ACCY801: Accounting and Financial Management - Woolworths Limited - Business Report Assessment Answer

Accounting and Financial Management Assignment

Assignment Task

Business report

Woolworths Limited

1. Reports must be typed, double spaced, in 12-point font.
2. Pages are to be consecutively numbered.
3. You must be able to provide a duplicate of your submission if requested. Always backup your work.
4. Your assignment must be submitted by the due time and date in order not to incur a penalty. Please refer to the student handbook for further details.
5. You must attach a completed and signed assignment coversheet. A downloadable coy is available on the Moodle site for this subject.
6. Do not plagiarise your work. Plagiarism is the unacknowledged work of another person. Plagiarism can result in zero marks or possible expulsion from the university.
7. Referencing style must follow the Harvard style. Style guides are available on the UOW library website.
8. Whenever the Annual Report is cited you must provide a page reference to the Annual Report so that your work can be easily verified.

Detailed Information

Recently Woolworths Limited has made news headlines due to poor financial results and hence it would be interesting to analyse the prior year financial information.

Therefore using data in the 2015 Annual Report and Corporate Governance Report for Woolworths Limited (Woolworths) address the following:

1. Provide a brief summary of the company. Include details such asindustry sector, primary activities, recent performance (300 wordsmaximum).
2. Prepare a table that outlines details of the Board of Directors.Include items such as name, gender, age, education, career history,remuneration, and any other details you think are important orinteresting. Provide a brief summary of the characteristics of theBoard (1,000 words maximum).
3. Woolworths follows the corporate governance recommendations of the Australian Stock Exchange (ASX) Corporate Governance Council(CGC) and has several policies in place to support its corporateconduct. The external audit function is discussed throughout theserecommendations.
4. Outline the key recommendations of the ASX CGC in tableformat.
5. Who is Woolworth’s auditor?
6. What amount of remuneration did the auditors receive fromWoolworths during the year?
7. Briefly discuss the role of the external audit function and howthis may/may not be achieved (400 words maximum).
8. Provide a financial statement analysis of Woolworths for 2015 in tableformat. Include the following ratios (show all workings):

1. current ratio,
2. Quick ratio
3. inventory turnover,
4. Accounts receivable turnover
5. asset turnover,
6. debt to equity,
7. gross profit margin,
8. profit margin,
9. return on assets,
10. return on equity.

Based on your results, make a brief comment on the liquidity,efficiency, solvency, and profitability of Woolworths for 2015 (600 wordsmaximum).

Analyse the distribution of Woolworth’s shareholding and identify and major shareholders. If there are major shareholders, list who they are and discuss the significance of their ownership stake in Woolworths? (300 words maximum). If there are no major shareholders in Woolworths, you should just discuss, in general terms, the impact/significance of major shareholder

Executive SummaryAn attempt has been made in the report to analyse the performance of Woolworths as instructed in the Assignment to drill down on the reasons of its poor financial performance presently.

Woolworths belongs to the ‘Food and Staples Retailing ‘Sector and is listed on the ASX with the ASX code ‘WOW’. The Company is a Supermarket chain based in Australia, New Zealand and Tasmania. Presently, it covers 80% of the Retail market in Australia. The recent performance of the group has been below expectations with a reported sale of $ 60.7 billion less by 0.2 % over last year and Earnings per share of 195.2 cents, 0.7 % less than last year. The group reported net profits of $ 2453.3 million, more than 0.1 % over last year.

The reasons of Woolworths poor financial performance may be attributed to the poor Operational Management as indicated by the Ratio analysis despite the fact that the Company complies with CGR rules relating to the Board of Directors, Audit and other recommendations mentioned therein. There are no Substantial shareholders of Woolworth. Overall, the Liquidity, Efficiency and Solvency are below expectations while the Profitability position is acceptable.

The Company complies with the key recommendations of the ASX CGC. The External Auditor is DELOITTE TOUCHE TOHMATSU who received $ 4,101,000 as remuneration during the year.

1 Introduction - Brief summary of Woolworth

Woolworths belongs to the ‘Food and Staples Retailing ‘Sector and is listed on the ASX with the ASX code ‘WOW’. The Company is a Supermarket chain based in Australia, New Zealand and Tasmania. Presently, it covers 80% of the Retail market in Australia. Woolworths specializes in groceries, electronics, consumables and stationery items and operates about 3729 Outlets in Australia and New Zealand. The Company also deals in Hotels, Home improvement, General merchandise and has Online operation too. The group is Socially, Ethically and Environmentally aware and has engaged in endeavours like sponsoring of Olympic and Paralympic teams. (Woolworthslimited.com.au, 2016, pg 1,31)

The recent performance of the group has been below expectations with a reported sale of $ 60.7 billion less by 0.2 % over last year and Earnings per share of 195.2 cents, 0.7 % less than last year. The group reported net profits of $ 2453.3 million, more than 0.1 % over last year.

An attempt has been made in the report to analyse the performance of the Company as instructed in the Assignment to drill down on the reasons of its poor financial performance presently.

2 Details of the Board of Directors and a brief of the characteristics of the Board

• Former Directors have been excluded from the list
• (Woolworthslimited.com.au, 2016; Pg. 48, 51, 26,27,28, CG report pg. 5)

Brief Summary of the characteristics of the Board

The details of the board functioning are found in the Corporate governance framework as detailed in the Corporate Governance Statement of Woolworth.

Each member of the board except the MD and (CEO), is approved by the Stakeholders and is directly accountable to them for appropriate Strategic initiatives and value?creation. The Board Delegates Strategy implementation to Woolworths Group Management and is responsible for ensuring compliance with Corporate Governance guidelines. The Board functions through four committees for effective discharge of its responsibilities; Nomination; Audit, Risk Management and Compliance; People Policy Committee; and Sustainability Committee. Each committee has a charters defining its role and responsibilities. The Chairman is chosen within the non?executive directors. Each Non?executive director is appointed at least to one Committee and compulsory totheNomination Committee.

The Board’s main function is the representation and serving of Shareholders’ interests through Oversight and appraisal of the Company’s strategies and performance so as to maintain and enhance Shareholder value and ensure proper Management. The Board Charter defines clearly and concisely the powers and responsibilities of the Board and regulates its Composition and the Meeting rules, as well as the Definition of the relationship between the Board and Management.

The Board composition included majority of Independent non?executive directors with requisite skill set and experience. The Nomination Committee functions to review possible candidates to the Board and also reviews the eligibility of retiring directors for re?election, based on attributes like skills, experience, diversity, commitment and probable conflicts of interest. The Board also recommends to shareholders in this relation in the notice of the (AGM), material information relevant to their decision. (Woolworthslimited.com.au, 2016; pg. 2 to 6; CG Statement)

3 Details of the External Audit function

a. Key recommendations of the ASX CGC

b. Details of Woolworth’s auditor

DELOITTE TOUCHE TOHMATSU

c. Remuneration received by the Auditors during the year$ 4,101,000 was received during 2015

d. Role of the External Audit function

Attendance of External Auditor in the AGM is deemed compulsory to answer questions from Stakeholders. Issue of an Independent Audit report of Opinion on prescribed matters. This may be achieved through following the Professional code of conduct and discharging the duties independently on the audit of the financials and supplements. Independence here implies lack of financial or management interest. The Auditor should try to obtain sufficient and appropriate audit evidence after thoroughly understanding the company and its environment. (Smallbusiness.chron.com, 2016)

4 Financial Statement Analysis for 2015

Liquidity

The Liquidity analysis of Woolworth will help to assess its capability to satisfy short-term obligations. Inventory is deducted from Current assets for Quick ratio as it is less liquid compared to other assets. The thumb rule of 2:1 and 1:1 respectively for Current as well as Quick ratio is used as a benchmark. Woolworth liquidity is below satisfactory and undermines its ability to meet short term liabilities in the ordinary course of business as calculated in Appendicle 1. The Current ratio of 0.84 implies that Woolworth current liabilities are covered only 0.84 times its current assets while the quick liabilities are covered only 0.30 times. The liquidity position is poor.

Profitability

The profitability analysis (Appendicle 1) of Woolworth shows 2.39 Return on assets and 5.45 Return on equity. The ROA implies that the assets are earning profits of $ 2.39 for each dollar invested in asset while equity is earning $ 5.45 for each dollar invested. The Gross margin and profit margin each indicates a profit of 27% and 4 % respectively implying that the profitability position is satisfactory if not excellent. This is so because the profit margin is extremely low compared to the gross margin profit implying that the management has failed to control the cost structure of the firm and needs to pep up efforts towards increasing the operational efficiency of the company. A profit margin of 4 % is very low and risks the future growth and survival of the Company if steps are not taken to correct it.

Efficiency

The efficiency of Woolworth (Appendicle 1) as reflected by the Inventory turnover of 9.27 appears satisfactory. Receivables turnover of 69.66 appear majorly unfavourable given the nature of business of Woolworth. Turnovers have been computed with averages of denominators in each case. The turnover is indicating that while the conversion of inventory is reasonable, the conversion of receivables needs major improvement. The Asset turnover of 2.45 is also satisfactory. The efficiency analysis is below expectation.

Solvency

The long term solvency of Woolworth (Appendicle 1) will give an idea of the % of its assets sponsored by Debtors. Investors prefer companies with minimum debt signifying minimum risk and financial cost with restrictions so that benefits from the investment exceed costs. The Debt-to-Equity Ratio of 1.28 clearly signifies that Woolworth in majorly dependent on debtors. A D/E greater than 1 implies that Debt exceeds Equity and puts the company in the high risk profile which does not find favour with Investors. The solvency of Woolworth needs improvement so as to ensure growth in the future and prospective investments for the company.

Overall, the Liquidity, Efficiency and Solvency are below expectations while the Profitability position is satisfactory.

5 Shareholding analysis

Though there are no Substantial Shareholders, the top 5 Shareholders of the Company include

HSBC Custody Nominees (Australia) Limited with 16.37 % shareholding; JP Morgan Nominees Australia Limited with 10.18 %, National Nominees Limited with 9.79%, Citicorp Nominees Pty Limited with 3.44 % and BNP Paribas Norms Pty Ltd with 2.79%. (Woolworthslimited.com.au, 2015; Pg. 123)

The impact or significance of the Major Shareholders of the Company needs to be understood from the perspective of Controllership and Share of profits. Major shareholders in liaison (normally 50% or above) have the power to influence the policies and the appointment of Board of Directors of the Company thereby exerting an indirect influence on the operations of the Company. This also implies greater part of the profits being distributed to these Shareholders. The Strategic direction of the Company may be steered as per their whims and fancies and the wishes of the minority tend to be ignored. These shareholders may also dilute their position to competitors for a good price on their stake. The major shareholders may not be able to authorize a buyout due to corporate restrictions favouring minority shareholders. (Investopedia, 2003)

Conclusion

The reasons of Woolworths poor financial performance may be attributed to the poor Operational Management as indicated by the Ratio analysis despite the fact that the Company complies with CGR rules relating to the Board of Directors, Audit and other recommendations mentioned therein. There are no Substantial shareholders of Woolworth. Overall, the Liquidity, Efficiency and Solvency are below expectations while the Profitability position is satisfactory.

The Company complies with the key recommendations of the ASX CGC. The External Auditor is DELOITTE TOUCHE TOHMATSU who received $ 4,101,000 as remuneration during the year.