QUESTION
Murdoch University
Murdoch Business School
MBS605 BUSINESS FINANCE
Group Assignment
1

CASH FLOW ANALYSIS AND SECURITY VALUATION
Woolworths Ltd
Semester 1, 2012

Assignment submission summary
Component Worth Due date
Group Assignment 25%
Tuesday  8
*Group Evaluation
Tuesday 8
th
th
May
May

* A photocopy is to be submitted.  The original is for your use and should be kept with your records.

Please be aware that the material covered in this assignment is examinable.

Objective
CASH FLOW ANALYSIS AND SECURITY VALUATION
Due Tuesday 8
2

th
May
To evaluate the performance of a firm and its share’s value a financial analyst must be able to analyse
the firm’s financial statements.  When analysing these statements, the analyst must focus on cash
flows of the firm because ultimately it is changes in the cash flows of the firm that determines its
value. This is also a market consensus. Hence understanding how and why cash flows change is an
indispensable component of security valuation.
The objectives of this assignment are:
1. To equip you with a good understanding of the financial statements of the firm;
2. To build up your analytical skills in the area of cash flows analysis;
3. To apply the methods of security valuation to value a real world company.
In addition to developing your knowledge of financial statements and security valuation, the
assignment aims to develop the ability to work in groups: learning how to coordinate with and learn
from peers as well as how to deal with any negative issues that may arise in the group process.  As
such, the assignment submission will include an evaluation of the group process.  The group
evaluation will not attract any marks; however the rest of the assignment will not be marked
without a group evaluation.  To assist in the smooth running of groups some guidelines are included
with the assignment instructions.  These are to be used as a guide only.  Groups have their own
personalities, so it is important to establish your group norms and plans in a way that best suits your
group.
Please ensure that group process problems are discussed and resolved as they arise.  If your group
encounters any problems that it cannot resolve you can ask your course coordinator to join the group
for advice or mediation. Do not leave this to the last minute. Your course coordinator will require all
group records to have been kept so that an objective record of proceedings is available.
Group evaluation:
As professionals, you are required to design your own evaluation form for your group
assignment. The evaluation should assess whether your group has achieved your stated goals
in completing the assignment.

Group formation:

Assignment groups will be formed in week 2, week commencing February 27
.  It is your
responsibility to ensure you are a member of a group.

The group assignment can be done in groups of 3 or 4. The assignment takes the form of case
studies or research projects. External students have the option of either doing the assignment
individually or as a group assignment. If you are an external student and wish to join with
another external or internal student to complete the group assignment, please inform me prior
to the lecture on March 5
th
.
th

Each group member will provide all other group members with contact details, either phone number
or email address.  A date and time within the next 7 days will be set for the first group meeting.
First group meeting
Ensure that all group members have their say in this meeting.  This ensures that everybody is aware of
each other’s expectations. To ensure that meetings run efficiently one group member should
undertake the role of facilitator, and another the role of note taker.  These roles can be filled on a
rotating basis.  The role of the facilitator is to manage the meeting, ensure the group code of
behaviour is adhered to and ensure that everybody has a chance to contribute.
Reaching a consensus regarding a desired code of behaviour ensures that all members know what is
expected of them. If all group members observe the code of behaviour everybody should learn from
and enjoy the group experience.
Establishing strategies now for if a member does not conform to the group code of behaviour, or does
not undertake their assigned task by an appropriate time or to an acceptable standard means that all
group members have been involved in establishing these strategies. Therefore if somebody does not
conform to the group standard they are more likely to see the subsequent course of action as fair and
objective.
Determining the skills of the various group members allows for tasks to be allocated in a manner that
optimises the group output. When allocating tasks; remember that one of the objectives is to learn
from each other.
At the end of this and every meeting you should set the next meeting date, time and venue.
Subsequent group meetings:
A record will be kept of –

Meeting date, time and place
Members in attendance
If any members are late and whether they have informed other members.
Who undertakes the roles of facilitator and note taker.
Tasks achieved since the last meeting.
Decisions made by the group (point form OK)
Where tasks are assigned: who is to do what by when.
Next meeting details – date, time, place.
If any disputes arise that require mediation from outside of the group a copy of these records will be
required.
3

Group Evaluation is to be submitted on May 8

4

th
together with your group assignment.
In order for individuals and the group to review the group process a group evaluation will be
conducted at the end of the group assignment. This is primarily for your use. Please take time
to conduct this review, as it provides an opportunity for improving the group process for
continuation of the assignment. A photocopy of this evaluation will be submitted with the
group assignment

Assignment requirements:

1. Download all available financial data for Woolworths Ltd (ASX Code: WOW) from
FinAnalysis.
2. Give a brief description of Woolworths Ltd.
3. Explain the purpose of financial statement analysis.
4. Verify the construction of cash flow statements by WOW using the methods
explained in Chapter 4 of Hawawini and Viallet (4
th
edition, 2011).
5. Analyse the firm’s current operation using its financial statements (i.e. income
statement, balance sheet and cash-flow statement. You should also take into account
supply and demand factors).
6. Use an appropriate dividend valuation model to value WOW’s shares (Hint: use the
final dividend figures).
7. Draw a graph of Woolworths’s adjusted share prices and compare with your analyses
in questions (5) and (6).
8. Use the information and results from your analyses in questions 5-6 above; identify
areas of cash flows where the firm needs to pay attention to.
9. Suggest relevant investment and financing strategies to improve the firm’s cash flow
position.
10. Justify your recommendation in terms of shareholders’ wealth maximisation.
Hint: Look at the entire operation of the company from a finance perspective as well as the growth
prospect of the company (you should focus on changes in the firm’s cash flows).

Report Submission:

Write a professional looking report for the management of the selected company with your
recommendation. Your recommendation(s) should be succinct and you need to highlight
expected outcomes or possible financial consequences of your recommendations.

The report should not exceed 2,500 words plus appendices. The body of the report should be
self-contained, while the appendices should provide further details for interested readers. It is
your decision as to what to be included in your report and in the appendices. However, make
sure they are relevant to your analysis.

You should state any assumption that you think necessary for your analysis. You should also
report any difficulty encountered in obtaining the data for this assignment. It is up to you to
decide which course of action is appropriate in the circumstances. I do not expect every group
to use the same assumptions. However, I do expect your assumptions to be plausible and for
you to justify them.

Referencing

Ensure you reference all sources of information used for the report. When indicating the source of a
point-of-view / evidence it is essential to include the reference both in the body of your writing and in
the bibliography.
The referencing style used in Finance is Chicago, where the author’s name(s) and the
publication data of the reference are included in brackets after the relevant material and full
details are provided in the bibliography. The Murdoch library website has information on
referencing techniques. Under ‘Find’ type citation guides.

Recommended references:
In addition to your textbook, you should read at least the relevant chapters in the following references
(available in reserve section in the library):
Penman, S.H., 2010. Financial Statement and Security Valuation. Fourth Edition, McGraw-Hill.
Peirson, G., Brown, R., Easton, S., Howard, P., and S. Pinder. 2009.  Business Finance, 10
edition.
Mc-GrawHill, Australia.
Viney, C., 2009. McGrath’s Financial Institutions, Instruments and Markets, 6
edition, McGrawHill,
Australia.

Pike, R. And B. Neale, 2009, Corporate Finance and Investment: Decisions and Strategies, 6

edition, Financial Times Prentice Hall, Limited.

You might also find the following websites useful:
Australian Securities Exchange:
www.asx.com
Australian Prudential Regulation Authority:
www.apra.gov.au
Australian Financial Markets Association:
www.afma.com.au
Australian Taxation Office:
www.ato.go.au
Australian Securities and Investments Commission:
www.asic.gov.au
Reserve Bank of Australia:
www.rba.gov.au
Australian Bureau of Statistics:
www.abs.gov.au
Financial Times Stock Exchange:
www.ftse.com
London Stock Exchange:
www.londonstockexchange.com
5

th
th
th
Australian Financial Review:
www.afr.com
New York Stock Exchange:
www.nyse.com

Accessing data from FinAnalysis:
1. Go to Murdoch Library on the web
2. Select
3. Select F. Then select
Journal databases
4.       Select Company Profiles
FinAnalysis
5.       Enter the ASX code or partial name and select Search
6.       This will present the ‘Main View’. Use the menu to the left to access additional
information.

Alternatively:
4. Select Search Tool

5. Construct your own queries. The program will search the database to identify
companies which match your search criteria. This tool is menu driven and
reasonably self explanatory. Ensure that under ‘Search Scope’ (darker blue box in
bottom half of page) you select a Trading Status of ‘Listed companies only.’
Remember: You are expected to contribute fairly to your group’s assignment. Free-riders are
not welcomed!

****   END OF ASSIGNMENT DOCUMENT   ***

SOLUTION

1. Introduction

Launched in 1924 in Sydney, Woolworths ltd has grown into a household name. The growth of Woolworth can be analysed from the fact of its presence in metropolitan and regional centre of Australia.  Formed as a company in 1933, Woolworths finally decided to go public in 1993 and was finally listed on the Australian stock exchange. 1 billion shares were offered and the issue was oversubscribed by 2.65 billion share applications. The company also operates 165 Big W stores supplying general merchandising items in both Australia as well as New Zealand. The company also boasts of international operations outside Australia and New Zealand; it operates more than 62 electronic stores under the Croma brand name in India as well.

Woolworths has always aimed at maximization of returns to its shareholders. With its constant growth in revenues and continuous expansion Woolworth’s has grown into a reliable brand in the stock market. The main aim of this paper is to analyse the profitability of the company and its cash flows. The main aims of the financial statement analysis are to analyse financial position of the company and determine its profitability.

(Woolworths, 2012 , 1 )

2. Company’s Recent Performance

2.1   Revenue

Woolworths being the oldest and the most trusted in the food business has consolidated its position in the market over past 84 years. According to a survey Woolworth‘s occupy over 70% of the market share in Australian food retail market and over 2700 stores all over the country. With over a 70% market share it seems that Woolworth’s does not have any real competition. But however the strengths of the competitors should never be underestimated by any organization to ensure maximum profitability.

Figure 1: Market Share of Woolworth’s Australia (freshplaza.com,2012, 1)

Woolworth’s with primary business activities concentrated in the Super markets and food and liquor is the major contributor of the group’s revenues. A continuous growth of the group’s revenues can be seen from the figure below.

Figure 2: Revenue Growth of Wool worth’s Australia 2008-2011(Annual Reports Woolworth ,2012,1-100).

The Woolworth’s sale has been growing constantly from 2008- 2011, the increase in sales has been consistent from $47,034 in 2008 to $ 54,142 in 2011. The launch of ‘Project Refresh’ and ‘Everyday Low Prices’ strategies in 2000 addressed with a focus on reorganisation, line items and end-to-end supermarket supply chain improvements. Woolworth’s have undertaken massive restructuring activities to introduce supply chain efficiencies and cost saving techniques.  This is clearly evident from the fact that Woolworth’s cost savings have been estimated to about $0.8 billion in the past 10 years. With the rationalization and efficiency introduced in the non-food sector further there cost savings are likely to increase. The greatest achievement for Woolworth’s is the reduction in the Cost of goods sold , this clearly emphasises the efficiency in sales and the high conversion rate of receivables to cash.( www.investsmart.com.au ,2012, 1 ).

Figure 3: Cost of Goods Sold Woolworth’s 2008 – 2011(Woolworth’s.com ,2012,1-110).

The reduction in the Cost of goods sold has been t of goods sold from 74.27% in 2010 to 74.22% 2011 which has resulted in the $4 billion increase in sales. The high revenue growth can also be attributed to growth in customer share at both Australian and New Zealand super markets. With the introduction of online shopping and its growing popularity enables the group access a large groups of population. With Woolworths online available to 85% of Australian population would clearly enable the group to generate a vast customer base eventually resulting in higher revenues. The group has also reported a 63% increase in online sales in 2011. Online sales would be the major contributor to Woolworth’s revenues in the future, as can be seen with the Big W website launches in 2010 a strong sales growth being reported (Woolworths, 2012, 1-15)

Food land Liquor continues to be maximum revenue contributors of Woolworths, followed by General merchandise division inclusive of consumer electronics. The revenue contribution from food and liquor in increased to 36,176 in 2011 from 34,675 in 2010 a 4% increase. Thus the food continues to be the competitive advantage of Woolworth’s and the company should focus on maximising its potential from this department. As well introduce efficiency measures to increase its contribution even further.

Therefore a strengthened revenue growth of Woolworth’s over the years has ensured the profitability of the company and value creation to its investors. Woolworth’s has to capitalize on the market opportunity of capture the market completely and further consolidate its position in the market. An increase in revenues also give the organisation to initiate large-scale expansion plans which Woolworth’s has undertaken of exporting consumer electronics to India , China and South Africa as well.

2.2 Profitability

2.2.1 Gross Profit Margins

After posing a consistent sales growth over the years 2008-2011 the gross profit margins have been increasing consistently for Woolworth’s. The growth in the Gross profits and its margins can largely be attributed to the massive growth in sales posed by the retail giant. The growths in sales accompanied with consistent declines in the Cost of goods sold have resulted in the high gross profit margins. The reduction in the Cost of goods sold has been t of goods sold from 74.27% in 2010 to 74.22% 2011 which has resulted in the $4 billion increase in sales as well as improving the gross profit margins.

Figure 4: Gross Profits Woolworth Australia 2011(Woolworths,2012 , 1-110)

The Gross profit margins have increased to 26.03% in 2011 25.91% from 2010 , the increase in the gross profit margins is however not reflected in the net profits of the business which have been subjected to a decline owning to high cost operations and financing.

2.2.2 Net Profitability

Woolworth’s profitability has been directly proportional to the high revenue growth posted by the retail giant. High revenue growth attributed to a superlative performance by the food and liquor departments of Woolworths. However the translation of sales into net profits has not been consistent. Though the profits margins have continued to grow but have not grown much in proportion to the revenue margins. But the firm has posted a consistent profit to enable the value creation for its customers as well as investors.

Figure 4: Net Profits Woolworth 2006-2010(www.woolworthsltd.co.au ,2012,81-100)

The Net profit has been increasing consistently but the increase in margins .However in the current year, Woolworth has reported a 17% decline in the net profits in the 1st quarter of 2012 due to a massive restructuring of Dick Smith consumer electronics division worth $300 million dollar. Even Though Woolworth beat the market and analyst expectation of the profits but however According to Woolworth itself the profits should have reached $1.184 billion, up by 3.2 per cent compared to a year ago. But restructuring has caused the reporting of low rates of profits. The slower growth of the super market giant is also attributed to the price wars on basic commodities like bread and milk with its close competitor Cloves .The grocers control over 80% share of the Australian super market .However Woolworth is satisfied with its performance owning to the international economy and facing of constant deflationary pressures. The business is also make large scale investments and adopting strategic structural changes that are likely to provide long term profitability to the business but the business may be faced with some pressures in the current situation. Another reason that can be attributed to the slightly sluggish net profit growth is the rising interest costs, this however is a global phenomenon and cannot be attributed to the Australian economy alone. Thus firms even with good profit margins to tend to get marginally affected by the rising interest costs which also tend to delay expansion plans. The net financing costs have increased by 23 %( approx.) In the last fiscal i.e. from 2010-2011 this tends to affect the profitability of the firm to some extent.

Woolworth registered a 4.3 per cent growth in food and liquor sales to $19.6 billion, but the overall sales growth was affected by deflation mostly in produce seafood bakery items and deli. The deflationary pressure was added by Woolworth itself owning to the price wars with Cole. Woolworth needs to consolidate itself and adopt a long term growth strategy rather running after short run gains caused by the price wars.

( au.ibtimes.com,2012, 1)

In the 84 years history Woolworth has constantly endeavoured to create value for all its stakeholders like customers, investors, suppliers and the farms. This is the reason for the company’s emergence as a retail giant in the Australian market. Woolworth has a focused long term strategy which aims to create value and Woolworth has always passed on their gains to the investors evident in the dividend policy adopted by the firm. Despite the sluggishness in the market Woolworth expects to make a profit of 2 to 6 % which surpasses the market expectation of 2.4%.

2.2.3 Dividend Policy

Woolworth has always believed in passing on the profitability to their investors. This is one of the major reasons that the firm has enjoyed investor confidence in the brand for over 60 years. This is evident by the rising dividends paid at regular intervals to investors as a reward to remain invested in the business.

Figure 5: Dividends Paid by Woolworth’s Australia 2008-2011(Woolworths.com- accessed on 11/04/2012, Pages 1-110)

The final dividend declared in 2011 was 65 cents, taking the total year dividend to 122 cents compared with 115 cents in 2010.Furthermore; the company expects a year of additional earnings growth in FY12 with the net profits expected to grow in the range of 2-6%, subject to domestic and international market conditions (www.investsmart.com.au – accessed on 11/04/2012, Page 1)

Figure 6: EPS Woolworth Australia 2007-2011(Woolworth Annual Report -accessed on 11/04/2011, 1-85)

The EPS has also increased subsequently in the years 2007-2011 with the increase in the earnings of over 7.5 % in the last fiscal. Therefore Woolworth has paid special attention to the needs of their shareholders by ensuring them high earnings for their investment.

Analysts expect an additional increase in the shareholder value in the current fiscal with an expectation of increase in the earning per share to 186 in 2012 much higher than 176 in 2011.Both the Price earnings ratio and the Price earnings growth of Woolworth is much higher than the market. The current P/E earning growth of Woolworth is about 2.9% whereas the market growth is only of 1.30%.  The price earnings ratio of Woolworth is 14 whereas the market is at 13. Thus the investment in Woolworth’s can be considered highly profitable as the earnings it generates are much higher than the market earnings. Moreover Woolworth’s rewards its investors appropriately by provided regular high interests as well as high performing owning to the strong fundamentals of the company.

2.2.4 Cash flows

The cash flow is one of the most important financial indicators of the company’s health. A sound cash flow is important to run and operate a business. It is only with the availability of free cash flows that a firm is able undertaking capital investment over a long period of time. It is essential that cash flows be maintained over a period particularly to complete the operating cycle of the firm. Woolworth has successfully been able to maintain healthy cash flows over a period of time. The firm over the 5 year period has encountered cash flow fluctuations owning to the large scale restructuring programme being undertaken by the firm. The firm has been able to maintain a healthy operating cash flow over a period of 5 years implying the smooth running of the firms operations.

The constant increase in the operating cash flow over a period of time has ensured that smooth has smooth running of operations. However the firm has undertaken massive capital expenditures to introduce long term productivity and efficiency in the business. This has led to availability of free cash flows though the firm has been able to maintain a positive balance.

Figure 7: Free cash flows 2007-2011(Annual report Woolworth’s –accessed on 11/04/2012, Pages 1-110)

Thus the firm’s availability of free cash has been on the decline and this decline is attributed to expansion and inefficient supply chain management. However there has been a marginal increase in the cash flow in 2011 after facing declines in 2009 and 2010.

Another factor affecting the firm’s net cash flow availability has been the payment of high and regular dividends. For instance, in the year 2009 high dividends of over $1000 million dollars were despite achieving a negative cash flow. In the year 2010 as well same high dividend of over $1000 million dollars was paid resulting in the same. The firm could have acted more prudently by declaring lower dividends and ensuring adequate availability of the cash. It would not put additional pressure on the organization already dealing with high costs capital expenditures. Thus after achieving negative net cash flows for 3 years 2008, 2009, 2010 the firm has finally achieved a positive cash flow of $ 806 million dollars.

Figure 8: Net Cash flows of the Woolworth 2007 – 2011(Annual Report,2011, 110)

The inconsistency in the cash flows in clearly evident from the figure. The firm could have been more prudent in the past years in their decision making to ensure adequate availability of cash flows in the past years.

3. Conclusion and Recommendations

Woolworth’s is the Australian super market giant with almost no close competitors except Clove. Woolworth has continued to dominate the Australian market for the past 84 years and continues to enjoy a brand image and a high customer loyalty. Woolworth has consolidated its position in the market owning to the adoption of strategies like ‘Project Refresh’ and ‘Everyday Low Prices’ directly targeting the lower end of the market to maximum customer base. Woolworth has identified its core strength of food and liquor and capitalised on the market to make maximum gains. This has been accompanied by a focussed expansion strategy adopted by the management. The expansion of operations has not only included expansion of product lines but as well expansion of operations in countries like New Zealand as well as India.

Woolworth has been a company with strong financial fundamentals in place and has created value for all stakeholders of the business. The business has ensured that the profits trickle down to the bottom end of the supply chain i.e. is the farmers. Thus the firm has ensured high investor gains in the forms of dividends and earnings per share and satisfied their core suppliers as well.

But however certain observations and recommendations are made analysing the firms performance over the past years

1. Firstly, the firm has undertaken massive capital expenditure that has resulted in the low net profit expectations in the current fiscal. This factor is likely to dampen investor spirit in the business to some extent, thus the firm needs to take steps to account for this factor.

2. Secondly, in the past the firm has indulged in ‘price wars strategy’ with its closest competitor Clove that has resulted in creating a deflationary pressure on the firm. The firm should instead consider a long term strategy for growth instead to creating a deflationary pressure on the firm that would impact both revenue as well as profitability. Woolworth penetrates the market by concentrating on online shopping as it has already experienced a 63 % increase in revenue. Accessing this end of the market would ensure creation of a vast customer base.

3. Finally, the firms intend change its top management with the resignation of Mr Smith planned in the current fiscal. This would lead to a massive change in the management and the decision making process. It is important that the firm adopts strategies such that the detrimental impact of decision on the organization can be minimised and smooth running of the organization is maintained.

Thus, If Woolworth’s continue to show high revenue generating capacity accompanied efficient supply chain management Woolworth would emerge as the market leader and would almost have a monopoly in the market with competitors not even close to it.

4. References

“Woolworths – Our Story.” Woolworths – Home. N.p., n.d. Web. 11 Apr. 2012. ,Page 1 <http://www.woolworths.com.au/wps/wcm/connect/Website/Woolworths/About+Us/Our-Story/>.

• “AU: Woolworths and Coles have 70% of retail market.” Fresh Plaza: Global Fresh Produce and Banana News. N.p., n.d. Web. 11 Apr. 2012. http://www.freshplaza.com/news_detail.asp?id=94763
• “WOOLWORTHS LIMITED (WOW) – Company Profile.” Managed Funds – Superannuation Funds – Managed Investments. N.p., n.d. Web. 11 Apr. 2012. <http://www.investsmart.com.au/shares/asx/WOOLWORTHS-LIMITED-WOW.asp>.
• “WOOLWORTHS LTD (WOW: ASX): Financial Statements – BusinessWeek.” Investing & Stock Research by Company and Industry – BusinessWeek. N.p., n.d. Web. 11 Apr. 2012. <http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=WOW:AU>.
• Hernandez, Vittorio. “Woolworths Suffers 17% Dip in Net Profit Due to Dick Smith Restructuring – International Business Times.” IBTIMES.com: International Business News, Financial News, Market News, Politics, Forex, Commodities – International Business Times. N.p., n.d. Web. 11 Apr. 2012. <http://au.ibtimes.com/articles/307023/20120229/woolworths-suffers-17-1-dip-net-profit.htm>.
• Annual Report 2011.” www.woolworthltd.au. Version 1-165. N.p., n.d. Web. 11 Apr. 2012. <http://media.corporate-ir.net/media_files/IROL/14/144044/WWL

JG96

But you can order it from our service and receive complete high-quality custom paper.  Our service offers “Accounting”  essay sample that was written by professional writer. If you like one, you have an opportunity to buy a similar paper. Any of the academic papers will be written from scratch, according to all customers’ specifications, expectations and highest standards.”