Comprehensive Financial Analysis of Woolworths vs Reece Ltd: Profitability, Liquidity, and Solvency Ratios

Comprehensive Financial Analysis of Woolworths vs Reece Ltd: Profitability, Liquidity, and Solvency Ratios

Gross Profit Margin Ratio
One. Utilize the Gross Profit from Continuing Operations on page 56 of the report to compute the Gross Profit Margin Ratio for the years 2015 and 2016. Is Woolworths' profitability level satisfactory to you? If so, please explain why; if not, what changes would need to occur to affect income and expenses?

Two. Utilize the Profit from continuing activities before income tax cost on page 56 of the report to compute the net profit margin ratio for the years 2015 and 2016. Do you find Woolworths' profitability acceptable? If yes, please explain why; if not, please clarify your reasoning, including any changes in operating and impairment costs that have influenced this year's profit figures.

Three. Utilize the Total Current Assets and Total Current Liabilities, together with pertinent elements from these categories on page 56 of the report, to compute the (1) current ratios and (2) fast (acid test) ratios for the years 2015 and 2016. .Is Woolworths' liquidity position satisfactory to you? If so, please explain why; if not, please clarify the reasons, including any changes in current assets that have influenced this year's situation.
liquidity? Recent occurrences involving Masters Home Improvement have had an effect.

Four. Utilize the Total Current Assets and Total Current Liabilities, together with the items categorized as expenses on page 26 of the annual report for Reece Limited Group, to compute the (1) current ratios and (2) fast (acid test) ratios for the years 2015 and 2016. 

5. Utilize the pertinent data on pages 56 and 58 of Woolworths' annual report and pages 25 and 26 of Reece Limited Group's annual report to compute (1) Days’ Sales in Inventory, (2) Inventory Turnover, and (3) Inventory Turnover in Days. Woolworths operates daily, except Christmas Day and Good Friday, from 8 AM to 9 PM Monday to Friday, with a closing time of 5:30 PM.
Occurrences on Saturday and Sunday. Reece functions only from Monday to Friday, 08:00 AM to 04:30 PM, and on Saturday from 08:00 AM to 12:00 PM. To ensure consistency in comparisons, you choose to use 365 days as the operational period for the denominator in computations for both organizations.

6. Utilize the ratios derived from requirements 3, 4, and 5 to elucidate the disparity in liquidity levels between Woolworths and Reece Limited Group. Include an explanation in your report to the board of directors on the acceptability of Woolworths' liquidity level; if acceptable, provide justification, or if not, explain the reasons for its unacceptability.

Seven. Utilize the data on page 26 to compute the debt-to-equity and debt-to-total-assets ratios for the years 2015 and 2016. Do you find Woolworths' long-term solvency acceptable? If yes, please explain why; if not, please clarify your reasoning. For instance, the effects of variations in debt, assets, and/or equity levels?

8. Based on your responses to the preceding seven questions, formulate a judgment about the advisability of recommending the acquisition of Woolworths' shares to your employer. You must decide whether to buy or not based on the facts available and the conclusions derived via deductive reasoning from your seven previous responses. Incorporate the data and your computations for the aforementioned questions into your analytical responses, which should thereafter serve as the foundation for your findings and suggestions.

Gross Profit Margin Ratio
The following report will compare Woolworths and Reece Ltd. The paper has addressed significant financial ratios, including solvency ratios, profitability ratios, efficiency ratios, and liquidity ratios. Solvency ratios assess the company's solvency status. Liquidity ratios assess a company's capacity to fulfill its short-term obligations. Efficiency ratios are used to evaluate the operational effectiveness of the enterprise. Profitability ratios assess a company's capacity to generate profits.

The research will culminate in a determination about the advisability of investing in Woolworths Ltd or recommending against such an investment.

This ratio is used to assess the company's financial stability. It is a profitability ratio used to determine the sales percentage beyond the cost of goods sold. Thus, this ratio assesses the company's effectiveness in using its materials and labor for product manufacturing. The gross profit margin is used to assess the company's business strategy and to benchmark it against rivals in the industry (Morningstar, 2017).

Gross profit margin = Revenue - Cost of goods sold

Income

                                                                Source: Annual Report

                                                                   Source: Annual Report

The gross profit margin for Woolworth is 27%, whereas Reece's is 33%, indicating that Woolworth's ratio is comparatively inadequate. A 27% gross margin ratio indicates that the firm retains 27% of its total sales after covering its direct costs. This indicates that the organization incurs significantly elevated operational costs.

This fundamental profitability ratio assesses the company's net revenue in relation to its net sales.  The net profit margin is used to assess and compare the profitability of rivals (Morningstar, 2017).

Net profit margin equals net income.

Net sales / Revenue

Earnings per share equals earnings attributable to equity shareholders.

Quantity of shares

                                                                  Source: Annual Report

                                                             Source: Annual Report

The net profit margin of Woolworth significantly declined to 2% in 2016, down from 6% in 2015. The net profit margin of Reece is 11% and 12%, surpassing that of Woolworths. This indicates that Reece Ltd is more profitable than Woolworth Ltd; nevertheless, a low profit margin does not always imply low earnings. A higher net profit margin signifies the company's efficiency in transforming revenues into real profit.  This indicates that Reece Ltd operates more effectively, maintains superior cost management, and achieves more profits compared to Woolworth Ltd.

Net Profit Margin Ratio
profits per share is a metric of profitability used by investors to assess shareholder profits (Smith, 2015). The EPS of Woolworth was 1.79 in 2015 and 0.82 in 2016, indicating a decline in shareholder earnings. The EPS of Reece Ltd was 1.66 and 1.93, surpassing that of Woolworths, indicating superior profits for shareholders.

The current ratio and quick ratio are the most prevalent liquidity ratios used to assess a company's capacity to settle its short-term liabilities (Morningstar, 2017).

Current ratio = Current assets

Present obligation

Quick ratio = Current assets - Inventories

Present obligation

Cash Ratio = Cash plus marketable securities

Present obligation

                                                          Source: Annual Report

                                                             Source: Annual Report

The current ratio assesses whether the corporation have sufficient assets to satisfy its liabilities. The standard current ratio is one or above, indicating that the corporation has more current assets than current liabilities.  The current ratios of Woolworth, at 0.84 in 2015 and 0.83 in 2016, are inferior than Reece Ltd's ratios of 2.02 and 2.04, respectively, indicating that Reece has superior liquidity relative to Woolworth. Woolworth lacks the usual benchmark of 1, indicating insufficient money to meet its short-term commitments.

The quick ratio demonstrates the availability of current assets inside the company to settle its short-term liabilities.  Liquid assets are current assets that can be rapidly turned into cash. It encompasses cash, tradable securities, etc. The current ratio assesses the relationship between current assets and current liabilities, while the quick ratio evaluates the proportion of liquid assets to current liabilities. The quick ratio of Woolworth in 2016 is 0.32, but Reece Ltd's quick ratio for the same year is 1.08, indicating that Woolworth's liquidity position is inadequate.

The cash ratio is an exceedingly cautious financial metric. It reflects the company's capacity to liquidate its cash and cash equivalents to settle its short-term obligations. A larger cash ratio indicates more liquidity for the organization, enabling it to settle its obligations more swiftly.

Days sales in inventories signifies the average duration required by the organization to sell the typical inventory during the designated year (Morningstar, 2017).

Days sold in inventory equals the number of days during a certain period.

Inventory turnover rate

Inventory turnover ratio equals cost of goods sold.

Liquidity Ratio
Mean Inventory

                                                             Source: Annual Report

                                                                 Source: Annual Report

The inventory turnover ratio signifies the frequency with which inventory is sold or replenished during a certain timeframe. A lower turnover ratio signifies less sales and hence elevated inventory levels. A lower inventory turnover ratio relative to its competitor indicates inadequate inventory management by the organization. The inventory turnover ratio for Woolworth was 8.98 in 2015 and 9.05 in 2016, surpassing Reece Ltd's ratios of 4.04 and 3.93 in the same years, indicating superior inventory management by Woolworth compared to Reece Ltd. Woolworth's high inventory turnover percentage signifies efficient operations and effective inventory management.

Inventory carrying costs need significant expenditure; hence, organizations should endeavor to minimize their inventory expenses. Days sales in inventory is a crucial aspect of inventory management for firms. To achieve a reduced Days Sales in Inventory ratio, the organization needs sustain its inventory sales. The expeditious movement of stocks is essential to enhance cash flow and reduce inventory holding costs. The days sales in inventory for Woolworth Ltd are 40.64 days in 2015 and 40.33 days in 2016, indicating that the firm can sell its goods in around 40 days, suggesting a favorable turnover of inventory. Reece Ltd has days sales in inventory of 90.25 days and 92.77 days, which exceeds that of Woolworth Ltd. Comparing the ratios, it can be concluded that Woolworth exhibits superior inventory management relative to Reece Ltd.

6. Liquidity ratios generally show a company's capacity to fulfill its short-term obligations, which is seen as a significant indication of financial health. The primary ratios used to assess the company's liquidity are the current ratio, quick ratio, and cash ratio. The current ratios of Woolworths Ltd and Reece Ltd were 0.84 and 0.83 in 2015, and 2.02 and 2.04 in 2016, respectively. This signifies that Reece Ltd has a superior current ratio relative to Woolworths Ltd, hence indicating a more favorable liquidity position compared to Woolworths.

The quick ratios for Woolworths and Reece Ltd are 0.30 and 0.32 for 2015, and 1.04 and 1.08 for 2016, respectively. This implies that Reece Ltd has a superior quick ratio, allowing it to fulfill its short-term obligations more swiftly than Woolworths Ltd.

Efficiency Ratio
The cash ratios for Woolworths and Reece Ltd were 0.15 and 0.11 in 2015, and 0.23 and 0.25 in 2016, respectively, demonstrating that Reece Ltd had superior liquidity compared to Woolworths.

Debt to equity equals total liabilities.

Equity of shareholders

Debt to asset ratio equals total debts.

Aggregate Assets

                                                               Source: Annual Report

                                                                 Source: Annual Report

The debt equity ratio reflects the extent to which total assets are funded by debt and shareholders' equity. A reduced ratio is preferable, since it signifies less danger. A higher ratio signifies more risk since the organization is more dependent on external financing. A debt equity ratio beyond one indicates that assets are funded by external debt rather than equity. An increasing trend in this ratio signifies elevated risk, since a greater proportion of the company's assets is funded by external debt.

The debt equity ratio of Woolworth has risen from 1.28 to 1.68, indicating that a greater proportion of the company's assets has been funded by debt. The debt-to-equity ratio should not exceed 2.  A debt equity ratio of 2 signifies that the company has funded its assets from external sources twice as much as from its own capital. Woolworth's ratio of less than 2 indicates that the firm is in a favorable solvency position.

The debt-to-asset ratio reflects the total assets funded by creditors rather than investors.  This ratio is used by investors and creditors to assess the total risk associated with enterprises. A higher ratio indicates that the firm is more leveraged, resulting in more interest and finance expenses deducted from its profits. Consequently, investors want firms with a lower debt-to-asset ratio.

In the specified instance, Woolworths Ltd exhibited debt to asset ratios of 56% and 60% in 2015 and 2016, respectively, indicating that the firm funded a greater portion of its assets from borrowed funds rather than its own capital. In contrast, Reece Ltd reported debt to asset ratios of 37% and 35% for the same years, respectively.

The growing trend and higher debt-to-equity and debt-to-asset ratios of Woolworths Ltd indicate that the firm is in a worse solvency situation relative to Reece Ltd.

8. Upon analyzing the aforementioned measures, it can be determined that the liquidity ratio of Woolworth Ltd is unjustifiable in comparison to Reece Ltd. The current ratio, liquidity ratio, and cash ratio of Woolworths Ltd are worse than those of Reece Ltd, indicating a weaker liquidity position. The company's capacity to fulfill its debt obligations is worse when compared to Reece Ltd.

Upon comparing the net profit margin and gross profit margin of both organizations, it can be determined that Reece Ltd's profitability statistics surpass those of Woolworths, indicating that Reece Ltd is generating more profits.

Upon analyzing the leverage ratios, namely the debt-to-equity and debt-to-asset ratios, it is evident that Woolworth Ltd's debt-to-equity ratio surpasses that of Reece Ltd, indicating that the firm has funded its assets more from external borrowings than through its own capital. The debt-to-asset ratio of Woolworths Ltd exceeds that of Reece Ltd, indicating a greater danger that the company's total assets may be unable to cover its liabilities. This also signifies that the organization is not using its resources efficiently.

Upon analyzing the efficiency ratios, namely the inventory turnover ratio and days sales in inventory of Woolworths Ltd, it can be concluded that the firm has a superior inventory management system compared to Reece Ltd, since its inventory turnover ratio is lower than that of Reece Ltd.

Final Assessment

Based on the aforementioned ratio analysis of both companies, it can be determined that purchasing shares of Woolworths LtdGenerate meta title, keywords and description is not advisable, since the firm does not provide superior outcomes compared to Reece Ltd. Therefore, it is advised that the employer refrain from investing funds in Woolworths Ltd.
 not advisable, since the firm does not provide superior outcomes compared to Reece Ltd. Therefore, it is advised that the employer refrain from investing funds in Woolworths Ltd.

Reference

Woolworths Group. (2016). Annual report. Assessed on 3 May from: https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf

Reece Ltd. (2016). Annual Report. Assessed on 3 May from: https://www.reecegroup.com.au/assets/Uploads/F2016-Reece-Limited-Annual-Report.pdf

Woolworths Group. (2015). Annual report. Assessed on 3 May from:

Reece Ltd. (2015). Annual Report. Assessed on 3 May from:

Morningstar. (2017). Efficiency Ratios. Assessed on 3 May from: https://news.morningstar.com/classroom2/course.asp?docId=145093&page=3&CN=sample

Morningstar. (2017). Liquidity Ratios. Assessed on 3 May from: https://news.morningstar.com/classroom2/course.asp?docId=145093&page=4&CN=sample

Morningstar. (2017). Leverage Ratios. Assessed on 3 May from: https://news.morningstar.com/classroom2/course.asp?docId=145093&page=5&CN=sample

Morningstar. (2017). Profitability Ratios. Assessed on 3 May from:  https://news.morningstar.com/classroom2/course.asp?docId=145093&page=6&CN=sample

Smith, T. (2015). What exactly do we mean by ‘shareholder value’?.  Accessed on 1 May from: https://www.ft.com/content/463abec2-9721-11e4-845a-00144feabdc0