease. The Company’s future is bright and will become more advanced because it utilizes all the chances it access to develop across New Zealand and Australia. However, the company management should make it a continental business organization by opening other stores in Africa and Asia to earn more profit.

Conclusion

In conclusion, Woolworths Company has a more advanced foundation, implying its future is greater than its current state. Its continuous profitability will sustain, and the fact that it is linked to the farmers of Australia (origin) identifies it as stronger and more advanced in the coming future. The Company relies on CAPM because it is much clearer and does not necessarily focus on the dividends growth but also discusses the risks associated with the investments. The percentage of non-marginal investors is higher as compared to the marginal ones. The non-marginal investors can be considered the main individuals who contribute to the Company’s advancement. The founders came up with the Company, and it has been put into place by the directors who receive goods from suppliers. The Woolworths group is subject to regulations, contractual arrangements, and laws that expose them to adverse legislative changes. The mentioned changes may result in the group’s negative reputation, affecting its profits. The risk is common to the Company because it is associated with more than one product, unlike other multinational companies with a single product. However, the risks are mitigated by the neutral collaboration of the key shareholders and the management team.

References

Liu, Ke. “Financial Analysis of an Australian Department Company Based on 3 Financial Models.” Open Journal of Business and Management 9, no. 2 (2021): 858-865. Web.

Van Kampen, Toine, and Ross Kirkham. “Assessment of the Supermarkets and Grocery Stores Sector in Australia: A Case Study of Woolworths and Coles using DEA and VAIC™.” Journal of New Business Ideas & Trends 18, no. 1 (2020): 1-11. Web.

Van Niekerk, Henk Johannes. “Evaluating and allocating outbound logistics cost in the fast-moving consumer goods (FMCG) industry.” Ph.D. diss., University of Pretoria, 2018. Web.

Woolworths Annual Report 2021. Web.

Footnotes

1 – Woolworths Annual Report 2021
2 – Liu, Ke. “Financial Analysis of an Australian Department Company Based on 3 Financial Models.” Open Journal of Business and Management 9, no. 2 (2021): 858-865.
3 – Liu, Ke. “Financial Analysis of an Australian Department Company Based on 3 Financial Models.” Open Journal of Business and Management 9, no. 2 (2021): 858-865.
4 – Van Kampen, Toine, and Ross Kirkham. “Assessment of the Supermarkets and Grocery Stores Sector in Australia: A Case Study of Woolworths and Coles using DEA and VAIC™.” Journal of New Business Ideas & Trends 18, no. 1 (2020): 1-11.
5 – Van Niekerk, Henk Johannes. “Evaluating and allocating outbound logistics cost in the fast-moving consumer goods (FMCG) industry.” Ph.D. diss., University of Pretoria, 2018.

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