Analysis of Income Statement

Woolworths is a major retail company from Australia and provide services throughout New Zealand and Australia. Based on the revenue, they are the second largest organization from Australia. Moreover, they were the 1^st variety type store in world to utilize the cash registers that also printed receipts for the customers. The secret of their success was the offering the customers with great offers associated with the goods. Over the past decades Woolworths were able to became the part of British national fabric and held a high position, so that people started looking it as the centre of community. The aim of the company were to develop the stock turns and maximize the efficiency of network through assuring that their customers are served by greater than 800 stores that can be found on every street all over Australia and New Zealand. They have invested a big amount in their supply chain management process that has great impact on all the divisions of the company (Woolworths Supermarket – Buy Groceries Online, 2017).

The aim of this report is to state the financial position of Woolworths Limited over the past six years and the trends in their financial figures. It will also identify the significant items from the income statement, balance sheet and cash flow statement and the analysis of various ratios for the past five years.  Section 2.0 will provide the analysis of statement of income, section 3.0 will provide the analysis of balance sheet, section 4.0 will provide the analysis of statement of cash flow, section 5.0 will present the analysis of ratios and finally, section 6.0 will present the conclusion.

The income statement of Woolworths Ltd shows that the net profit of the company over the last six years is in increasing trend except for the year 2012.The fall in net profit figure during 2012 was primarily because of less revenue generations from other sources as compared to the other years. Further, three significant items from the income statement of Woolworths are operating revenue, interest revenue and interest expense, which will be explained in details through the horizontal analysis.

Figure 2.1: Percentage changes for operating revenues

(Source: Created by author)

As shown in the figure 2.1 for the operating revenue, it can be identified that the operating revenue was steadily increasing till year 2014. However form the next year it started falling and for the year ended 2016, the growth rate for operating revenue was (– 4%). The fall in the generation of revenue was due to fall in the sales of various goods and ssrvices (Ball et al., 2015).

Analysis of Balance Sheet

Figure 2.2: Percentage changes for interest revenues

(Source: Created by author)

It is revealed in the figure 2.2 that the interest revenue of the company is in decreasing trend till 2014, however it came down to nil amount in 2015 as well as 2016. What was increased at 17% over the years from 2011 to 2012 that came down to 0% in 2015 and continued the same in 2016 also. That shows that the company is not able to make enough investment out of their surplus fund.

It can be identified from figure 2.3 that the interest expense is in increasing trend till 2013 and increased significantly by 29% over the years from 20112 to 2013. However, in 2014 it fell significantly by 32% and till 2016 it was in decreasing trend. It shows that the company borrowed bigger amount during 2013 and from 2014 onwards it started paying-off the loan and thereby the interest expenses started reducing (Bepari et al., 2016). 

The balance sheet of Woolworths Ltd reveals that the financial position of the company is quite strong and it is maintain the sustainability over the last six years. Three significant items from the balance sheet of Woolworths are long-term debt, current investment and account payable. These three items has been chosen as they have great impact on the financial position of the company. 

However it started reducing from 2013 and was in decreasing trend till 2015 and finally reduced by 26% in 2015 as compared to 2014. It shows that the company was able to pay off their debt regularly out of the surplus income. However, during 2016, the company further borrowed an amount of 791,600,000 and the long-term debt increased by 26%.

It can be identified from figure 3.1 that the current investments of the company are in decreasing trend till 2014 and significantly increased by 1384.25% during 2015. It was primarily due to the availability of cash during 2015 that was used for investing over short-term period. However, during 2016 it significantly fell by 70.29% as compared to the huge increase of 2015.

With regard to the accounts payable, it can be identified that the accounts payable of the company is in increasing trend except for the year 2012, where it was decreased by 0.5% and significantly went up by 13.76% during 2014. It reveals that the company is not able to pay off their creditors regularly out of their surplus income. However, it was able to reduce the rate by the year 2016 and achieved the rate of 1.37% (Johnston et al., 2016).

Analysis of Cash Flow Statement

The aim of all the organization is to manage the operation of cash flow in a profitable way, so that after expenses towards financing, operating and investing operations, it may retain some cash for to meet other obligations. Three significant items from the cash flow statement of Woolworths are payment to suppliers and employees, investment purchased and proceeds from issue.

As per the figure 4.1, it is identified that over the last six years there were no significant changes in the trends of payment to suppliers and employees. However, the company’s payments towards the suppliers and employees have been reduced to 1.11% during 2016 as compared to 4.77% in 2012. It reveals that the company’s payment towards their employees and creditors are regular or the quantity of purchase is getting reduced (Scott & Walker, 2016).

As it can be seen from the figure 4.1 that the purchase of investment by the company is not in regular trend as they are not able to purchase during every year. They were able to purchase investment during 2012, 2013, 2015 and 2016. However, they were not able to make any purchase of investment during 2011 and 2014. The reason behind this may be that the company did not have surplus fund to purchase any investment during 2011 and 2014.

With regard to the proceeds from issue, from figure 4.3, it can be identified that till 2013 it was in increased trend and the [roceeds went up by 29.08% as compared to 2012. However, from 2014 it is in decreasing trend and in 2016 it reduced by 32.01% as compared to 2015. It reveals that the company has reduced issue of shares (AO Dos Santos, Svensson, & Padin, 2014). 

	30th June 2011	30th June 2012	30th June 2013	30th June 2014	30th June 2015	30th June 2016
Liquidity
Acid test ratio	0.31	0.22	0.23	0.21	0.23	0.16
Current ratio	0.8	0.86	0.91	0.95	0.84	0.83
Efficiency
Accounts receivable turnover	66.22	41.27	98.07	100.20	109.71	128.41
Total asset turnover	8.23	8.95	9.76	9.10	8.21	7.72
Profitability
Return on total asset	0.32	0.29	0.38	0.37	0.29	-0.31
Profit margin ratio	0.04	0.03	0.04	0.04	0.04	-0.04
Solvency
Debt ratio	0.63	0.61	0.58	0.57	0.56	0.63
Equity ratio	0.37	0.39	0.42	0.43	0.44	0.37

The liquidity ratio of Woolworths Limited showing that the liquid position is quite good and they are able to pay-off their short term obligations with the available assets. 

It can be identified that the acid test ratio of the company is maintained at more or less same level. Except for year 2012 where the ratio reduced to 0.22 as compared to the 0.31 of 2011. And considerable fall in 2016 that reached to 0.16. The reason behind this is availability of cash during 2012 and 2016.  

It can be identified that the current ratio of the company is maintained at more or less same level. Current ratio of Woolworths Limited is quite good and is near to 1. It shows that the company is maintaining a balance between their current assets and current liabilities.  

Analysis of Ratios

The efficiency ratio revels that the company’s efficiency ratio is well maintained and the company is able to turn their sales into asset.   

However, it started falling from the next year and reached to 7.72 in 2011 that was 8.23 in 2011. Therefore, the capability of the company to turn their sales into is reducing over the year.

The income statement of Woolworths Ltd shows that the net profit of the company over the last six years is in increasing trend except for the year 2012.The fall in net profit figure during 2012 was primarily because of less revenue generations from other sources as compared to the other years 

The items that are not included in the balance sheet are the fixed asset segregation and segregation of shares into preference shares and equity shares which are crucial for the presenting the balance sheet. The segregation of assets enables the users to get an idea regarding the holding period and whether they can be used to pay off the short-term obligation or the assets are held for long-term period. Further, the segregation of shares into preference shares and equity shares enables the user to get an idea regarding how much to be paid as preference dividend out of the net earnings and the number if shareholders whose dues are to be paid on preference basis (Spillan & Ling, 2015).

Conclusions:

From the above information, it is concluded that from the performance aspect Woolworths is performing quite good as their sales and net profit are in increasing trend except for the year 2016. However, the account turnover rate of the company is continuously increasing. Therefore, the company must take some steps to improve their collection period. For instance, they can engage debt collector to reduce the collection period. Further, the company must try to pay-off their debts out of the surplus earnings and reduce the percentage of debt and thereby reduce the total obligation. The company is spending a huge amount towards the lease rental. As alternative, they can purchase the asset through one time investment rather than paying regular rents on lease. The company further, make some corrections in the format of balance sheet to reveal the segregation of fixed assets as equipment, furniture, building and shares into equity shares and preference share to enable the users to have a more clear and transparent view.  

Reference:

AO Dos Santos, M., Svensson, G., & Padin, C. (2014). Implementation, monitoring and evaluation of sustainable business practices: framework and empirical illustration. Corporate Governance, 14(4), 515-530.

Atrill, P., McLaney, E., & Harvey, D. (2014). Accounting: An Introduction, 6/E (Vol. 6). Pearson Higher Education AU.

Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. V. (2015). Deflating profitability. Journal of Financial Economics, 117(2), 225-248.

Bepari, M. K., Bepari, M. K., Mollik, A. T., & Mollik, A. T. (2016). Stakeholders’ interest in sustainability assurance process: An examination of assurance statements reported by Australian companies. Managerial Auditing Journal, 31(6/7), 655-687.

Johnston, R., Stafford, J., Pierce, H., & Daube, M. (2016). Alcohol promotions in Australian supermarket catalogues. Drug and Alcohol Review.

Scott, P., & Walker, J. (2016). The only way is up: retail format saturation and the demise of the American five and dime store, 1914-1941. Business History Review.

Spillan, J. E., & Ling, H. G. (2015, January). Woolworths: An Adizes Corporate Lifecycle Perspective. In Business History Conference. Business and Economic History On-line: Papers Presented at the BHC Annual Meeting (Vol. 13, p. 1). Business History Conference.

Woolworths Supermarket – Buy Groceries Online. (2017). Woolworths Online. Retrieved 12 April 2017, from https://www.woolworths.com.au/