Financial Analysis of Woolworths and Metcash

Table of Contents 1.0 Executive Summary ................... 3 2.0 Business Description .............. 4 2.1 Mission ................. 4 2.2 Ojectives .. ............. 4 2.3. Keys to Success .. ............ 4 3.0 Market Analysis ..................... 5 3.1 SWOT Analysis .............. 5 3.2 Market Opprtunity ..... . 5 3.3. Market Research .... . 6 3.4 Market Trends ... . 7 3.5 Competitive Advantage ... 9 4.0 Solution 10 4.1 Testing ... 11 5.0 Competitor Analysis ..... 12 5.1 Price Comparison ..... ..... 12 6.0 Strategy . 13 6.1 Business Model ..... 13 6.2 Marketing .. 15 6.3 Future Expansion ... 15 6.4 Timeline .... 16 6.5 Brand Positioning .. 17 6.6 Risk Management .. 17 7.0 Management Team ........ 18 7.1 Legal Structure ..... 19 8.0 Financials . ... .20 8.1 Funding . .21 8.2 Modelling Assuptions. ... 21 8.3 Sensitivities .. . 22 9.0 Appendices ....... 23 10.0 Bibliography .... 24

1.0 Introduction This report is to compare the financial situations of two companies, in the food and staples retailing industry in Australia; Woolworths Limited and Metcash Limited. The primary purpose of this report is to determine which company is an appropriate and profitable company to invest in. Specific objectives include analysis of annual reports of Woolworths and its industry competitor Metcash. This report will give us in depth analysis on the two companies financial position and will help in determining which company is more profitable for potential investors.

2. Analysis of Financial report data 2.1 Profitability and efficiency of operations The relationship between the company's profit and the investor's return makes ROE and ROA particularly valuable metrics to examine. As shown in Table 1, strong and stable Woolworths ROE ROA ratios provide a clear picture of managements effectiveness. This shows that not only the mature characteristic of the industry seems to produce stable return, but also the business has used its equity and assets more efficiently in operating and investing activities to generate more profits. Its net profit margin has also been stable and good for the last 2 years. In comparison, Metcash ratios show the company has been significantly less efficient in optimizing asset utilization and generating earnings than Woolworths. Metcash need to reduce its operating and interest expenses so as to increase its net profit margin. Woolworths can be more attractive company to invest in. The higher the ROA ratio indicates the company is earning more money on less investment. High ROE also confirms that Woolworths generate profits more efficiently than Metcash which made Woolworths more attractive to investors.

2.2 Activity Analysis A firm's operating activities require investments in both short-term and long term assets. Activity ratios describe the relationship between the firm's level of operations and assets needed to sustain operating activities. Asset turnover is important in determining firms ROA; it also formulates reasons of how it will affect firm's ROE. 2.2.1 Short term activity ratios Working capital is our main concern while evaluating a company. Receivables turnover ratio measures company's efficiency in collecting its sales on credit and collection policies. As table 2 shows that a high receivables turnover ratio of Woolworths

implies either that the company operates highly 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 of Metcash means collection takes longer. Accounts receivable represents the indirect interest free loans that the company is providing to its clients. Therefore, it is very important to know how costly these loans are for the company. The lower the ratio is the longer receivables are being held and the risk to not be collected increases. A low receivables turnover ratio implies that Metcash should re-assess its credit policies in order to ensure the timely collection of credit sales that is not earning interest for the firm. Inventory turnover indicates the efficiency of inventory control and the velocity of merchandise through the business. Metcash was able to convert its inventory into sales at a slightly faster pace compared to Woolworths. 2.2.2 Long term activity ratios Metcashs total asset turnover ratio is approximately 18% higher than Woolworths as shown in table 2. This represents Metcash is more efficiently utilizing its resources to increase its production as compared to Woolworths. Metcash's very high fixed asset turnover ratio can be contributed to the fact that PPE forms a very small part of Metcash's total assets. Ahigh ratio indicates they have less money tied up in fixed assets for each unit of currency of sales revenue. If compare with Woolworth on high fixed asset turnover ratio we can conclude that Metcash has been utilizing its fixed asset optimally. 2.3 Liquidity Analysis Table 3 Liquidity Ratios are employed to determine the firm's ability to pay its short-term liabilities. Liquidity analysis determines ability to cover its liquidity risk. Liquidity risk may arise due to shortfall or over liquidity within the firm and this in turn lead to firm's disability of fulfilling its liquidity needs. 2.3.1 Short-term Liquidity Ratios Current and quick ratios for Woolworths have been dangerously low uniformly less than 1 in the last 2 year indicating the company is not able to maintain stable liquidity. Major concern is that the company has negative working capital and is probably facing a liquidity crisis. It seems Woolworths is falling in to liquidity crunch and might need short term funds to meet its current liabilities. While Woolworths is behind on current and quick ratios by a very high margin except cash flow liquidity, Metcash has double the cash ratio as compared to Woolworths, however, its quick ratio less than 1 indicates its ability to meet its short term liabilities also questionable. The low quick ratio of both companies indicates substantial portion of its liquidity is tied up in excess inventory. The quick ratio can be improved by shortening the days inventory.

2.3.2 Long term Debt and solvency Analysis The analysis of a firm's capital structure is essential to evaluate its long - term risk and return prospects. Table 4 presents that both firm's debt to equity and debt to capital ratios are consistently below 1 which shows that they employed more equity than debt as its source of financing. Debt to total capital has also been consistently been around 0.5 - 0.6 during the last 2 year period. This shows that firm has been stable with its financing policy and has not done much change with its debt and equity mix. Overall, long term solvency ratios of Woolworths seem to be performing more optimally. Metcash has the higher debt to equity, debt to capital. Historically a debt to equity ratio of 2:1 is considered optimal therefore can still rely on debt to finance its future undertaking rather than issuing new shares. It is observed that Woolworths has interest coverage ratio greater than Metcash but that can be attributable to its low profit margin as compared to Woolworths. It seems Woolworth is at par with its competitors in terms of debt and solvency ratios. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Both companies show optimal financial structure. They have low debt levels, low risk of insolvency. This indicates both companies are stable in the long-term, a lower financial risk, therefore be able to attract additional lending capital.

3.1 Cash Flow Analysis Cash flow analysis is essential to understand that whether the firm's cash flow have the ability to sustain the business, to meet unexpected obligations and to meet its short term liabilities. This also helps to understand whether firm will be requiring additional financing and firm can take advantage of new business opportunities as they arise. 3.1.1 Operating cash flow As Table 4 shows, interest coverage ratio indicates the companys ability to use its cash flow to satisfy its fixed financing obligations. The higher the number, the stronger a company is likely to be. Conversely, a low number suggests that a companys fortunes are looking ominous. Woolworths has better interest coverage ratio as compared to Metcash which means that Woolworths has better ability to service its debts than Metcash. Woolworths higher cash flow per share value means that earnings per share should potentially be higher

3.1.2 Investing cash flow

Woolworths investing cash flow was negative in the last two years. there was a significant increase in investment in PPE. Fixed asset growth reflects ongoing capital expenditure and property development expenditure offset by disposals of property and ongoing depreciation.

The was No significant addition or acquisition for metcash in the period. 3.1.3 Financing cash flow

net financing cash flow for both companies was negative in the last two years. There was an increase in both borrowing and repayment for Woolworths while there was a decrease in . . 4.0 Conclusion

On comparing the performance of Woolworths with Metcash we can conclude that Woolworths is way ahead its major competitor. Woolworths can be more attractive company to invest in. The higher the ROA ratio indicates the company is earning more money on less investment. High ROE also confirms that Woolworths generate profits more efficiently than Metcash which made Woolworths more attractive to investors. Despite Woolworths had a risk of short- term solvency, Woolworths is considered as the better company to invest in The company is a lean, mean profit creator have a competitive advantage with high efficiency, low risk and great return to shareholders.