MBS605-Business finance CASH FLOW ANALYSIS & SECURITY VALUATION OF WOOLWORTHS LTD.ELECTRONIC ASSIGNMENT COVERSHEET

Student Number31709764, 32592791, 32602658, 32523609, 32509568

SurnameGeorge, Ghadyali, Sachin, S. Unnithan

Given nameGeomon, Hatim, Sudeep, Hamdhullah, Rahul

Emailaj116joe@yahoo.com, hatimghadyali@hotmail.com

Unit CodeMBS605

Unit nameBusiness Finance

Enrolment modeInternal

Date25/03/2015

Assignment numberAssignment 1

Assignment nameCash Flow Analysis & Security Valuation of Woolworths Ltd.

TutorDr. Zaheda Ronak

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PETER LYNCH FINANCIAL GROUPMBS 605

HATIM: 32592791GEOMON: 31709764HAMDHULLAH: 32523609SACHIN: 32602658RAHUL: 32509568

ContentsCOMPANY INTRODUCTION: WOOLWORTHS LIMITED4PURPOSE OF FINANCIAL STATEMENT4ANALYSIS OF CURRENT OPERATION5FINANCIAL RATIO ANALYSIS5RETURN ON ASSETS6RETURN ON EQUITY7NET PROFIT RATIO8CURRENT RATIO9DEBT TO EQUITY RATIO10EARNING PER SHARE11DIVIDENDS PER SHARE11PRICE TO EARNING RATIO12TREND ANALYSIS13HORIZONTAL ANALYSIS17VERTICAL ANALYSIS18CASH FLOW ANALYSIS19CASH FLOW TO MARGIN RATIO25OCF RATIO25DEMAND & SUPPLY ANALYSIS26DIVIDEND VALUATION MODEL32GRAPHS OF SHARE PRICE AND RETURN AND COMPARISON WITH PREVIOUS ANALYSIS.35AREAS OF CASH FLOWS36CASH FLOW FROM OPERATING ACTIVITIES36CASH FLOW FROM INVESTING ACTIVITIES36CASH FLOW FROM FINANCING ACTIVITIES37CONCLUSION FOR CASH FLOW ANALYSIS:37RECOMMENDATION OF INVESTMENT AND FINANCING STRATEGIES38JUSTIFICATION OF RECOMMENDATION SHAREHOLDERS WEALTH39WORK CITED40APPENDICES42

COMPANY INTRODUCTION: WOOLWORTHS LIMITED Woolworths is a very well-known Australian supermarket/grocery chain founded in 1924.Woolworths are specialized in selling products including vegetables, meat, fruits, packaged foods, magazines , consumer electronic products and other stationery products .They operates over 900 stores across Australia through supermarkets, Electronics stores, Department Stores, Petroleum and liquor outlets and hotels.In 2008, Woolworths Limited became the first Australian company to break into the Top 25 global retailers list. Woolworth is one of the most famous and trusted retailers in the Australian retail market and as a part of their strategy, they continually invested in new stores and upgraded old ones to provide quality service and experience for its customers. They also made reinvestments of significant cash flow share for improving operations, market range, stock availability and customer service.PURPOSE OF FINANCIAL STATEMENTFinancial statement is an important tool to provide information about the financial position, performance and changes of an enterprise that is very useful for a wide range of users in making economic decisions. The statement identifies the basic information required for such users and helps to analyse the operation of the enterprise or entity over a period of time. Financial statements includes a firm's Income Statement, Balance Sheet, statement of Cash flows & the statement of Retained Earnings.Financial analysis shall be used by managers and owners to make important business decision and strategies. Stakeholders analyse financial statement to study current financial status of a company to determine the return on investment and make investment decisions. New investors can use these statements for a feasibility analysis before investing, forecast future dividends and understand risk related with the investments. Financial institutions use it to examine financial health of a firm before making a decision to provide loans/credit to a business. Supplier's and vendor's decision on whether to supply goods on credit to a particular company is based on its financial statements. Government institutions use financial statements to calculate tax accuracy confirmed in tax return report as well as to monitor economic growth.ANALYSIS OF CURRENT OPERATION

FINANCIAL RATIO ANALYSISThe appendix 1 shows all the ratios of Woolworths Limited from 2009 to 2014. Appendix 1

RETURN ON ASSETS

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Sometimes this is referred to as "return on investment". The ROA of Woolworths Limited has been in a good health overall since 2009. In 2009 it was 17.19 which in 2010 increased to 17.33. In 2011 it decreased to 16.56 which in 2012 further decreased to 15.71. This most probably might be because of the divestment of its retail and wholesale consumer electronics businesses in Australia, New Zealand and India. But in 2013 & 2014 it started recovering & went to 16.4 and 16.25 respectively.

RETURN ON EQUITY

ROE is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. In 2009, the Woolworths ROE, which was 27.62%, was at prosperity. In the next two years it remained quite consistent but in 2012 it drastically came down to 22.3. The reason for that is obviously the divesting from its retail and wholesale consumer electronics businesses. In 2013 it increased back to 25.46 which in 2014 again decreased to 24.73%.

NET PROFIT RATIO

The ratio of profitability calculated as net income divided by revenues, or net profits divided by sales is known as net profit ratio. It measures how much out of every dollar of sales a company actually keeps in earnings. The net profit ratio of Woolworths seems to be in a quite good health. In 2009, it was 3.7% which in 2010 increased to 3.91. For the next year it remained a bit constant but in 2012 came down directly to 3.32. In 2013, it again increased to 3.86 & improved more in the next year by increasing to 4.03.

CURRENT RATIO

Current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. In the case of Woolworths, they were having a low current ratio in 2009 which was 0.76. This further decreased to 0.73 in 2010. But after that it had a good increase and in 2014 it reached till 0.95. But it is still not a good sign for them as it is still below 1.

DEBT TO EQUITY RATIO

Debt to Equity is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. This clearly shows that Woolworths has been aggressive in financing its growth with debt. In 2009 it was 142.09 which in 2010 decreased to 136.48. But in 2011 it drastically went up to 165.47. In 2012 it came down to 155.51 & even for the next two years it decreased impressively. In 2014 it came down to 129.97 which is the lowest in last six years.

EARNING PER SHARE

Earnings per share serves as an indicator of a company's profitability. Earnings per share is generally considered to be the single most important variable in determining a share's price. The Woolworths Eps has been quite impressive since 2009 as it has only been increasing since 2009 to 2014. In 2009 it was 1.51 which in 2014 is 1.97.DIVIDENDS PER SHARE

DPS is the sum of declared dividends for every ordinary share issued. The DPS of Woolworths is also been in a decent growth since 2009 to 2014. In 2009 it was 1.04 which in 2014 has increased to 1.37. This is quite impressive for an investor to invest in Woolworths shares.

PRICE TO EARNING RATIO

The P/E ratio is a valuation ratio of a company's current share price compared to its per-share earnings. The P/E ratio of Woolworths has been fluctuating in the last six years. The highest was in 2009 which was 18.58 which decreased to 16.45. It again decreased to 14.38 in 2011 but it in 2012 it increased to 17.8 & then it again came down to 15.61 in 2014.

TREND ANALYSIS

SALES REVENUE TREND ANALYSIS

Particulars200920102011201220132014

Sales Revenue 49594.8051694.3054142.9054777.1058516.4060772.80

Trend100.00104.23109.17110.45117.99122.54

The Sales Revenue of Woolworths has only been increasing since 2009. Which shows that they are having a positive sales trend.

INCOME BEFORE TAX TREND ANALYSIS

Particulars200920102011201220132014

EBIT 2815.503082.103276.403352.103594.603775.20

Trend100.00109.47116.37119.06127.67134.09

The EBIT trend has also been increasing constantly since 2009.

NET INCOME TREND ANALYSIS

Particulars200920102011201220132014

Profit1835.702020.802124.001816.702259.402451.70

Trend100.00110.08115.7198.96123.08133.56

Till 2011 the net income increased till $2124 million. But in 2012 it drastically decreased to $1816.7 million. But in 2013 it again joined the race & jumped directly to $2259.4 in 2013 which then again increased to $2451.7 in 2014.

RETAINED EARNINGS TREND ANALYSIS

Particulars200920102011201220132014

RETAINED EARNINGS 3178.603855.203897.504163.404661.105423.10

Trend100.00121.29122.62130.98146.64170.61

The Retained earnings of Woolworths has been increasing decently since 2009.

HORIZONTAL ANALYSISHORIZONTAL ANALYSIS OF THE BALANCE SHEET

Particulars2014 (AUD in Millions)2009 (AUD in Millions)$ Change% Change

Assets

Total Current Assets7,174.804,859.202,31647.65

Total Non Current Assets17,030.4012,225.704,80539.30

Total Assets24,205.2017,084.907,12041.68

Liabilities

Total Current Liabilities7,558.206,414.601,14417.83

Total Non Current Liabilities6,121.603,613.002,50969.43

Total Liabilities13,679.8010,027.603,65236.42

Total Share Holder's Equity10,525.407,057.303,46849.14

HORIZONTAL ANALYSIS OF THE INCOME STATEMENT

Particulars2014 (AUD in Millions)2009 (AUD in Millions)$ Change% Change

Revenue60,952.2049,697.8011,25422.65

Gross Margin16,477.6012,723.403,75429.51

Income Before tax3,515.102,626.3088933.84

Net Income2,458.401,860.0059832.17

Keeping the last six financial years in mind, we have done the horizontal analysis of the balance sheet and income statement between 2009 and 2014 directly and shown the $ & % change from 2009 to 2014.VERTICAL ANALYSISVERTICAL ANALYSIS OF THE BALANCE SHEET

Particulars2014 (AUD in Millions)%2009 (AUD in Millions)%

Assets

Total Current Assets7,174.8029.644,859.2028.44

Total Non Current Assets17,030.4070.3612,225.7071.56

Total Assets24,205.20100.0017,084.90100.00

Liabilities

Total Current Liabilities7,558.2031.236,414.6037.55

Total Non Current Liabilities6,121.6025.293,613.0021.15

Total Liabilities13,679.8056.5210,027.6058.69

Total Share Holder's Equity10,525.4043.487,057.3041.31

VERTICAL ANALYSIS OF THE INCOME STATEMENT

Particulars2014 (AUD in Millions)%2009 (AUD in Millions)%

Revenue60,952.20100.0049,697.80100.00

Gross Margin16,477.6027.0312,723.4025.60

Income Before tax3,515.105.772,626.305.28

Net Income2,458.404.031,860.003.74

Keeping the last six financial years in mind, we have done the vertical analysis of Woolworths limited of the years 2009 and 2014 and compared both the years with the percent change.

CASH FLOW ANALYSIS

HORIZONTAL ANALYSIS OF THE CASH FLOW STATEMENT

Particulars2014 (AUD in Millions)2009 (AUD in Millions)$ Change% Change

Net cash from operating activities3,472.702,604.20868.5033.35

Net cash from investing activities-2,031.40-1,806.20-225.2012.47

Financing Activities

Proceeds from borrowings7,859.8013,619.30-5,759.50-42.29

Repayment of borrowings-7,927.10-13,458.505,531.40-41.10

Dividends paid-1,523.10-1,041.60-481.5046.23

Net cash from financing activities-1,371.90-808.90-563.0069.60

Net increase in cash69.40-10.9080.30-736.70

Keeping the last six financial years in mind, we have done the horizontal analysis of the cash flow statement between 2009 and 2014 & shown the $ & % change from 2009 to 2014. Further comments on the cash flow statement are mentioned & discussed under the Areas of Cash flows section

PROCEEDS FROM ISSUES TREND ANALYSIS

Particulars200920102011201220132014

PROCEEDS FROM ISSUES66.70153.30274.30323.90418.10219.10

Trend100.00229.84411.24485.61626.84328.49

Woolworths has been getting huge proceeds from issuance of shares and which has been increasing from 2009 to 2013. But in 2014 it dropped drastically from $418.1 million to $219.1 million by almost 50%.

PROCEEDS FROM BORROWINGS TREND ANALYSIS

Particulars200920102011201220132014

Proceeds from borrowings13619.3012833.8013349.2012361.905974.507859.80

Trend100.0094.2398.0290.7743.8757.71

Their borrowings has dropped directly from $5974.50 million in 2012 to $7859.8 million in 2014 which shows that they are now less depending on the debt, which is a good sign.

REPAYMENT OF BORROWINGS TREND ANALYSIS

Particulars200920102011201220132014

Repayment of borrowings-13458.50-12347.70-11590.90-12830.80-6501.80-7927.10

Trend100.0091.7586.1295.3448.3158.90

The repayment of the borrowings has also been decreased with a big difference, but when compared to the proceeds from borrowings each year, they are paying off more than what they are borrowing. Which is a good sign for the company.

DIVIDENDS PAID TREND ANALYSIS

Particulars200920102011201220132014

DIVIDENDS PAID-1041.60-1181.40-1273.20-1332.80-1416.80-1523.10

Trend100.00113.42122.24127.96136.02146.23

As we have shown in the DPS analysis, the dividends paid has increased from 2009 to 2014 constantly.

NET CASHFLOWS FROM FINANCING ACTIVITIES TREND ANALYSIS

Particulars200920102011201220132014

NET CASHFLOWS FROM FINANCING ACTIVITIES-808.90-832.90-0.70-1469.20-1520.40-1371.90

Trend100.00102.970.09181.63187.96169.60

The only year which gets our attention in the net cash flows from financing trend is the year 2011. Their net cash flow from financing activities in 2010 was $(832.9) million which in 2011 directly decreased to $(0.70) million.

CASH FLOW TO MARGIN RATIO

OCF RATIO

DEMAND & SUPPLY ANALYSIS

Being a mature market, Australia has one of the most concentrated grocery sectors in the world. Woolworths & Coles are the major supermarket chains who dominate almost 80% market share of the industry valued at $80 billion.

In recent years, Woolworths consolidated its position among the most profitable major supermarket chain, with gross profit margins of more than 25%. And many suppliers relied on annual price rises to boost their profitability. Such price rise has paved path for low-cost competitors like Aldi, the German discount grocery and US grocery chain Costco to attract bargain-seeking consumers. Coles has begun to use price as a differentiator, its Down, Down marketing campaign and $1 milk/$1 bread discount promotions. Over the next five years, their continued expansion will be a major factor in the future of supermarket retailing. Following figure describes the price difference among major retails players in Australia.

Australia is estimated to be the home of over 10,000 small and independent retailers. With a population of 22.7 million, Australia ranks considerably behind the USA and UK. Nevertheless it has more number of supermarkets per capita compared to the US, and about three times as many compared to the UK.

Supermarket revenues for 2011-12 posted a modest growth of 2.5% (to A$ 83.7 billion), which reached a figure of A$ 85.9 billion by 2012-13. By 2016-17, it is forecasted to touch A$ 94 billion mark.Of the total household expenditure, food and non-alcoholic beverages account for over 17%, which in turn represents 16% of the total wholesale trade. The Australian supermarket and grocery sector is the largest contributor to the retail turnover with the contribution standing around 29%.Generic house brands (private label) continues their crusade against the branded products, with a current market share of 23%. It is expected to steadily grow its market share towards the likes of 30%. The competition levels are so fierce that it is expected to drastically change the consumer shopping patterns over the next five years even resulting in supermarket shelf wars. It is anticipated that consumers will demand a broader range of goods and possibly increase expenditure on gourmet or luxury items.Parallel importsLegislation in Australia allows for parallel importing since the year 2000. It permits non-counterfeit products to be imported from another country, without the permission of the intellectual property owner. On allowing this rule in relation to FMCG products, legitimate importers are concerned whether the imported goods comply with the Australian regulations for labelling and composition, risking consumer safety and enjoyment by marketing out of date products and poor storage conditions.Various industry bodies are constantly monitoring the parallel import activities against potential damages to consumer confidence and the legitimate investor's investment in advertising, brand building and trade support.

Changing Retail Purchasing Patterns in AustraliaAccording to Nielsen Market Research organization, Australia's supermarket sector is rapidly evolving. According to them, ever increasing influence of digital and social media, changing consumer demographics and fragmented media and ethnicities will redefine Australian retail landscape by 2017 .Their new research has revealed that the demand for 'Connected device' is rapidly increasing which is evident in the growth of online retail marketing sector. Mr. Shane Scacco(Head of Client Service, Retail Industry Group, Nielsen) during Consumer 360 conference said that 'with internet penetration in Australia quickly approaching saturation point, connected device ownership growing significantly, and consumers' attitude toward online purchase evolving ,traditional 'bricks and mortar' retailers are making a play to secure their digital footprint and make the challenging transition from offline to online to omni channel'.Traditional Purchasing in AustraliaOne of the biggest challenges that retail industry facing is the 'Customer Loyalty'. Online grocery retailing is still a naive industry and retailers like Woolworth and Coles are discovering that the consumers' preferences for offline purchase still remains the same.

An illustration of how often consumers look online and buy at store, 2007, 2009, 2011 and 2013 is given in below table:

Proportion of internet usersProportion of population

20072009201120132007200920112013

Never3427302452413931

Sometimes4043445129353846

Often2630262519242323

Presently, almost 6 out of 10 Australian consumers use online retail website to research product to purchase and carryout purchase offline. Recent research also shows that almost 64 percent of shoppers visit any one of the four major retail chain a given week.

More than 9 out of 10 Australians (91 %) support Australian farmers ,while nearly 73 % believe they are paying more in retail stores than what they should really pay for household products. 80% of total Australian retail consumer population also believe that reduction in price would make a huge difference ;but 52% believe that this reduction shall make a bad impact on Australian farmer and another 64% believes that it is this retailers who are the biggest gainers of price reduction and promotions. Another study has also shown that 41% of consumers feel their expenses on grocery has reduced in past five years and

Online Purchasing in Australia:Major retail giants in Australia, Coles and Woolworth offer an online purchase service where customers can order any grocery product online and have it delivered to their door. Other smaller players such as Adli and Aussie Farmers Direct, having more than 200 franchises in Queensland, Victoria, New South Wales, ACT, South Australia, Western Australia provide more of regional services.

A significant finding during a research conducted by Roy Morgan is that Food and Beverages recorded a 30 percent growth in online shopping and has come into the top 5 online purchase expenditure list. The findings also showed a clear trend that a customer who has not made online shopping in an average 3 month period has become a minority for the first time in 2013. Youth in Australia, aged 14 and above spent over $24 billion in 12 months during March 2013 to March 2014, recording an increase of 11.9 percent on the previous year. However, total retail sales increased only 3.4 percent during the same period.According to Roy Morgan Research, the average internet shopper spent $285 online per four week period, with Travel, Entertainment and Leisure, Electronics, Fashion and Food and Beverages the Top 5 categories by expenditure.Australian Food News reported earlier in September 2014 that Global retail giant Amazon could be preparing to enter the Australian grocery market, with Amazon advertising for a software development engineer in Brisbane for its Amazon Fresh grocery delivery business.

Following table shows the frequency of online purchases made from during recent years.Proportion of internet usersProportion of population

20072009201120132007200920112013

Never4327221559413223

Less thanmonthly2021201914171818

Monthly2733333620272933

Weekly91723257142023

Daily12251124

PARTICULARS2009 $ML2010 $ML2011 $ML2012 $ML2013 $ML2014 $ML

Sales49,594.8051,694.3054,142.9054,777.1058,516.4060,772.80

Avg assets16,378.7017,786.1019,790.9021,337.8021,915.6523,227.70

Net profit1,835.702,020.802,124.001,816.702,259.402,451.70

Avg equity6,646.307,437.507,831.758,146.058,873.409,912.95

EBIT2,815.503,082.103,276.403,352.103,594.603,775.20

Avg inventory3,151.303,365.703,587.653,717.403,951.854,449.30

COGS36,871.4038,300.7040,049.7040,316.1042,754.9044,474.60

AVG receivables472.05569.70725.10836.20939.80947.15

CA4,859.205,199.006,326.905,802.106,226.107,174.80

CL6,414.607,153.408,022.206,766.206,866.007,558.20

Inventory3,292.603,438.803,736.503,698.304,205.404,693.20

Total liabilities10,027.6010,669.6012,982.6013,134.8012,949.7013,679.80

Total equity7,057.307,817.707,845.808,446.309,300.5010,525.40

Total assets17,084.9018,487.3020,828.4021,581.1022,250.2024,205.20

Operating cash flows2,604.202,759.902,991.102,873.802,719.903,472.70

DIVIDEND VALUATION MODEL

In order to evaluate the dividends of Woolworths (WOW), we must first have a look at their dividend distribution over the past 5 years i.e. from 2010-2014. Table 1 shows the history of dividend distribution by Woolworths.

Before we move on to evaluate the dividends issued by Woolworths we have to calculate the Divided Growth Rate of the company. The calculations of Dividend Growth Rate are shown:Dividend Distribution in 2010 = $ 1.15Dividend Distribution in 2014 = $ 1.37

As the above dividends are franked, we have grossed up the dividend by tax rate of 30% = D/(1-Tax rate)= D/(1-Tax rate)=1.15/(1-.30)=1.37/(1-.30)=1.15/(.70)=1.37/(.70)=1.6429=1.9571

CAGR = (FV/PV)1/5-1From the above equation the Dividend Growth Rate= (1.9571/1.6429).20-1= (1.1918).20-1= (1.0356)-1= .0356 or 3.56%Over the course of 5 periods dividend grew from $1.64 to $1.95, its compound annual growth rate, or its overall return, is 3.56%.CAGR essentially smooths out the progress of investment over a period of time, providing a clearer picture of annual return. However, although investment started at $1.64 and ended with $1.95, its growth in any one year may have been quite a bit higher or even negative (if the investment ever lost money over that time). Consequently, the CAGR figure may give the impression that the investment has produced a stable return throughout its life, even if the investment was extremely volatile, fluctuating a great deal from year to year.Accordingly, the return on market or Rm is 0.0356 of 3.56% and Rf rate considered for WOW is also 0.0183 or 1.83% which is the average risk free rate (5 years Average Government bond yield). Beta is taken from. This is 0.478. Now we have all the variables to calculate the required rate of return for WOW which is nothing but CAPM. CAPM = Rf + (Rm-Rf).Where Rf is Risk free rate, is systematic risk, and Rm is Return on market. CAPM = 0.0183 + 0.48 (0.041 0.0183) = 0.0183 + 0.0108 = 0.0292 or 2.92%

Since the growth rate is higher than the required rate of return, we cannot use Gordon Dividend Model {P=Div (1+g)/r-g}. So we will use dividend discount model to calculate the price of share.

P = Share prices = 67.03

Though the share price which we got is higher than the market share price of WOW, this could be because we have not taken the actual return on market, which is not available so we calculated the return on market by using the S&P ASX 200 Index rate in Australia. Moreover we have taken the systematic risk rate as on date, which is different from the date of fiscal year closing as on 31st December 2014.

Data which is available to us is for group and not for one particular activity. Because CAPM is a model that calculates expected return not the actual rate of return based on expected rate of return on the market, the risk-free rate and the beta coefficient of the stock. Moreover we have taken the average risk free rate. This is the reason we have got the higher share price of WOW.

GRAPHS OF SHARE PRICE AND RETURN AND COMPARISON WITH PREVIOUS ANALYSIS.

By looking at past 5 years, Woolworths ltd share price has gone up from $ 27.40 (year 2010) to $ 35.66 (year 2014). At the same period, returns have increased around 20%. However ongoing financial year Woolworth ltd share price has fallen significantly.

Current share price of Woolworths ltd is AUD 28.96 in Australian Stock Exchange. One of the reasons for the share price to fall is losing its competitiveness and market share in its core businesses. Woolworths was the market leader in Australia and New Zealand supermarket industry, but today Woolworths is facing tough competition from its competitors such as Coles. In addition to that, group is facing loss from other subsidiaries such as master home improvement. Therefore investor confidence has gone down and share price has been falling significantly. In supermarket industry Woolworths is losing its revenue because Coles and other competitors in the industry is gaining market share by reducing price level. This leads the revenue to decrease from its core supermarket division and it affect all over profit of the Woolworths Group. AREAS OF CASH FLOWSCASH FLOW FROM OPERATING ACTIVITIESWow has maintained their net cash flow from operating activities around $ 2000 million to $ 3000 Million since last 6-7 years. By looking at the past five years, cash flow from operating activities has increased from 2752 million dollars (year 2010) to 3472.7 million (year 2014). The company has enough cash to pay dividend to its shareholders from current years operations itself. In year 2014 company has generated 3472.7 million dollar of operating cash which is more than enough to cover its total dividend of 1491.9 million dollars. Wow is converting their maximum portion of revenue into cash, they dont have major receivables on the balance sheet. Their cash from operating activities such as receipt from customers that generate cash have increased over the years. In this segment of cash flow, company has generated more than 65,891 million dollars in the year 2014.In terms of the payment to suppliers also they have maintained the same proportion to receipt over the period. Which shows there is not much difference in the margin in their sales also the credit period with the suppliers remain as it is.

CASH FLOW FROM INVESTING ACTIVITIES Looking into investing activities of Woolworths, companys investment on assets, property and equipment has decreased over the last two years. In year 2012 and 2011, company had invested more than 2100 million dollars on capital expenditure which came down to 1800 million dollars in 2014. It shows company has decreased investment on expansion. To compete in todays dynamic business environment to have a sustainable growth company need to invest on business expansion and to diversify into more areas. There is a 900 million dollars Income from disposable of asset, in year 2013. The reason behind this would be the decrease in investment on capital expenditure and some of the investment they had divested. This can be seen through the proceeds from selling of a subsidiary as well. To increase the value of the company, Woolworths need to invest on capital expenditure which would help company to bring back investor confidence and that will automatically lead to increase in the share price.

CASH FLOW FROM FINANCING ACTIVITIESWith comparison to last five years, in 2014 Woolworths had not received much capital from issuing new shares to the public. While Woolworths has generated more than 300 million dollars in year 2012 and more than 400 million dollars in 2013, but in 2014 its dropped down to 200 million dollars.

In year 2013 Wow had dropped their borrowing to half of what they have borrowed in 2012, also they have maintained approximately same level in 2014. They are paying of the prior debts completely in the same year, which shows they have enough cash flow to repay their debts.

However to further investment in expansion of business, company need to acquire additional capital. If not competitors would continue to gain more market share. Woolworth as a leading company in Australia and New Zealand it has the capability to expand beyond its current markets which will need a healthy inflow of cash.

CONCLUSION FOR CASH FLOW ANALYSIS:

Wow had maintained their overall net cash flow at a same level over the period of 6-7 years except in 2011 where it had went up to 1500 million dollars from an average of 700 to 800 Million dollars in other years. Main reason being they had not paid of their complete debt during that period. Also based on the net cash flow we can assume WOW is managing their cash flows very prudently, even though the debt is quite higher compared to equity, they have enough resources to pay off the debt. They do not maintain very high cash balance also which shows they are investing their maximum inflows either in investing activities. In other ways it can be assumed as they are mainly debt based company the maximum cash inflow and outflow comes through borrowings and repayment of the same.

RECOMMENDATION OF INVESTMENT AND FINANCING STRATEGIES

In todays dynamic business environment, Woolworths has to take strategic investment and financing strategies to improve cash flow position and continuous growth of the company in order to be competitive in the market.Woolworths ltd has to defend their leadership in food and liquor business in order to improve its cash flow position. Company already has strong presence in food and liquor industry but company need invest more to retain and increase the market share. Woolworths ltd has to diversify its business portfolio in order to diversify the risk and generate more revenue for the company. Diversifying its business portfolio further would help Woolworths ltd to earn revenue from more sources and it would help to improve its overall cash flow. This will also help the company diversify its risk on depending revenue only from few businesses. Further, this would help to improve investor confidence and it enables share price to rise. To improve cash flow position of the company, Woolworths ltd needs to use its resources efficiently. Company has to invest on latest technology in its operations in order to reduce the cost and use resources efficiently. This would further help company to be more competitive in front of its business rivals. Woolworths ltd can issue more shares to the public to generate capital for the new investments and improve cash flow. In addition to fresh capital, Woolworths ltd can borrow loans from the finance houses to a small extent. Loans would help company to invest without completely depending on its cash flows. Therefore new investment wouldnt be a burden for companys current cash flow.If WOW would like to grow the shareholder wealth, they have to venture outside the current market, which needs higher investment. As their financing is mainly through debt, they have to balance it by issuing some additional shares. Before they will issue the shares they need to bring back the investors confidence as it is not at right level which can be noted from recent decrease in share prices. Also they need to diversify their risk from any other venture where the cash out flow is not as quick as the current model, where they do not have longer credit periods. Other option would be to invest higher on the businesses which have higher margins like the liquor

JUSTIFICATION OF RECOMMENDATION SHAREHOLDERS WEALTH

By investing more on liquor and food business, diversifying its business and upgrading technology, Woolworths ltd can generate additional revenue and increase competiveness of the company. Additional revenue for the company would lead to more profit to share to shareholders. Moreover, additional investments would increase investors confidence towards the Woolworths Company and it will eventually help to increase the price of the share. By issuing new shares for additional investment means, company is not using its profit or cash flow for the investments. Therefore it wont affect the profit to the shareholders and also increase shareholders wealth in the long term.In order to sustain the business over long period they have to look outside the current market, also improve the supply chain example sourcing materials from the countries where those materials can be sourced at very low price without compromising in quality, it will be easier to source from different markets if they have stores within those markets.

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APPENDICES

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