Financial Statement Analysis - BHP, Transfield and Woolworths

(financial year 2008, 2009 & 2010)

Executive Summary

This assessment conducts a comprehensive, both Qualitative and Quantitative, analysis of the

financial stances of the 3 companies; BHP Billiton (ASX: BHP); Transfield services Limited

(ASX: TSE) and Woolworths Limited (ASX: WOW). This analysis weighs upon those

factors (quantitative and qualitative) that are to be reflected upon before investing in any of

the above mentioned company since this analysis was considered for the sole reason of

finding out the most profitable investment. This analysis is adapted from various websites

such as asx.com.au, Investsmart.com.au and of course, from the financial statements and

reports of those Companies. This report includes the brief introduction of the companies and

the business sector they belong to, various ratio calculations, the ratio analysis and the

interpretation of the financial statements.

Contents

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

Business Sector of the Companies:........................................................................................................1

Retail Industry – Woolworths Limited:.............................................................................................1

Metals and Mining Industry – BHP Billiton:.....................................................................................1

Commercial Services and Supplies Industry – Transfield Services Limited:.....................................2

Details of each company:......................................................................................................................2

Woolworths Limited:.........................................................................................................................2

BHP Billiton:.....................................................................................................................................2

Transfield Services Limited:..............................................................................................................3

Qualitative factors to be considered:......................................................................................................3

Transfield Services Limited:..............................................................................................................4

Woolworths Limited:.........................................................................................................................5

BHP Billiton:.....................................................................................................................................5

Ratio calculation:...................................................................................................................................6

Ratio analysis:.......................................................................................................................................7

Profitability Ratios:...........................................................................................................................7

Liquidity and Solvency Ratios:..........................................................................................................8

Explanation on why we chose the ratios:...............................................................................................9

Final investment decision:...................................................................................................................12

Reference List.......................................................................................................................................1

Appendices............................................................................................................................................2

Introduction:

‘Smart investors have always known that financial statements are the keys to every company’

(Kennon 2010, p.1 of 2). Before investing in any business, a wise investor would check the

financial health of a company before committing to it. An analysis of the financial statements

is a mandatory process in investing. The financial statements include the Balance Sheet, the

Income Statement and the Cash Flow Statement. Various financial ratios, calculated from the

financial statements, portray the signs of that “health” of a company.

Business Sector of the Companies:

Retail Industry – Woolworths Limited:

Woolworths belongs to the retail industry. All Supermarkets, Departmental Stores, Discount

Stores, Warehouses and General Merchandise stores, each, are a part of Retailing Industry.

According to Australian Bureau of Statistics, there are more than 77,000 retailers in Australia

who operate in more than 200,000 retail outlets producing a grand sum of more than $200

billion in annual sales; which is growing at a 6% plus compound per year. Australian

Retailing Industry started with the opening of first departmental store – a David Jones Store,

in 1838. Now, Woolworths employs more than 191,000 employees and is a largest, private

sector, employer in Australia. 50% or more of the adult population is estimated to have had

worked in the past or is currently working in the retail industry (About Australia’s retail

industry 2010).

Metals and Mining Industry – BHP Billiton:

BHP Billiton belongs to the Metal and Mining Industry. Around 15% of Australian’s GDP is

derived from Mining. It involves the heavy usage of Machinery tools and a whole lot of

manpower. Australian Mining Industry constitutes coal, petroleum, metallic and industrial

minerals and is one of the primary contributors which act as an important catalyst for the

growth of Australian Economy. During the fiscal year ended June 30, 2009, BHP realized

annual production volumes of 137.2 million barrels of oil equivalent. This industry is up and

alive due to the range of commercial operations following the discovery, development and

utilization of Mineral resources. The reason behind this is the large volume of Ores present in

Australia. Australia is the world’s largest bauxite, diamond, ilmenite, and Zircon producer.

NSW alone produced a diverse range of minerals worth $11.7 billion in the fall of 2006.

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Commercial Services and Supplies Industry – Transfield Services Limited:

Transfield Services Company belongs to Commercial Services and Supply industry. This

industry involves in the provision of services to various individuals, organizations or

governmental entities. It might include accounting, trademanships, computer services, asset

management’s and many others. Service Industry does not actually produce its commodities

but rather use those commodities to provide an ease for different customers. Resources and

Industrial service and supply sector include the work in primary industries like manufacturing

and other similar companies; whereas infrastructure services sector mostly watches over the

maintenance of various public infrastructures such as railways, roads, public hospitals,

telecommunications and more others. Transfield services are a provider of such services

which include maintenance and asset & project management services.

Details of each company:

Woolworths Limited:

It has come a long way since it started on 5 December 1924, with a capital of £25,000 and

11,707 shares issued out of 15,000 shares. Today, Woolworths (WOW) is a retailer giant

based primarily on supermarkets – 84% of which represents Food and Liquor sales and the

rest include BigW discount departmental stores, Consumer electronics through Dicksmith,

Powerhouse and Tandy; Petrol through the Woolworths/Caltex Alliance ; and Hotels

following an active acquisition program. It has 30% of the Australian food, liquor and

grocery market which can be considered as a strong market share. BigW, a part of WOW’s,

has a clear market position and its “everyday low prices” approach has been well received by

value-conscious customers. Woolworths Limited was the first to approach the innovative

cash registers that printed receipts for the customers. Moreover, Woolworths had changed its

priority towards capital Management which has had a positive outcome to a considerable

amount on shareholder returns. Competitors include Aldi & Pick’ n Pay for the grocery

retailing and HVN for the electronic retailing market.

BHP Billiton:

BHP is the world’s leader when it comes to the resources mining industry. It has diversified

various resources group on a global portfolio of Quality assets since its incorporation in 1885.

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The major activities of BHP comprises of production and distribution of various minerals,

some of which are carbon steel, Petroleum, Aluminium, Base Metals, stainless steels and

Diamonds. Petroleum Division comprises 15% of net operating assets which make it the

differentiating factor among other productions. All other resources are utilized into a diverse

rage of mining which makes BHP the power to withstand any increasing energy prices or any

other factors that proves to be a negative blunt towards the whole mining industry. BHP

Billiton is known for their innovations, cost-efficiency projects and integrated workforce to

bring the best of financial results despite challenging Marketing Conditions.

Transfield Services Limited:

Out of the engineering and Construction activities of Transfield Holdings group, TSE was

introduced in 1993 and was listed on the ASX on May 2001 issuing 76.6M shares at $1.60

per share. From that time onward, Transfield Services has developed itself internationally

into a leading provider of operation, maintenance, asset management and project

management services to thousands of people across Australia, New Zealand, the United

States, the United Arab Emirates, Qatar, South East Asia, India and Canada. It has since

involved in diverse industries including, mining and process, hydrocarbons, roads, rail and

public transport, water, power telecommunication, facilities management and defence. The

company’s strong records was maintained by the late chairman Dr. Franco Belgiorno-Nettis,

which since its foundation has prioritised the need to engage with the communities to provide

a very wide range of development of infrastructure and other services such as asset

management.

Qualitative factors to be considered:

Qualitative factors are the intangible factors that are not measureable in terms of ratios or

money. It might be the goodwill of the company or the commitment towards an employee or

it might just be a trend. It is very crucial that we look onto these factors as they tend to have a

substantial effect on our decision making.

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Transfield Services Limited:

Corporate governance of this company aims towards the appropriateness of accountability

which requires them to minimize the possibility of business risk and to manage it as

efficiently as possible. It tries to boost the investor’s confidence by promoting and rewarding

the ethical conducts across the company. Some governance policies that out sketches the

ethical conduct are share trading policy, conflict of interest policy, related party transaction

policy and continuous disclosure policy. The main purpose of these policies is to protect the

gist of the decision making process which is recorded and accepted in the real time basis

following the approval of related parties. Such developments are monitored constantly and

are made sure that appropriate practice is happening within.

Transfield is a certified body for customer service in Australian and international standard

and it is always looking forward to increase its customer service value. It also has a client

relationship program which is also referred to the health of a relationship. This allows

Transfield to monitor their performance and the relationship with the customers

simultaneously. They follow the sequence of getting the feedback from customers and hence

implementing any changes that tightens up the relationship even more.

Transfield had a casualty rate of 16.44% not so long ago. Now, its primary strategy is to

minimise the risk in the areas of health and safety. And Transfield has been successful so far.

Other operational highlights included the renewal of more than 90% of the contracts issued.

This proves the solid performances from their infrastructure and facilities management

business. Moreover, on the Report, The Company illustrates about the anticipation of

financial growth with the global recovery after the recession of 2008/09. (ASX Statement

2010)

As at August 23, 2010, Transfield reported a net full year loss, after tax, of $32.96 million for

fiscal 2010, recovering a little from the prior year. Though, it was better than in the prior year

when it made a loss of $38.02 million Loss. (AAP 2010)

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Woolworths Limited:

Corporate governance of this company aims towards the superiority on issues such as

compliance, community investment and environmental sustainability. This is the primary

target because it is large and affects a diverse range of interests. Like every other companies,

it looks forward to grow and realise innovating practices to continue the streak of rewarding

the shareholders. In addition, there has been a new target to acquire compliance and risk

management disciplines from the ground to the board or senior management level.

Woolworths have a great responsibility to satisfy millions of people all across Australia. In

about 810 stores, there are a minimum of 14 million customers every week. To satisfy these

hungry customers Woolworths make sure they offer customers the freshest of commodities

for best prices. Woolworths is looking forward to achieve this goal by increasing the

interaction with the suppliers and working for more efficient ways to maintain the best prices.

More training are continually provided to the employees to ensure the customers are satisfied

with the environment Woolworth has to offer.

Woolworths had an increase of 4.2% on sales which represented a $2.1 billion. Moreover,

Woolworths approach to international market esp. TATA from India has produced sales of

$252 million as compared to $187 last financial year. (Gardner, b 2010)

BHP Billiton:

Corporate governance of this company aims on excelling the principles and systems that

govern the discovery, development and production of Minerals and other Natural

resources.BHP Billiton reminds shareholders that it operates as a single entity under a dual

listed company structure management. One of its primary effort is to minimize the high risk

during Manufacturing.

BHP employees a lot of employees and monitors over them and confirms that they are not

involved in any violations of commonly accepted business terms and practices. It illustrates a

concern over a group which would rather move away from the integrity, dignity of the

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relationships and the respect towards the company. The CEO along with the company is keen

to meet the requirement that the board declared as a governance document.

BHP was involved in a court case where the union claimed that the BHP threatened the

employees to leave the unions which the company denies. The company says that is is a

matter of individual choice for him to stay in a union or leave it.

According to BHP, their revenues rose up 5.2 per cent $US 52.8bn in the year ended June 30,

from $US50.21bn the previous year, and the company is cautions on the short term outlook

for the global economy.

Ratio calculation:

The prime ratios to consult before an investment are the Profitability Ratios.

(Table 1)

Profitability Ratios

WOW BHP TSE

year 2008 2009 2010 2008 2009 2010 2008 2009 2010

Dividend yield (%) 3.8 4.0 4.3 1.7 3.2 2.7 4.8 5.2 4.5

Profit margin (%) 3.4 3.7 3.9 25.8 22.1 23.4 3.5 3.7 3.9

EPS (cents) 23.9 12.1 9.0 3.8 -13.5 6.2 16.3 -5.0 3.6

P/E Ratio 22.2 17.6 20.5 15.3 14.1 14.4 22.6 9.0 13.4

ROE (%) 27.1 27.0 26.7 40.1 28.0 25.7 15.8 15.9 16.0

ROA (%) 11.6 11.9 12.0 21.3 15.1 14.7 7.2 8.0 7.9

(Source: adapted from Investsmart 2010 & theaustralian.aegis 2010)

Other ratios such as Liquidity Ratios and Solvency Ratios also provide succulent information

about the financial position of the Three Companies.

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(Table 2)

Liquidity and Solvency Ratios

WOW BHP TSE

year 2008 2009 2010 2008 2009 2010 2008 2009 2010

Liquidity Ratio

Current Ratio 0.70 0.75 0.81 1.32 1.90 2.12 1.162 1.172 1.17

Quick Ratio 0.226 0.238 0.287 0.98 1.41 1.49 1.049 1.029 1.034

Solvency ratio

Debt ratio 0.602 0.586 0.585 0.49 0.48 0.45 1.828 1.480 1.188

Time Interest

Earning ratio

11.128 12.166 13.738 11.128 28.33 56.899 33.222 -0.434 4.202

Ratio analysis:

Profitability Ratios:

Profitability is the measure of result of overall performance and the effectiveness of the

companies. Therefore, we analyze the profitability ratios of all the companies we plan to

invest on and see if they can survive, grow and prosper or incur loss.

Dividend Yield:

Dividend Yield for Woolworths kept increasing from 3.8% on 2008 to 4% on 2009 and

finally, to 4.3% on 2010; whereas there was a little bump for BHP and TSE while progressing

from 2009 to 2010. However, Transfield has a higher dividend yield of 4.5% even though it

decreased from 5.2% on 2009. BHP has the lowest dividend yield of 2.7% on the year 2010.

Profit margin:

Net profit margin of BHP is sky-high when compared to the other contenders. While WOW

and TSE has a range between 3 and 4 %, BHP ranges above 23.4% even after a streak of

decrement from 2008.

Earnings per share ratio (EPS):

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EPS of all three companies has decreased from 2008 to 2010; prime reason being the

recession of 2008/09. EPS of BHP decreased by 0.173c; from 0.038c on 2008 to -0.135c on

2009. EPS of WOW also has a decreasing trend from 0.239c on 2008 to 0.121c on 2009

Likewise; TSE is no different and suffered even higher loss of 0.213c from 2008 to 2009. In

the end, Woolworths provides 0.09c for every share which is better than BHP at 0.062c and

TSE at 0.036c.

Price to Earnings Ratio (P/E ratio):

If the P/E ratio is too high, the company is overvalued and you probably don’t want to pay

more for a stock than it’s worth. All three companies incurred a decrease in P/E ratio on

2009. P/E ratio of WOW decreased to 17.6 from 22.2; P/E ratio of BHP decreased to 14.1

from 15.3 and P/E ratio of Transfield dropped to a staggering 13.6 less; 22.6 at 2008 to 9.0 at

2009. After the increasing trend in 2010 in all three companies, WOW had the highest ratio

of 20.5 in contrary to 14.4 of BHP and 13.4 of TSE.

Return on Equity (ROE):

ROE of BHP was 40.1% on the year 2008 and WOW and TSE had considerably low ROE of

27.1% and 15.8% respectively. But it changes in 2010 when ROE of WOW is highest at

26.7%.

Return on Assets (ROA):

While ROA of WOW and TSE had a streak of increment from 2008 to 2010 in ROA, BHP

faced a continuous decrement. Even after such negative trend, BHP is still able to maintain a

highest ROA of 14.7%.

Liquidity and Solvency Ratios:

Liquidity ratios measures the firm’s ability to raise cash to meet its short term financial

obligations whereas Solvency Ratios measures the firm’s ability and long-run viability to

meet its long term financial obligations.

Liquidity Ratios:

i) Current Ratio :

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Current ratio of BHP is 2.12 which is higher than TSE (1.17) and WOW (0.81).

BHP has $2.12 worth of Current Assets for every dollar of liability it owns. All

three companies have an increasing trend on the Current ratio hence suggesting a

progression of every company.

ii) Acid-test Ratio or Quick Ratio :

Both WOW and BHP had an increasing trend whereas TSE suffered 0.02 when

moving to year 2009. It ended to a ratio of 1.034 which again is an all time low in

its record. BHP has the highest Quick ratio of 1.49 followed by TSE at the ratio of

1.034.

Solvency Ratios:

i) Debt Ratio:

Debt Ratio is higher for TSE in 2010 which is at 1.188 decreasing from 1.828 on

2008. The ratio is also decreasing continuously from 0.49 on 2008 to 0.45 on

2010. Same goes for WOW, which also had a decreasing fashion on its ratio from

0.602 on 2008 to 0.585 on 2010.

ii) Time Interest Earning Ratio (TIE ratio):

TIE ratio is in increasing fashion from 2008 to 2010 for WOW and BHP but

BHP’s TIE ratio has increased phenomenally from 11.128 on 2008 to 28.33 on

2009 and finally, 56.899 on 2010. However TSE had a decrement of 33.646 of

TIE ratio when moving from 2008 to 2009 and finally had a small increment of

4.634 TIE ratio.

Explanation on why we chose the ratios:

Ratio Analysis helps us analyse the strengths and weaknesses of a company. It includes an

overview of success, failure, and progress of the company we chose. In our opinion, the ratios

we have referred are the ones which give enough information to make a sound decision.

Since, this analysis was conducted with an intention to invest in a stable organization with

high profit with a keen wish to receive a stable dividend and profit can be received. this

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report has focused more on profitability and financial strength of company. The ratios not

only provides a ground for comparing with other companies; it also illustrates the position of

a company in terms of short term and long term and give us a general forecast of the

Company’s future and its ability to cope with unexpected financial or economical changes.

The ratios provide us early-indications that allow us to act wisely before our investment is

destroyed by the wrong choice. The above mentioned ratios are not the end of it all and lots

of other ratios are calculated for the best of investment decisions. But, the ratios mentioned

above cover a considerable outline of the position of the company and their ability to return

on our investment.

To find the financial strength of the organization, the liquidity ratios and solvency ratios are

also calculated.

Profitability Ratios

Dividend yield ratio is possibly a useful indicator to the investor, since it allows the investor

to start making initial comparisons with other investment opportunities. It is the ratio of

dividends per share to the market price per share. It is a way to measure how much cash flow

we can get from each dollar we invest in an equity position (Horngren et.al 2010).

Profit Margin is regarded as a key indicator of profitability. This ratio measures how much

out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful

when comparing companies in similar industries. A higher profit margin indicates a more

profitable company that has better control over its costs compared to its competitors. The

Companies always strive for a high rate of return. The higher the return, the more net sale

dollars are providing profit to business (Financial ratio 2010).

We definitely wanted to know this because Earnings per share (EPS) because this ratio

illustrates the capacity of the company to pay dividends to its equity shareholders. EPS is the

amount of net profit per share of the company’s ordinary shares. EPS is mainly useful for

companies with publicly traded shares. It is quoted in the financial statement. If we compare

the EPS of a company to EPS from previous year, it indicates that the rate of growth of the

company’s earnings is growing on a per share basis (Wild J.J et.al 2007).

Price to Earnings Ratio (P/E ratio) is the ratio of the Market price of an ordinary share to

the company’s earnings per share. It is another important ratio people look at before throwing

in the money at any company. The P/E looks at the relationship between the stock price and

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the company’s earnings. This ratio gives an idea of what the market is willing to pay for the

company’s earnings. A high P/E ratio suggests that the investors are expecting higher

earnings growth in the future compared to the companies with the lower P/E ratio (Financial

ratio 2010).

Return on Equity (ROE) shows the relationship between the net profit and ordinary

shareholders’ investment in the company. This ratio, moreover, measures a company’s

profitability by revealing how much profit a company generates with the money shareholders

have invested. The ROE is useful for comparing the profitability of a company to that of

other firms in the same industry. It is also known as the shareholders’ investment (Horngren

et.al 2010)

‘Rate of Return on Assets is very useful indicator of how profitable the companies are in

relative to the total assets’ (Wild J.J et.al 2007) .This ratio measures the success of a company

in using its assets to earn a profit. For the shareholders, this profit is their return. It is

generally calculated by dividing the company’s annual earnings by its total assets. It is an

indicator of how profitable the company is in relation to its total assets.

Liquidity and Solvency Ratios

The Current ratio is a widely applied financial ratio used to test a company’s liquidity (also

referred to as its current or working capital position) by deriving the proportion of current

assets available to cover current liabilities.. The current ratio is used extensively in financial

reporting. However, while easy to understand, it can be misleading in both a positive and

negative sense - i.e., a high current ratio is not necessarily good, and a low current ratio is not

necessarily bad(Financial ratio 2010).

The Quick Ratio also known the quick assets ratio or the acid ratio test - is a liquidity

indicator that further refines the current ratio by measuring the amount of the most liquid

current assets there are to cover current liabilities. The quick ratio is more conservative than

the current ratio because it excludes inventory and other current assets, which are more

difficult to turn into cash. Therefore, a higher ratio means a more liquid current

position(Horngren et.al 2010)..

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The Debit Ratio compares a company’s total debt tot to its assets which is used to gain a

general idea as to the amount of leverage being used by a company. A low percentage means

that the company is less dependent on leverage, i.e., money borrowed from and/or owed to

others. The lower the percentage, the less leverage a company is using and the stronger its

equity position. In general, the higher the ratio, the more risk that company is considered to

have taken on(Wild J.J et.al 2007).

Final investment decision:

After all the quantitative and qualitative analysis we have come to realize that our investment

is rather safe with Woolworths and there is a good chance of return for a long term.

Although, Transfield reported some profit in the year 2010; All the ratios are against

Transfield because of its loss in the financial year 2009.Transfield, as it seems, did not cope

well with the Recession of 2008/09. And it is on its way to recover its losses. So, Low return

and Low profitability ratios is a big no-no for our investment.

We would have invested on BHP after accepting the fact that its profit almost doubled in

2010 but its volatility was very scorching. Like Transfield, BHP did not cope well with the

Recession. Most of the profitability ratios dipped very low in the year 2009. It seems people

cut back on what BHP has to offer on the periods like recession. Since, we want long term

stability on our investment and gazing over the fact that people demands change

exponentially with time; which greatly affects the profitability of BHP, we gave up on BHP.

Finally, we came to the final decision to invest on Woolworths. Even in the worst market

period like recession people still needed Woolworths and what it had to offer. From food to

low prices commodities on BigW, Consumers did not gave up on Woolworths. Besides, Most

of the profitability ratios are higher for Woolworths. However, Dividend yield of Woolworths

is less than Transfield but the huge loss of Transfield in the financial year 2009 made us take

Woolworths as our primary Investment target.

We might as well share the investment with Transfield for two reasons.

i) If the investment on Woolworths fails, all will not be lost.

ii) Investing in a company that is expanding fast, would profit us in a short

term.

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Reference List

AAP 2010, Transfield reports loss for 2009/10, viewed at 25 August

2010,http://news.theage.com.au/breaking-news-business/transfield-reports-loss-for-200910-

20100823-13i3n.html

AAP 2010, Transfield returns to FY Profit, viewed at 25 August 2010,

http://news.theage.com.au/breaking-news-business/transfield-returns-to-fy-profit-20100826-

13sys.html

About Australia’s retail industry 2010, Retail Industry Australia, p.1of4, viewed 18 August

2010, http://www.insideretailing.com.au/RetailIndustryAustralia.aspx

ASX Statement 2010, TRANSFIELD SERVICES DELIVERS 33 PER CENT INCREASE

IN NET PROFIT, viewed 21 August 2010,

http://www.transfieldservices.com/icms_docs/65415_Transfield_Services_delivers_33_per_c

ent_increase_in_net_profit.pdf

Fickling, D 2010, BHP Billiton more than doubles full-year profit, Dow Jones Newsletters,

viewed August 28 2010, http://www.theaustralian.com.au/business/bhp-billiton-more-than-

doubles-full-year-profit/story-fn65t1pq-1225910023134

Financial ratio 2010, financial ratio: Definition from Answers.com, viewed at 25 August

2010, http://www.answers.com/topic/financial-ratio

Gardner, B 2010, Woolworths pulls in $51bn in sales, Queensland Business Review, viewed

at 29 August 2010, http://www.qbr.com.au/news/articleid/68737.aspx

Horngren, Harrison, Best, Fraser & Willet 2010, Financial Accounting, 6th edn, Pearson

Australia, French Forest NSW

Kennon, J 2010,’Analysing a Balance Sheet’, viewed 20 August 2010,

beginnersinvest.about.com

Wild J.J, Subramanyam K.R & Halsey R.F 2007, Financial Statement Analysis, 9th edn, McGraw-Hill/Irwin, NY

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