Introduction

Coles Myer Limited ( CML ) and Woolworths Limited ( WOW ) are two major Australian companies with extended retail involvement and listed on the Australian Stock Exchange. They are Australian public companies which operate a figure of retail ironss.

CML is Australia’s 2nd largest retail merchant. behind WOW. It operates a figure of ironss of retail mercantile establishments which are including Coles Supermarkets. Bi-Lo. Liquorland. Pick ‘n Pay Hypermarket. Kmart. Officeworks. Target. Harris Technology and Coles Express ( Wikipedia. 2006 ) .

WOW is presently the largest retail company in Australia and New Zealand by market capitalization and gross revenues. WOW operates in Australia through several retail streamers such as Woolworths and Safeway Supermarkets. BWS. Dan Murphy’s. BIG W. Dick Smith Power House and Dick Smith Electronics ( Wikipedia. 2006 ) .

The intent of this study is to analyze fiscal public presentations of the two publically listed companies in last 5 old ages by utilizing series of computation tools include horizontal analysis and fiscal ratios. Besides as a recommendation. we will rede investors to purchase or non purchase the two companies’ portions harmonizing to the consequences of the public presentation analysis.

Fiscal Condition

( See Appendix 1 & A ; 2 for ratio inside informations )

1. Overview

The WOW’s gross has increased every twelvemonth. one twelvemonth every bit great as 149. 90 % in 2005 ( see appendix 11 for inside informations ) . In 2001. grosss were 20915. 1 million while in 2005 gross has increased to 31352. 5 million. Since gross increased. the net net income evidently has increased every bit good. Net net income rose 84. 70 % from 2001 to 2005. The Horizontal Analysis ( Appendix 11 & A ; ; 14 ) indicates WOW is a really successful company and gaining money. CML’s gross has increased 52 % and the net net income rose 314 % from 2001 to 2005. the growing was enormous because it occurred in typical connexion with the restructuring of the method of financing a foreign operation ( Fiscal Report. 2005 ) .

2. Liquid

Current ratio

This ratio represents the fiscal liquidness of the company. ‘The current ratio compares the assets a company can rapidly change over to hard currency to the liabilities it must pay in the close term’ ( Vance. D. E. 2003 ) . The higher the ratio. the more liquid the company is. For CML. there was a little addition of 0. 04 from 2001 to 2002. Then it followed by an obvious autumn from 1. 37 to 1. 09 during period from 2002 to 2005. This represents that one-unit current liabilities is secured by 1. 37 units of current assets in 2002 and 1. 09 units. about one current plus for one current liability. in 2005. From the position of WOW. the ratio starts from 0. 81 up to 0. 84 so declined to 0. 81 and eventually dropped to 0. 82 during this period of clip. The current ratios are all less than one. bespeaking that one current plus will fix for the payment of more than one unit current liability. That leads to high liquidness hazard in the concern operation. If there is an exigency to WOW. it will meet the job of refund.

Quick ratio

Quick ratio is similar with current ratio. but more conservative than current ratio. because in numerator. stock list is excluded from current assets. and in dominator. bank overdraft is excluded from current liabilities. ‘The speedy ratio addresses the issue of whether current assets could cover current liabilities if stock list were found to be worthless’ ( Vance. D. E. 2003 ) . WOW experienced a little addition from 0. 2 to 0. 26 in this period of clip. In contrast. CML experienced a modest fluctuation and stop up with 0. 28 in 2005. the lowest one in 5-year clip and the highest 1 is 0. 41 in 2003. By and large. the speedy ratios of CML exceed the 1s of WOW.

Cash flow ratio

Cash flow ratio will analyze the ability of refund on current liabilities from the position of the operating hard currency flows. Vance. D. E. ( 2003 ) states that it is another manner to believe about the hazard of taking to. or puting in a company. These two companies both experienced a bead on this ratio from 2004 to 2005. 0. 35 for WOW and 0. 3 for CML in 2005.

3. Fiscal purchase

Equity ratio & A ; debt ratio

Equity ratio and debt ratio are both planing for capital construction and they are negatively related with each other. The cost of equity is higher than the cost of debt. but stockholders will non necessitate companies to refund them dividends and principals any clip. However. companies must pay the debt holders involvements and principals each twelvemonth. And increasing purchase ratio will ensue in increasing the return to stockholders. yet at the same clip. it will increase the repayment committednesss and so raise the hazard to company and stockholders.

CML’s equity ratio increased to 0. 4 and correspondingly debt ratio decreased to 0. 15 from 2001 to 2005. Generally it is a good tendency. even though there has been a lessening in equity ratio in 2005 from 0. 45 to 0. 40 and an addition in debt ratio from 2004 to 2005. it may be due to the acquisition from US group KKR. However. in 2005. equity is about three times debt. which means the capital construction is still in good status.

On the other manus. WOW experienced a different tendency that its equity ratio has decreased from 0. 30 to 0. 25. and debt ratio has significantly increased from 0. 13 to 0. 32 between 2001 and 2005. Wow raised financess to a great extent on interest-bearing liabilities and accordingly takes higher hazard than CML due to higher purchase ratio.

Timess involvement earned & amp ; fixed charges coverage

‘Times involvement earned ratio examines the ability of the concern to run into its regular fiscal commitments’ ( Harvey. McLaney and Atrill 2001 ) . Fixed charges coverage ratio is really similar to Clock involvement earned ratio. These two ratios assess the profitableness of company and the ability of involvements and chief refund. CML experienced a important addition on these two ratios from 3. 48 to 12. 04 and from 6. 81 to 16. 64. even though there was a little bead between 2004 and 2005. However. WOW experienced an obvious autumn to 11. 82 and 12. 25 on times involvement earned and fixed charges coverage severally. In 2005. compared with WOW. CML showed a better fiscal public presentation on the ability to refund the involvements and principal.

Average payment period

CML experienced a diminishing tendency on mean payment period from 45. 29 to 38. 69. In contrast. WOW experienced an addition from 19. 41 in 2001 to 37. 78 in 2003. and a lessening to 34. 77 in 2005. Compared with WOW. CML has a longer payment period. It means CML can keep its money more clip and make some investings.

4. Assetss direction

Gross saless turnover

This ratio indicates assets direction efficiency that one unit plus can bring forth how much gross revenues. From the position of CML. the gross revenues turnover bit by bit increased from 2. 9 in 2001 to 3. 94 in 2005. On the other manus. WOW maintained stable on about 4. 5 gross revenues turnovers. We can see that WOW managed its assets more expeditiously than CML did.

Average stock list turnover period

This ratio assesses the efficiency of stock list direction whether company cut down the stock lists every bit fewer as possible. The fewer stock lists. the more free hard currency flow company has to put on other assets. Both WOW and CML experienced a lessening on stock list turnover period from 39. 64 to 29. 64 and from 59. 45 to 41. 38 severally. It indicates that CML managed its stock lists less expeditiously than WOW did.

5. Profitableness

Tax return on gross revenues

WOW return on gross revenues remained changeless. 4 % of gross revenues. For CML. it maintained stable. about 2 % of gross revenues. Obviously. WOW has a higher operating net income border. and so a better profitableness public presentation possibly due to the more efficient costs control.

Tax return on assets

‘It is used to mensurate whether assets are being fruitfully employed’ ( Vance. D. E. 2003 ) . This ratio indicates how much net income one unit plus can bring forth and how profitable company is as a whole. WOW and CML are both in the increasing tendency. 0. 17 and 0. 1 severally in 2005. In term of this ratio. it showed that WOW is more profitable than CML

Tax return on equity & A ; gaining per portion

These two ratios reflect the return to the stockholders and the value addition for the stockholders. WOW and CML both experienced an addition on the return to the stockholders. yet the WOW’s addition of the return is more stable than CML’s. In 2005. in term of return on equity. WOW stayed with 37 % of the equity. yet CML merely 16 % .

Decision

The two companies have been making rather good in recent old ages as can be seen from the increasing profitableness. The tabular array in Appendix 15 indicates a comparing of the two companies harmonizing to the above treatment. CML has a better public presentation on liquidness and fiscal purchase but WOW managed Assetss and Profitability better than CML.

Recommendations

On 8th September 2006. WOW’s shutting portion monetary value is $ 20. 80 and CML is $ 13. 70. Based on the fiscal analysis above. we can reason that WOW has maintained a changeless fiscal public presentation in last 5 old ages. but their growing is non rapid. However. Simpson ( 2006 ) states that ‘At present Coles Myer is gaining a 13 per cent return on capital invested in shops. compared with 24 per centum by Woolworths. ’ Therefore. I recommend possible investors buy portions from WOW for a short-run. Harmonizing to CML intelligence released in March and June. CML had acquired Sydney drug shops Pty Ltd ( CML News Release. 2006 ) and Hedley Hotel Group ( CML News Release. 2006 ) . CML will spread out the pharmaceutics concern farther more and have a different scheme than WOW if the ordinances change in the future becomes true. CML besides will spread out their spirits concern to vie WOW every bit good. Thus. I believe that the possible fiscal growing of CML will be a batch higher than what it is right now and I suggest investors put their money on CML for a long-run investing.

Mentions

1. Wikipedia 2006. Coles Myer Ltd. Wikipedia Free Source Organization. viewed 10 September 2006

2. Wikipedia 2006. Woolworths Ltd. Wikipedia Free Source Organization. viewed 10 September 2006

3. Fiscal Report. 2005. Coles Myer Ltd. . pp 19

4. Vance. D. E. 2003. Fiscal Analysis and Decision Making. McGraw-Hill. United States of America

5. Harvey. D. McLaney. E and Atrill P 2001. Accounting for concern. Butterworth-Heinemann. Oxford

6. Simpson. K. 2006. Market delaies for higher Coles spot. The Age. 8 September 2006. front page of Business Section

7. News Release 2006. ‘Coles Myer Acquires Pharmacy Direct’ . Coles Myer Ltd. . 31 March 2006

8. News Release 2006. ‘Hedley Hotel Acquisition Complete’ . Coles Myer Ltd. . 14 June 2006