Financial Analysis of Coles Ltd

Financial abstract of Coles Ltd1. INTRODUCTION1.1 PurposeIn this compensate my purpose is to do a financial abstract of Coles Ltd which provides a basis, on which the paygrade of company finish be done.1.2 ScopeThis report conducts a financial epitome for Coles by performing a trend compendium of financial symmetrys using the data given for one-time(pre zero(prenominal)inal) 5 historic period. It withal includes a hard currency prey compend which a dogged with financial dimensions helps equivalence coles with its industry counterparts, Woolworths and Met capital and finally this epitome would help in price valuation to calculate a fair price for coles shargon.1.3 MethodologyThis report is base on primary data avail equal to(p) from Coles website as well as secondary data such as research paper, electronic database and other publications.1.4 LimitationAlthough all efforts deport been do to use as oft avail able-bodied information as possible exactly there were several(prenominal) constricting factors such as lack of available data of past financial information which restricted this research. Reli strength of data and time constraints were in any case hurdle in performing this analysis.The biggest picayunecoming was that circulating(prenominal) data was ground on AIFR and data for years before 2005 was based on AGAAP, which made comparative trend analysis very(prenominal) difficult.2. FINANCIAL ANALYSISIn this we will be evaluating the steadys financial proportions and property flow whole tones of the ope tell, financing, and investing executing of a company in relation to key competitions historical carrying into action. give the firms strategy and goals, together these tools allow the analyst to investigate and examine a firms mathematical process and its financial condition. balance analysis is the tool which involves assessing the firms income statement and sleep sheet data. On the other side, the cash flow analysis r elies on firms cash flow statement.2.1 Ratio analysisThe ratio analysis deals with military rating of the performance of Coles in perspective of its mentioned strategies and goals. In order to achieve this object lens a combination of cross sectional analysis and time series analysis is performed. Workings of Ratios for 2006 atomic number 18 mentioned in APPENDIX 4.2.1.1 Profitability analysisIf we look at the strike on equity (ROE) of Coles, for a limit of 5 years, it is being notice that ROE has swap magnitude in 2006 as compared to 2002. Although ROE has move in 2006 (15. 30%) as compared to 2005 (18.30 %) barely it underside be seen that on an average Coles ROE has been stable or increased over last 5 years. Return on addition (ROA) has overly been stable around 10% during the last 3 years and increase from 7.17% in 2002 to 9.54% in 2006.The briny discernment for stable ROE and ROA are bankrupt performance delivered by the management and as well as the mature chara cteristic of the industry, that produces stable return as well as stable ontogenesis seeing population demographics in the country. fudge 1 Profitability Ratio of Coles LtdSource Coles financial statement after adaptionGross pull in has been quite stable and goodish for the last 5 years but the concerned part is the engagement profit margin. meshwork profit margin has been very low, it had been increasing from 2002 to 2005 but it again roughshod in 2002 to 1.57% from 2.08%. Coles need to trim back its in operation(p) and kindle expenses so as to increase its net profit margin. circumvent 2 Profitability Ratio Comparison within the industry in 2006On comparing the performance of Coles with its industry counterparts we dissolve cease that Coles Ltd is way behind its major competitor, Woolworths, in limits of ROE and ROA which might be attributable to lower net profit margin and lower financial leverage. Coles has amplyer financial leverage as compared to Woolworths and m etcash, which representation it, has greater financial guess. But despite of tall leverage it has low ROE which confirms the fact that Coles has low net profit margin asset turnover ratio.2.1.2 natural process AnalysisA firms operating activities require investments in both curtly- experimental condition (inventory and accounts receivable) and long full term assets. Activity ratios describe the relationship between the firms level of operations and assets needed to feature operating activities. Asset turnover is important in scrape up firms ROA it as well formulates reasons of how it will affect firms ROE. Evaluating the effectiveness of asset management is the purpose of asset turnover analysis.2.1.2.1 Short term drill ratiosWorking heavy(p) is our main concern while evaluating a company. It can clearly be find that since Coles has high turnover ratios it uses cash basis in its sales. It can be clearly being seen that it took only 4.48 eld on an average for Coles to replace its inventory investment back in to cash. From the figures last 5 years we can clearly interpret that Coles has drastically improved its cash modulation cycle from 23 days in 2002 to 4.48 days in 2006. control board 3 Short-term Activity Ratios for Coles LtdTable 4 Short-term activity ratio comparison, 2006Now, if we compare Coles with its competitors we can see that Woolworths has lower cash revolution cycle and metcash has high cash variety cycle. Woolworths has lower cash conversion cycle because it keeps inventory in stock for shorter duration and stock is reborn in to good sold in less span of time. On the other hand Metcash keeps inventory in stock for lower no. of days but it provides more no. of days to its receivables for payment delinquent to which it has higher cash conversion cycle. Seeing the industry it can be conclude that Coles has good cash conversion cycle but it can improve on it by reducing the Average number of days for which inventory is in stock.2.1.2.2 Long term activity ratiosIn the analysis of long term activity ratios, long-term asset turnover and property, industrial plant and equipment turnover fork over been utilized.Table 5 Long term activity ratios for Coles LtdOn the whole both ratios moved in the same image during these periods. Relatively, this pattern shows that asset utilization has improved uniformly for the period ranging from 2002 (310.12%) to 2006(372.70%). This helps to conclude that company is continuously improving its utilization of assets to increase its production.Table 6 Long term activity ratios comparison, 2006While comparing to its competitors it can be seen that Coles tote up asset turnover ratio is approximately 30% higher than its competitors. It helps to analyze that Coles is more efficiently utilizing its resources to increase its production as compared to its competitors. Metcashs high PPE turnover ratio can be contributed to the fact that PPE forms a very small part of Metcashs total assets. If compare Coles with its major competitor Woolworth on PPE Turnover Ratio we can conclude that Coles has been utilizing its fixed asset break in than Woolworths.2.1.3 Liquidity AnalysisLiquidity is referred to a firms ability to pass on fitting property when needed and convert its non-cash assets in to cash easily. Liquidity Ratios are employed to watch the firms ability to pay its short-term liabilities. Liquidity analysis enables us to determine Coles ability to cover its liquidness risk. Liquidity risk may arise due to shortfall or over liquidity within the firm and this in turn lead to firms disability of fulfilling its liquidity needs.In order to determine firm liquidity level, Current ratio, immobile ratio and cash ratio are short- term liquidity ratios which fork up been employed.Table 7 Coles Short-term Liquidity RatiosOn doing the trend analysis for last 5 years it can be watch overd that Coles oc ongoing ratio has been consistently falling, which increases the possibility that Coles will not be able to meet up its short term liabilities. Current ratio has locomote from 1.37 in 2002 to 0.98 in 2006 which is of major concern, as a current ratio of less than 1 think ups that company has negative working hood and is probably facing a liquidity crisis. The more stringent measure of liquidity is fast(a) ratio and cash ratio which have besides been falling uniformly in last 5 years. It seems Coles is falling in to liquidity crunch and might need short term funds to meet its current liabilities. There has been lot of volatility in the cash ratio of the firm as they have been rising and again falling, so we can conclude that Coles is not able to maintain stable liquidity.Table 8 Short term liquidity ratios comparisons, 2006As compared to its competitors Coles has better current ratio than Woolworths but has current ratio less than Metcash. Comparing Coles with its major competitor in retail sector, Woolworth, we can clearly see Coles has better current cash ratio but is behind on quick ratio. On comparing with metcash we see that Coles is behind on all the short term liquidity ratios by a very high margin. Metcash has doubly the cash ratio as compared to Coles, which reach outs Coles ability to meet its short term liabilities questionable.2.1.4 Long term Debt and solvency AnalysisThe analysis of a firms capital complex body part is essential to guess its long term risk and return prospects. The long term debt and solvency ratios which we are dismission to use here are debt to equity, debt to capital and interest reporting ratio.Table 9 Coles long term Debt and Solvency ratiosAs indicated by Coles debt and long term solvency ratios, it denotes that firm is not a dissolver company and relies heavily on debt financing. The firms debt to equity and debt to capital ratios are consistently above 1.00 which shows that Coles employed more debt than equity as its source of financing. Debt to total capital has also been consistently been around 0.55-0.60 during the 5 year period. This shows that firm has been stable with its financing policy and has not done much change with its debt and equity mix. Since it relies so heavily on debt financing, issues can be raise regarding its ability to pay off the interest arising due to long term debt financing but we see that company has EBIT 7 times more than the interest charges it has to pay, so that should concern much. It can be observed interest coverage ratio has declined in 2006, as compared to 2005 2004, but it is hush able to meet industry benchmarks.Table 10 Debt and Solvency ratios Comparison 2006Compared to its competitors, long term solvency ratios of Coles seem to be performing optimally. Woolworths has got the highest debt to equity, debt to capital interest coverage ratio. historically a debt to equity ratio of 21 is considered optimal so Coles can still rely on debt to finance its future project rather then issuing new sha res. It can be observed that Coles has interest coverage ratio greater than Metcash but less than Woolworths but that can be attributable to its low profit margin as compared to Woolworths. It seems Coles is at par with its competitors in terms of debt and solvency ratios.2.2 bullion Flow AnalysisCash flow analysis is essential to visit that whether the firms cash flow have the ability to sustain the telephone circuit, to meet unexpected promises and to meet its short term liabilities. This also helps to understand whether firm will be requiring spare financing and firm can take advantage of new business opportunities as they arise.In cash flow analysis we will evaluate 3 ratios Operating cash flow to current liabilities, Interest coverage (cash flow basis) operating cash flow to dividend payment. Methodology for calculation of cash flow ratios is shown in APPENDIX 5Table 11 Cash flow ratios for Coles LtdBased on the table above, we can say that Coles has the ability to servic e its debts which can be seen in firms interest coverage ratio from cash flow basis. Moreover, we observe that Op. cash flow to dividend payment has locomote over the time span from 2002 to 2006 which could be an area of concern. Operating cash flow to current liabilities has also fallen a bit, which means it can be a problem for the firm if legitimate unexpected obligation come up due to which it might require additional financing.Table 12 Cash flow ratios Comparison, 2006If we compare Coles to its competitors in the industry which it operates we observe that Coles has got better interest coverage ratio (cash flow basis) as compared to Woolworths Metcash which means that Coles has better ability to service its debts than its counterparts. Coles also has a shortcoming in operating cash flow to dividend payment ratio, as it can be seen it has the lowest operating cash flow to dividend payment ratio. It can be attributable to the fact that it pays more dividends than it should pay. So it can be concluded that Coles needs to reduce dividend payment as it might lead Coles in to financial difficulties if some unexpected obligations turn up. In terms of operating cash flow to current liabilities we see that although it has fallen substantially for Coles in last 5 years but it is at par with its biggest competitor Woolworths greater than Metcash.3. Prospective analysisProspective analysis enables us to determine future performance of the firm based on historical performance of the company. Here will be determining the mean return for sales and earning before interest taxes (EBIT) . Using those mean returns we will be make a sales forecast and EBIT forecast.3.1 gross revenue and EBIT forecastIn determining the sales growth, I have considered the following assumptions-Past trend of sales is going to continue in the following years.Firm is not going to bring a major change in its pricing policy.The intromission for sales EBIT growth is historical sales EBIT gro wth and I have used mean reverting model to determine the future sales growth, in which future sales EBIT growth will be mean return of last 4 years sales growth. I have not taken the 5 year sales EBIT growth because EBIT growth rate is to high in 2002 (73%) which could adversely effect the mean return considering present situation of Coles.Table 13 Sales EBIT Growth outrank for Coles LtdUsing the mean reverting model we are able to find out a growth rate of sales for 7.64% EBIT growth rate of 11.87%. Using these growth rates we will be able to make a sales forecast EBIT forecast. This forecast will help in proper valuation of Coles on the basis of its predicted future performance.Figure 1 Line chart for sales EBIT growthTable 14 Sales EBIT Forecast for Coles LTDUsing the growth rates we can forecast the sales and EBIT for Coles which helps an analyst in a fair valuation of the company. The main reason we use the sales growth as a base for forecasting, is that the mass of f irm income is derived from its supermarket business.This forecast suffers from one serious shortcoming that EBIT growth has fallen from 34.31% in 2004 to 11.16% in 2005 and then to -17.07% in 2006 but we are still predicting a growth in EBIT of 11.87% in 2007 and thereafter.4. ConclusionI have gone through the multi-step process of ratio analysis, cash flow analysis and prospective analysis to present a report on financial analysis of Coles ltd. During the process, I have identified that Coles is operating in a mature industry with small profit margins.I have performed ratio analysis, cash flow analysis prospective analysis which would help a great deal in valuation of Coles based on its current market situation. During the Ratio analysis I was able to conclude that Coles has got good activity liquidity ratios but the major area of concern is profitableness ratios. Coles needs to improve its net profitability so as brave out in this competitive environment. Cash flow analysis he lped us to sop up that Coles has cash flow ratios at par with its competitor, Woolworths, but Coles need to reduce its dividend payout as it is too high as compared to industry counterparts. By doing a prospective analysis I am able to forecast the future sales EBIT for Coles for next 4 years. Growth rate for forecast has been deliberate using the mean return for past 4 years. This helps us to understand future growth of the company.I would like to conclude by motto that although Coles is competing in a low profit margin industry but it is the 2nd biggest company in the retail industry, therefore if it brings about certain petite changes in its financing and operating activities it can add a great deal to its shareholders value.