Accounting and Finance Australian Retail Company

Question: Describe about the Accounting and Finance for Australian Retail Company. Answer: Summary Woolworths ltd is an Australian retail company listed on the ASX, and has more than 3000 customers diversified across New Zealand and Australia. In terms of revenue, it is regarded as the second largest company after Wesfarmers ltd. Furthermore, it functions with 3729 stores across New Zealand and Australia that aims to serve premium quality services to their customers, under brands like Woolworths, Foodtown, Thomas Dux, and Countdown. Its primary activities comprise of supermarkets under Woolworths brand and Countdown brand, liquor retailing, pubs and hotels under the (ALH Group) Australian Leisure and Hospitality Group, and discount department stores (Knight, 2014). It also provides home improvement services including procurement of improvement of home goods. In relation to performance, Woolworths delivered a 0.1% enhancement in net profit after tax in 2015, reporting at $2453.3 million. However, it represented a decline in sales by 0.2% due to alterations in Woolworths-Caltex alli ance (Woolworths Limited, 2015). If sales of petrol were to be ignored, its sales depicted an increment of 2.5% in 2015 compared to the last year. As a result, it also declared a 1.5% increment in its dividend per share (DPS) to 139 cents in 2015, up from 137 cents in 2014. Board of Directors Name Age Gender Education Career history Gordon Cairns Male MA (Hons) (Edin) Cairns has held Australian and international experience as CEO of Lion Nathan Ltd, senior management positions in marketing, senior executive, and finance with Nestle, Cadbury, and PepsiCo. Grant OBrien Male Completed Advanced Management Program from Harvard Grant started as an accountant in Tasmania, wherein he was appointed CEO and MD. He also held roles of CEO Designate, Deputy CEO, COO Australian Food and Petrol, General Manger, Marketing and Merchandise Manager etc. He is also a director of Consumer Goods Forum and Avner Nahmani Pancreatic Cancer Research Fund. Jillian Rosemary Broadbent Female Jillian has a Bachelor of Arts degree (math majors and economics). Jillian is a member of Risk Management, Audit, Compliance, and Nomination Committee since February 2011. She is the Chair of the Swiss Re Life and Health Australia Ltds Board, Chancellor of Wollongong University, and Chair of Clean Energy Finance Corporation. She has also served as a director of ASX Ltd, Qantas Airways Ltd, Coca-Cola Amatil Ltd etc. Christine Cross Female Cross has a BEd (Bachelor Education) and MSc in Food Science together with a management diploma. Christine started her executive career with Tesco Plc. She has experienced the role of Consumer Advisor and Chief Retail and was a member of PwC advisory board. Carla Hrdlicka Female Carla has a BA (Hons) degree in Maths and Economics together with a MBA degree. Carla is a member of the Nomination and People Policy Committee. She is the CEO of Jetstar Group but before such position, she was the Qantas Group Executive of Strategy, Technology, and Transformation. Before her executive career, she was a senior partner with Bain and Company, a management-consulting firm. Earlier she ran consumer-products businesses in the marketing and publishing industries. Allan Douglas Mackay Male Allan holds a BBA degree (Bachelor of Business Administration) Allan had a long career with the Kelloggs company as the CEO and president. He was also the member of Kelloggs board and global leadership team. Furthermore, he was a non-executive chairperson and independent director of Beam, Inc, Former Director and board member of Australias Grocery manufacturers, and MD of Sara Lee Bakery. Scott Redvers Perkins Male Perkins has a degree of Bachelor of Laws (Hons) and Bachelor of Commerce (Hons) from Auckland University Perkins was recently Head of Corporate Finance for Deutsche Bank New Zealand and Australia. He was also a member of the Asia Pacific Corporate and Investment Bank Management Committee. Michael James Ullmer Male Michael pursues a BSc (Maths) (Hons) degree from University of Sussex James started as a Deputy Group Chief Executive at NAB (National Australia Bank). Before joining NAB, he was the CFO and then Group Executive at the Commonwealth Bank of Australia. Before this, he was a partner at Coopers and Lybrand and KPMG. From the above table, the characteristics of the Board are that most of them pursue a history of relationship with different companies prior to working in Woolworths. Furthermore, the Board possesses huge demonstrated leadership skills that assist in better operational effectiveness. Due to their impeccable character and prior business experience, they are able to contribute towards the well-being of the company (Choi Meek, 2011). Few board members even pursue strong banking experience that assists in providing a strong commitment to the bank. Corporate Governance Recommendations of ASX Corporate Governance Council Recommendations Principles Recommendation 1. Act ethically and responsibly The company must possess a code of conduct for all its members and disclose such code in summary to them. 2. Safeguard integrity in corporate reporting The Board must have an audit committee that must undertake a key role in corporate reporting. If the board does not have an audit committee, it must independently verify and safeguard the integrity of its reporting. 3. Make balanced and timely disclosure Company must have a written policy for adhering to its regular obligations under the listing rules and it must make ways to disclose such policy to all its members. The auditor of Woolworths Ltd in the year 2015 is Deloitte Touche Tohmatsu. During the year 2015, these auditors have not only performed their assigned regulatory duties, but have also assisted in performing certain other kinds of services that is non-audit services (Woolworths Limited, 2015). Besides, even the board of Woolworths is also satisfied that performing such services in addition to their statutory responsibilities have not compromised their independence requirements set in the Corporations Act 2001 or as set out in APES 110 Code of Ethics for Professional Accountants. Other auditors comprise of international associates of Deloitte Touche Tohmatsu. The remuneration received by Deloitte Touche Tohmatsu in the year 2015 for review or audit of the financial report stands at $2518000, for compliance and regulatory associated services $13,000, for non-audit related services $687,000, and for tax compliance services $85,000 (Woolworths Limited, 2015). Furthermore, other auditors of Woolworths received $172,000 for review or audit of financial reports, $525,000 for other non-audit associated services, and $101,000 for tax compliance related services. This makes the total remuneration of Deloitte Touche Tohmatsu and its international associates report at $4101000 in the year 2015 ($3303000 + $798000). Throughout the process of audit, external auditors add credibility to the financial statements of the management that permits investors, creditors, bankers, and owners to utilize them with greater confidence. Furthermore, such auditors are entrusted with attaining a thorough understanding of the operations, environment, and internal controls of the company (Albrecht et. al, 2011). After thorough understanding, external auditors prepare ways to collect evidence in order to form an opinion regarding the financial statements. However, it is notable that this can be achieved only if there is no lack of independence because lack of independence restricts an external auditor to address the audit problems that in turn minimizes the assurance and credibility of an external audit. Financial statement analysis Ratio Formula Woolworths Limited-2015 Woolworths Limited-2014 PROFITABILITY RATIO Return on Assets Ratio Net Income 2137.4 = 0.084 8.4% 2458.4 = 0.102 10.2% Total Assets 25336.8 24136.5 Net Profit Margin Ratio Net Income 2137.4 = 0.035 3.5% 2458.4 = 0.040 4% Sales 60679.1 60772.8 Gross Profit Margin ratio Gross Profit 16688.6 = 0.275 16447.6 = 0.271 Sales 60679.1 60679.1 LIQUIDITY RATIO Current Ratio Current Assets 7660.9 = 0.836 7106.1 = 0.949 Current Liabilities 9168.6 7489.5 Quick Ratio Quick Assets* 7660.9-4872.2-9.9 = 0.303 7106.1-4693.2-13.2 = 0.320 Current Liabilities 9168.6 7489.5 SOLVENCY RATIO Debt to Equity ratio Total Liabilities 14204.8 = 0.561 13611.1 = 0.564 Total Assets 25336.8 24136.5 Return on Equity Net income 2146 = 0.197 2452 = 0.208 Shareholders equity 10834.2 10252.5 EFFICIENCY RATIO Inventory turnover ratio Sales 60679.1 = 12.69 60772.8 = 13.66 Average inventory 4693.2+4872.2/2 4205.4+4693.2/2 Accounts receivable turnover sales 60679.1 = 61.693 60772.8 = 62.318 Average accounts receivable 965.2+1001.9/2 985.2+965.2/2 Asset turnover Sales 60679.1 = 2.395 60772.8 = 2.52 Total assets 25336.8 24136.5 Liquidity Ratio Liquidity ratio assists in depicting the company skills in meeting its debt obligations. The most common acceptable current ratio is 2:1 while the most commonly acceptable quick ratio is 1:1. From the above table, it is identifiable that both these ratios have depicted a decline when compared to the last year (Northington, 2011). This signifies poor liquidity position prevailing in the company and therefore, it is highly required that it must take proper corrective actions to get rid of such crunch. Profitability Ratio This ratio assists in determining how effectively the company is utilizing its assets for generating profits in future (Graham Smart, 2012). From the above table, it is observable that the return on assets ratio has depicted a decline in comparison to the last year that indicates the company has not effectively utilized its assets and therefore, the management must give due attention towards it (Parrino et. al, 2012). Furthermore, the net profit margins have also witnessed a decline in comparison to the last year due to immense competition from competitors like Wesfarmers ltd. Therefore, due to significant drop in sales, the net profit margin also declined. In contrast to this, Woolworths have improved its financial health in comparison to the last year and it is evident from the slight increase in its gross profit margin ratio. Solvency Ratio From the above table, observable that the debt to equity ratio of the company has declined indicates lesser debt utilized by the company while the return on equity ratio has also declined (Williams, 2012). This means that the company has utilized more of investors financing in the year 2015 but it has failed to utilize such funds effectively, thereby leading to various problems in future. Efficiency Ratio From the above figures, it is observable that the inventory turnover ratio, asset turnover ratio, and accounts receivable turnover ratio have significantly declined in the current year. A decline in inventory turnover ratio of the company indicates that Woolworths is holding its inventories for more period than it used to hold before (Horngren, 2013). Furthermore, decline in accounts receivable turnover ratio indicates that Woolworths has significantly failed to collect its dues from the customers, thereby resulting in crunch of cash and working capital management. Distribution of major shareholders Name Number of FPO Shares HSBC Custody Nominees (Australia) Limited 207,407,841 JP Morgan Nominees Australia Limited 128,923,967 National Nominees Limited 123,973,450 Citicorp Nominees Pty Limited 43,557,520 BNP Paribas Noms Pty Ltd 35,391,163 HSBC Custody Nominees (Australia) Limited 8,265,514 Citicorp Nominees Pty Limited 7,997,012 AMP Life Limited 6,407,380 Australian Foundation Investment Company Limited 5,595,000 RBC Investor Services Australia Nominees Pty Limited 5,115,620 Woolworths Custodian Pty Ltd 4,509,791 Argo Investments Limited 4,133,026 BNP Paribas Nominees Pty Ltd 3,673,219 UBS Wealth Management Australia Nominees Pty Ltd 3,461,113 UBS Nominees Pty Ltd 3,313,592 Questor Financial Services Limited 3,036,845 Milton Corporation Limited 2,903,973 Navigator Australia Ltd 2,888,661 RBC Investor Services Australia Nominees Pty Limited 2,332,146 Nulis Nominees (Australia) Limited 2,175,760 Significance of ownership stake The above-mentioned shareholders have proved to be a significant tool in the alignment of managements interest and firm ownership. Furthermore, these shareholders play a key role in the performance of Woolworths as they contribute for its effectiveness of corporate sector and the development of economy as a whole (Davies Crawford, 2012). This in turn assists in the efficient utilization of assets within the company because these shareholders are the efficient monitors and with their ownership stake can force the management to operate according to their will. This permits them to overturn or veto decisions made by the present board members of the company (Woolworths Limited, 2015). Moreover, since these shareholders do not hold more than 50% shares of the company, this relationship between the company and shareholders is irreversible. In the event of acquisition or merger, such major stakeholders also gain an advantage to enhance their stake of shareholding in the new company (Heffer nan, 2015). This implies that, in case of a strategic merger that involves swap of shares, these major shareholders gain a significant opportunity to structure the deal in such a manner that they continue to pursue majority of voting power in the new formed entity. Conclusion From the above report, it is clear that Woolsworth has faced acute problem in its operations and is evident from the poor recoding of ratios. The liquidity ratio is poor and is a strong alert for the management. Similarly, decline in asset turnover ratio portrays that the company is not growing into its capacity. On a whole, Woolworths is in a critical situation and must take corrective actions immediately. References Albrecht, W., Stice, E. Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. Brealey, R., Myers, S. Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin. Choi, R.D. Meek, G.K 2011, International accounting, Pearson . Davies, T. Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Heffernan, M 2015, Pay deals imminent for supermarket giants Coles and Woolworths, viewed 19 October 2016, https://www.smh.com.au/business/retail/pay-deals-imminent-for-supermarket-giants-coles-and-woolworths-20150427-1mu42b.html Graham, J. Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Knight, E 2014, Woolworths losing the two-horse race as Coles takes decisive lead, viewed 19 October 2016, https://www.smh.com.au/business/comment-and-analysis/woolworths-losing-the-twohorse-race-as-coles-takes-decisive-lead-20141104-11gnkj.html. Northington, S 2011, Finance, New York, NY: Ferguson's. Parrino, R., Kidwell, D. Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley Williams, J 2012, Financial accounting, New York: McGraw-Hill/Irwin. Woolworths Limited 2015, Woolworths Limited Annual Report and accounts 2015, viewed 19 October 2016, https://www.asx.com.au/asx/research/company.do#!/WOWhttps://www.woolworthslimited.com.au/.