accounting concepts & practices woolworths project report

Table of Contents0.Executive Summary:...........................................................................................................................3

1.Introduction:.......................................................................................................................................4

2.Main Body:.........................................................................................................................................4

2.1.Woolworths core business:.............................................................................................................4

2.1.1.Liquor outlets:..............................................................................................................................4

2.1.2.Petrol stations:.............................................................................................................................4

2.1.General Merchandise:.....................................................................................................................5

2.1.4.Hotels:..........................................................................................................................................5

2.2.Chairman’s and Managing Director’s Report:..................................................................................5

2.3. Ratios calculations:.........................................................................................................................6

2.3.1. Liquidity Ratios............................................................................................................................6

Current ratio..................................................................................................................................6

Quick ratio.....................................................................................................................................6

Receivable turnover.......................................................................................................................7

Inventory turnover........................................................................................................................7

2.3.2.Profitability Ratios........................................................................................................................8

Profit margin..................................................................................................................................8

Gross profit margin........................................................................................................................8

Expense ratio.................................................................................................................................9

Asset turnover...............................................................................................................................9

Return on assets..........................................................................................................................10

Return on equity..........................................................................................................................10

Earnings per share.......................................................................................................................11

Payout ratio.................................................................................................................................11

2.3.3Gearing Ratios.............................................................................................................................12

Debt to total assets ratio.............................................................................................................12

Cash debt coverage.....................................................................................................................12

3.corporate governance and corporate social responsibility:..............................................................13

4. Assessment & Recommendations:..................................................................................................14

5.Conclusion:.......................................................................................................................................15

6. Bibliography.....................................................................................................................................15

Executive Summary:

The purpose of this report is to summaries Woolworth annual report 2011 taking in

consideration a description of the core business and the operating activities of the company,

the discussion of critical issues mentioned in the Chairman’s and Managing Director’s

Report, a discussion of the corporate governance and corporate social responsibility and a

calculation of key financial ratios of 2011.

The key findings of this report are:

Woolworth Limited is not only a supermarket/grocery chain, but also liquor outlets, petrol

stations, general merchandise and hotels.

According the Chairman’s and Managing Director’s Report we found that the company have

3 issues: natural disasters, a successful CEO retiring and low spending rate from the

customers.

Woolworths has created a comprehensive corporate governance framework which is

particularly strong in the critical areas of compliance and financial reporting. Plus it is

represented in almost every community in Australia and New Zealand

We done a calculation of the key financial ratios of Woolworth limited, and we found out

through one of calculation that average earnings per issued ordinary share have almost doubled over the two years, which is really good news for investors.

In the due course you will find in this report overall assessment, recommendation and conclusion based on current consolidated woolies annual report 2011

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1. Introduction:

Woolworth is a well known Australian supermarket/ grocery chain operating in Australia

New Zealand and India. In this report, which is based on the information taken from

Woolworth Limited annual report 2011, we are going to discuss the company’s core business

which not only about Supermarket/ grocery but multiple other businesses. Plus we are going

to look at some issues that occurred in the Chairman’s and Managing Director’s Report. And

also the corporate governance and corporate social responsibility along with a calculation of

the key financial ratios for 2011, and finally we are going to give an overall assessment of the

company and mention about our recommendation to invest in Woolworth.

2. Main Body:

2.1. Woolworths core business:

Woolworths Limited is a giant Australian supermarket/grocery chain, its main business is

linked with the sales of food product mainly groceries, and as at the end of the financial year

2011 they have 840 supermarkets operating around Australia, and they also own 156

supermarkets in New Zealand (excluding franchisees). However food/grocery are not the

only type of product that Woolworth sells, they also own a number of other product which

are (woolies, 2012):

2.1.1. Liquor outlets:

At the end of the year 2011 Woolworth operate 1250 liquor retail outlet and 140 of

them are Dan Murphy’s stores. (woolies, 2012)

2.1.2. Petrol stations:

The supermarket giants at the end of 2011 have 581 petrol stations counting 132

Woolworth/Caltex alliance locations, plus all the sites are operated by convenience

stores. (woolies, 2012)

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2.1. General Merchandise:

o Big W: is a department store in Australia. Traditionally Big W stores deliver

the lowest prices on a large range of quality and branded product daily

including well known brands such as “Mambo” and “Apple” and also

exclusive contemporary varieties such as “Man and Women by Peter

Morrissey”. Furthermore Big W operates 165 stores as from the end of 2011.

o Consumer Electronics: provides a wide range of electronics with their

experts through “Dick Smith, Tandy and TATA stores “in 3 countries:

Australia and New Zealand have a total of 390 Dick Smith stores and

4 Tandy stores at the end of 2011.

India has a total of 64 TATA retail stores operating under the Croma

brand as from the end of 2011.

(woolies, 2012)

2.1.4. Hotels:

There was no mention of names of the hotels in the Woolworth Limited annual report

2011. However they own a total number of hotels and clubs of 282 and a combined

total of 1319 accommodation rooms. (woolies, 2012)

2.2. Chairman’s and Managing Director’s Report:

There were multiple significant issues that we spotted while reading the chairmen and the

managing director’s report.

First the report mentioned multiple times about consumer confidence stayed historically low

because of the rise of utility cost, interest rate and global financial uncertainty during the first

half of the year, which forced people to save money instead of spending. (woolies, 2012)

The second issue was the unpredictable occurrence of natural disasters especially in New

Zealand after Christchurch earthquake and the aftershocks which was the reason behind

shutting down of seven Countdown and franchise stores. Even though customers continued

shopping at other close by stores but sales were negatively affected. (woolies, 2012)

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The third and last issue was the announcement of the retirement of CEO Michael Luscombe

at the end of September. The retirement of CEO is always an issue in a company especially

and according the report he was a really successful leader and during his 5 years at

Woolworths Limited, the company doubled its profit. Overall he set a very good example for

the entire employee with his modesty, hard work and care for individuals. (woolies, 2012)

2.3. Ratios calculations:

2.3.1. Liquidity Ratios

Current ratio

A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties (liquidratio, N/A) (Keryn Chalmers, 2010).

Current ratio=Current Assets/Current Liabilities

For Woolworths the ratios are:

2011……….. 0.795458659

2010……….. 0.726787262

2009……….. 0.757521903

After calculating 2011 current ratio of woollies it is concise & clear that it has improved keeping in view 2010.

Quick ratio

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It measures the firm's capacity to pay off current obligations immediately. It allows you to see

just how many times the company can cover its short term liabilities with the cash,

marketable securities, and accounts receivables (Quick ratio analysis, N/K) (Keryn Chalmers,

2010).

Quick ratio= (Cash + short term investment +Receivable)/Current Liabilities


2011………… 0.318738463

2010………… 0.227891632

2009………… 0.222430081

Quick ratio had declined from 2009 to 2011.

Receivable turnover

Receivables turnover ratio measures company's efficiency in collecting its sales on credit

and collection policies. A high receivables turnover ratio implies either that the company

operates on a cash basis or that its extension of credit and collection of accounts receivable

are efficient. Also, a high ratio reflects a short lapse of time between sales and the collection

of cash, while a low number means collection takes longer (receivable turnover ratio ) (Keryn

Chalmers, 2010).

Receivable turnover=Net credit sales/Average net receivables


2011……. 53.1073075

2010……. 65.3944339

2009…… 149.3369467

Woollies have improved its receivable turnover.

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Inventory turnover

The inventory turnover ratio measures the efficiency of the business in managing and selling

its inventory. This ratio gauges the liquidity of the firm's inventory. It also helps the business

owner determine how they can increase their sales through inventory control (inventory

turnover ratio, N/K; Keryn Chalmers, 2010).

Inventory turnover=Cost of sales/Average inventory


2011…. 11.16321269

2010….. 11.37971299

2009…… 11.70037762

2.3.2. Profitability Ratios

Profit margin

The Profit Margin of a company determines its ability to withstand competition and adverse

conditions like rising costs, falling prices or declining sales in the future. The ratio measures

the percentage of profits earned per dollar of sales and thus is a measure of efficiency of the

company (Profit margin, N/K) (Keryn Chalmers, 2010).

Profit margin=Profit/Net Sales


2011…… 0.039431093

2010……… 0.039355178

2009…… 0.037426204

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http://bizfinance.about.com/od/inventory/ht/Inventory_Control.htm

Gross profit margin

This ratio looks at how well a company controls the cost of its inventory and the

manufacturing of its products, and subsequently it pass on the costs to its customers. The

larger the gross profit margin, the better for the company (Gross profit margin, N/K) (Keryn

Chalmers, 2010).

Gross profit margin=Gross profit/net sales


2011…………. 0.259641301

2010…………. 0.258639601

2009………….. 0.256015357

Expense ratio

The expense ratio of a stock or asset fund is the total percentage of fund assets used for

administrative, management, advertising, and all other expenses. An expense ratio of 1% per

annum means that each year 1% of the fund's total assets will be used to cover expenses.

(Keryn Chalmers, 2010).

Expense ratio=Expenses (excluding tax)/net sales


2011…………….. 0.203446974

2010…………. 0.202584542

2009………….. 0.202348997

Asset turnoverThe asset turnover ratio is a measure of how efficiently a company's assets generate

revenue. It measures the number of dollars of revenue generated by one dollar of the

company's assets (asset turnover, N/K) (Keryn Chalmers, 2010).

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Asset turnover=Net sales/Average assets


2011………… 2.742649399

2010…………. 2.911532039

2009……….. 3.034294541

Return on assets

The Return on Assets ratio is an important profitability ratio because it measures the

efficiency with which the company is managing its investment in assets and using them to

generate profit. It measures the amount of profit earned relative to the firm's level of

investment in total assets. The return on assets ratio is related to the asset management

category of financial ratios (Peavler, N/k) (Keryn Chalmers, 2010).

Return on assets=Profit/average assets


2011…………. 0.202924933

2010……………. 0.220475678

2009……………… 0.21773613

Return on equity

Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet (Kennon, 2001) (Keryn Chalmers, 2010).

Return on equity=Profit/Average equity


2011........ 0.273285026

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2010............. 0.274016807

2009............... 0.527113769

Earnings per share

The earnings per share gives the investing public a means of determining the amount the business earned on its stock share investments. In other words, earnings per share tell investors how much net income the business earned for each stock they own (Financial ratio analysis-earningper share, 2011) (Keryn Chalmers, 2010).

Earnings per share=profit/weighted average ordinary shares issued


2011........... 1.759825687

2010.............. 1.654086519

2009............ 1.527093596

The good news for investors here is that the average earnings per issued ordinary share have almost doubled over the two years. So this really is a good result as profits available for shareholders must have increased significantly too

Payout ratio

A very law payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends.

The payout ratio also indicates how well earnings support the dividend payments: the lower the ratio the more secure the dividend, because smaller dividends are easier to pay out than larger dividends (Pyout ratio)(Keryn Chalmers, 2010).

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Payout ratio=cash dividends/profit


2011............... 3.547726954

2010.............. 3.714622179

2009................ 3.662634409

2.3.3Gearing Ratios

Debt to total assets ratio

It measures the portion of the assets of a business which are financed through debt. Debt ratio ranges from 0.00 to 1.00. Lower value of debt ratio is favourable and a higher value indicates that higher portion of company's assets are claimed by its creditors which means higher risk in operation since the business would find it difficult to obtain loans for new projects. Debt ratio of 0.5 means, that half of the company's assets are financed through debts (debt ratio) (Keryn Chalmers, 2010). So as we see from the calculation, half of Woolworth’s assets are financed through debts.

Debt to total assets ratio=total debt/total assets


2011.......... 0.628064187

2010........... 0.577131328

2009............ 0.586927638

Cash debt coverage

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This ratio indicates a company's ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets used in operations (Cash debt coverage ratio, N/K) (Keryn Chalmers,2010).

Cash debt coverage=Net cash flows from operating activities/average liabilities


2011.............. 0.250109749

2010........ 0.265929691

2009............ 0.267580453

3. Corporate governance and corporate social responsibility:

Corporate Governance:

Woolworths has created a comprehensive corporate governance framework which is

particularly strong in the critical areas of compliance and financial reporting. Woolworths

follows the Australian Securities Exchange (ASX) Corporate Governance Council’s

Corporate Governance Principles and Recommendations (second edition). Its directors are

committed to the ethical pursuit of shareholders’ best interests. (woolies, 2012)

Directors: The board’s principal objective is to maintain and increase shareholder

value while ensuring Woolworths’ overall activities are properly managed.

Board Committees: The board has established a number of committees to support it

in matters that require more intensive review.

Privacy Policy: Woolworths complies with the National Privacy Principles for the

Fair Handling of Personal Information that sets standards for collection, use and

disclosure, access, storage and destruction of personal information that we collect as

part of our business operations.

(woolies, 2012)

Social Responsibility:

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Woolworths is represented in almost every community in Australia and New Zealand. In

many towns, they are often the largest local employer, as well as the place where residents

shop for their food and everyday needs. As a member of those communities they understand

that they have a duty to be more than just a retail outlet, but to also make a positive impact on

the societies that they serve. (woolies, 2012)

Community: Woolworths' businesses support these communities through their work

with a range of partners and through fundraising and charitable partnerships.

Reconciliation Action Plan: is a far reaching strategy to create new employment and

education outcomes for Aboriginal and Torres Strait Islander Australians.

Health & Safety: Woolworths is committed to managing its operations so as to take

appropriate measures to protect the safety, health and wellbeing of its employees,

contractors, customers, suppliers and the wider community.

Vision: achieving Safety and Health vision is described as ‘Destination ZERO’ zero

harm to its people, environment and community.

(woolies, 2012)

4. Assessment & Recommendations:

According the annual report of 2011 of Woolworth Limited 2011, we found that the company

is not only a supermarket/grocery chain but has also multiple other services which are: Liquor

outlets, petrol stations, general merchandise, and hotels. And we could find that there was A

5.1% increase in earnings from 2010 which brings a profit of $2,124.o million in 2011and an

6.5% increase in earnings per share which is 174.6 cents, and also 6.6% increase in earnings

before interest, tax, depreciation and amortisation, and a 4.7% increase in sales which is

$54.143 million and finally a 6.1% increase in dividends. Plus we found out through one of

calculation that average earnings per issued ordinary share have almost doubled over the two years, which is really good news for investors. (woolies, 2012)

Wesfarmers' Coles supermarket and liquor chain beat Woolworth, posting a 5.9 per cent gain

in sales and an 18.3 per cent rise in earnings before interest and tax (EBIT) compared with an

8.1 per cent EBIT rise at Woolworth' food and liquor division.

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Woolworth said that it boosted earnings before interest and tax by 6.3 per cent to $3.27

billion in the June year, and that looked pretty pedestrian beside the 21.2 per cent EBIT rise

that its biggest rival, Coles, unveiled inside the profit its parent, Wesfarmers announced last

week. (coles-woolies, 2012)

The Woolies supermarkets and food and liquor businesses lifted their EBIT by 7.9 per cent to

$2.79 billion, and generated 6.63 cents of EBIT for every dollar they collected from

customers. Even after its strong rise in EBIT for the year, Coles only kept 4.2 cents in the

sales dollar as EBIT.

For investors, however, the trend is friendly and there’s no doubt that in the supermarket

business, Coles has the momentum. It looks to have shut down the lead that Woolies had in

the discount store sector, too.

Wesfarmers’ Kmart discount stores, another of the retail chains that Wesfarmers took over

with its acquisition of the Coles group in late 2007, lifted its EBIT by 5.8 per cent, and

boosted its EBIT to sales margin from 4.7 per cent to 5 per cent to get its nose in front of Big

W, on that measure.

Wesfarmers' discount store chain, Kmart, also outperformed, boosting EBIT by 13 per cent

while Woolies' Big W chain suffered a 17.1 per cent slide in EBIT, to $125 million. (coles-

woolies, 2012)

5. Conclusion:According the annual report of 2011 of Woolworth Limited 2011, we found that the company

is not only a supermarket/grocery chain but has also multiple other services which are: Liquor

outlets, petrol stations, general merchandise, and hotels.

On the other hand Wesfarmers is showing that it is a tough competitor. It won't have escaped

you that Woolies was valued most highly for its growth prospects just as Wesfarmers was

bedding down its takeover of the Coles group, including the Coles, Kmart, Target and

Officeworks chains.

It’s very difficult to predict future profit, growth and market share but still we

think Woolies in the long run will escalate it stake holders, shareholders and number of

customer due to its consistent policies & procedure.

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Last but not the least we will conclude that woollies will embark for future profits on its

existence expansions strategic business units that will come to break even in next couple of

years and later they could enrich from these investments.

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