Financial analyze about Woolworths Limited

Abstract： Woolworths Limited is one of the leading companies in Australia. It operates in many other countries and covers wide-ranging. This report will evaluate the value of Woolworths Limited and estimate the future performance by calculating and analyzing relevant data. Then， the report will give recommendations to investors. Moreover， relevant data of Woolworths Limited will be selected to calculate. Methods and assumptions will be given in each part and then the strengths and weaknesses of Woolworths will be discussed in the report.

Key words： Woolworths Limited；Financial analyze； Capital market

1. Growth Prospects of Woolworths Ltd

1.1Industry Analysis—— Opportunity and Threat for Woolworths Ltd

Woolworths has 33.6% market share of Australia retail trade industry， which is one of the largest retailers in Australia retail trade segment. However， the company is under a pressure of the competition. The rise of ALDI over the last five years has given a pressure of the pricing strategy of Woolworths. Furthermore， there is a price competition between Coles and Woolworths to gain market shares. In addition， the low growth rate of customer spending in Australia also is a threat for Woolworths. From the opportunity perspective， annual growth rate of Australia GDP is expected to slightly increase to 2.5% and 2.9% in 2018 and 2020 respectively.

2. Financial analyze

2.1 Capital Structure

The debt ratio reflects the value composition of the capital and its proportion. From the table above， Woolworths experiences a debt ratio between 56.06% to 62.63% and reaches the highest point in 2016 with 62.63%. However， the higher debt ratio indicates a greater reliance on non-owner financing or financing leverage. The large percentage of capital in Woolworths is compounded by debt.

2.2 Benefits and Limitations

Financial ratios play a significant role in analyzing corporate’s performance. It is convenient to understand company’s performance can explain past figures and predict future trending. However， there are still some limitations about ratio analysis. Ratio analysis relies on specific accounting principles， accounting methods， and accounting classifications. Thus， the final results will be different even in same industry and will destroy comparability.

3. The Weighted Average Cost of Capital （WACC）

The WACC is the rate that used to discount the free cash flow so that to provide the result that provided by the sum of required return on equity and required return on debt.

3.1 Method and assumption

The WACC is calculated from the equation based on the imputation system， when it is used to discount forecast cash flows estimated after tax. The WACC is calculated based on assumptions， which include we use the Imputation Tax System but not classical tax system， and Woolworths Limited paid fully franked dividend so that the = 1. The imputation tax system means the tax that is paid by a company qualifies for making distributions can be available to deduct the tax that is paid by company's shareholders.

3.2 Strength

The tax effect should be involved in calculation of cost of capital. The strength of our method is considered about the tax shield， which means claiming allowable deduction in order to deduct taxable income for Woolworths Limited.

3.3 Weakness

The assumption under the WACC is there are fully franking credit， but the weakness for this

assumption is that there were alwaysdidn’t provide fully franking credit in reality. Minney claims that the market value of franking credits for stocks in the ASX 300 were increased in recent years， like the assigned proportion of franking credits were at 53% during 2006 to 2009， and it just get proportion of 24% from 2001 to 2005. Depends on there are not fully franking credit， we might overestimate the allowable deduction.

4. Conclusion and Recommendation

Based on the quantitative result above， it can recommend investor buy WOW shares in the future since the stock is underpriced at current situation. Microeconomic conditions influence WOW share priceand macroeconomic factors like inflation level and GDP growth rates contribute to company earning capacity. Furthermore， other external factors like political factor， environmental factor and ethical factor contribute to firm future value as well.

References：

[1]Fernandez， P 2010， ‘WACC： Definition， Misconceptions， and Errors’， Business Valuation Review， vol. 29， no. 4， pp. 138-144， .

About the Author：

Xiaochen， yinhua pu，tiantian xia，Southwest Jiaotong University Hope College。