Financial Analysis of Woolworths
Financial Analysis of Woolworths Limited 10 October 2011 By: Huatong (Claire) Liu To: Potential investors Executive Summary The primary purpose of this report is to determine whether Woolworths Limited is an appropriate and profitable company to invest in. Specific objectives include analysis of annual reports of Woolworths and its competitors (Wesfarmers) as well as interpretation of relevant government and industry statistics, stock exchange, market information and media comments. Further, Woolworths’s financial strengths and weaknesses are identified.
The potential growth prospects for Woolworths, the future of the food and staples retailing industry, and the risks versus the benefits of investing in Woolworths are all considered to determine whether Woolworths is profitable for potential investors. Based on relevant information and detailed analyses, Woolworths Limited is considered as the best company in the food and staples retailing industry with high efficiency, low risk and great return to shareholders. In the face of a down economy, the company’s growth rate has been significantly low since 2009.
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Thus Woolworths had higher level of liquidity. Furthermore, Woolworths had an interest coverage ratio of 10. 92, comparing to 6. 14 of Wesfarmers and 5. 87 of the food and staples retailing sector. This ratio reveals that Woolworths had a higher ability of earnings to cover interest and finance expense. In conclusion, Woolworths can be ranked as one of the low risk corporations in the food and staples retailing sector. Market – based Ratios Price/Earnings ratio measures the amount that the market will pay for $1 of profit. Generally a high P/E suggests that investors are expecting higher earnings growth in the future.
As the industry average P/E ratio (times) was 15. 2, Woolworths had a P/E ratio of 15. 60, which is at a moderate level. Compared to the previous year, the P/E ratio of Woolworths decreased by 6. 7%. This is mainly because the market price per ordinary share did not change much but earnings per share increased by 6. 48%. Compared to 19. 13 of Wesfarmers, Woolworths has a lower stock valuation. looking at P/E ratios as part of your stock analysis is to consider what premium you are paying for a company’s earnings today, and determine if the expected growth warrants the premium.
Also compare it to its industry peers to see its relative valuation to determine whether the premium is the worth the cost of the investment. The chart (from ASX website) of daily prices over the most recent 6 months for security of Woolworths Ltd and Wesfarmers illustrates a very obvious decreasing trend. In the near future, the market share price will continue to drop. P/E ratio is going to fall as a consequence. In addition, the dividend yield of Woolworths was 4. 48%. About 4. 48 per cent of a share’s market value returned as dividends to shareholders of Woolworths each period.
However, this value is lower than the sector dividend yield, which was 5. 5% and Wesfarmers’ dividend yield, which was 4. 70%. The Reserve Bank of Australia (RBA) kept its interest rate unchanged at 4. 75 per cent at its daily board since 03 Nov 2010 and indicated in its statement that the RBA was open to lowering the cash rate if inflation pressures ease. Due to the high inflation at present, the RBA will be reluctant to cut rates any time soon. Compared to the current interest rate and high inflation rate, the annual return of investment in Woolworths is not attractive to income seeking investors.
Therefore, it would be a better strategy for potential investors not to buy Woolworths’ shares at the moment but wait till later. http://www. startupsmart. com. au/growth/catch-of-the-day-moves-into-grocery-market-with-new-site/201109213946. html Catch of the Day moves into grocery market with new site By Patrick Stafford Wednesday, 21 September 2011 Online tralors http://www. internetretailer. com/2011/03/18/online-grocery-shoppers-home-delivery Management Managing Director and Chief Executive Officer: Grant O’Brien Mr O’Brien succeeded Mr Luscombe as Managing Director and Chief Executive Officer on 1 October 2011.
He has been working in Woolworths for over 24 years and therefore has a broad experience across diverse areas of the business. Mr O’Brien created Australia’s first supermarket loyalty scheme and developed the company’s liquor strategy and new home improvement venture. Current Outlook The economy is volatile at the moment due to both global and domestic factors, such as Europe Debt Crisis and fiscal stress in the US. The retail sector has been in a depression as the consumer confidence slumped and household savings rate rose. This was seen particularly in the second half of last financial year.
http://www. theaustralian. com. au/business/opinion/luscombe-says-woolworths-outlook-difficult-to-predict/story-e6frg9lo-1226122000746