Liquidity, Solvency and Profitability
This report consists of ratio calculation and analysis of Woolworths’ liquidity, solvency as well as profitability. Liquidity ratios include current ratio, quick asset ratio and inventory turnover. Solvency ratios include debt to total asset and interest coverage. Profitability ratios include return on owners’ equity, payout ratio, return on assets, return on sales, asset turnover, cash return on sales and operating expense ratio.
Ratio Calculation | Formula | Calculation $M | Results | | | 2012 | 2011 | 2012 | 2011 | Current Ratio | Current AssetsCurrent Liabilities | 5,802.16,766.2 | 6,326.98.022.2 | 0.86 : 1 | 0.79 : 1 | Quick Asset …show more content…
For example, increase sales, which in turn increase cash inflow or receivables through quick sales like discounts. Current liabilities can also be paid off to improve current and quick ratios using long-term loans.
To improve inventory turnover ratio, Woolworths has to increase sales maybe with more tempting marketing strategies to attract more customers or search suppliers with lower price so they could offer customers products with more agreeable price. Therefore, their sales will be strengthened seen by an increase in cost of sales. Another way is to decrease the average inventory so it will minimize inventory-holding cost.
Solvency ratios are used to measure long-term risk and are of interest to long-term creditors and shareholders (Carey, 2009).
Debt to Total Asset
Debt to total asset ratio calculates the percentage of assets provided by creditors. A lower debt ratio indicates that a company relies less on borrowing as compared to equity for financing its assets. The higher the ratio, the greater risk will be associated with the firm’s operations (Carey, 2009).
In Woolworths’ case, its debt to asset ratio has improved as the percentage declines from 62.33% to 59.61%. This suggests that Woolworths has sufficient amount of assets to cover its debts in the long term. Deducting from the balance sheet, it can be seen that even though its