A financial analysis of Harvey Norman Holdings Limited Essay
A financial analysis of Harvey Norman Holdings Limited, residing in United Kingdom and Woolworths Group PLC incepted in Australia will take place in this assignment. Both companies are engaged in the retail industry and an examination of their profitability, liquidity and financial stability will take place. It was noted through the accounting ratios adopted that Harvey Norman Holdings Limited, managed to improve the financial performance and financial position during the time frame considered. In addition they hold a better profitability and stability than Woolworths Group PLC, which is deteriorating on their side.
The financial position of both companies is deteriorating in the period considered. However, Harvey Norman Holdings Limited still holds a better liquidity than the other company in light of a higher current ratio and quick ratio. Harvey Norman Holdings Limited is considered in the latter part of this assignment as the corporation that holds the best financial health. The main weaknesses of accounting ratio, which encompass that qualitative characteristics and economic elements are not considered, together with that accounting ratios are based on historical data will be outlined.
1. Introduction – Organizations Selected Harvey Norman Holdings Limited and Woolworths Group PLC, the organizations selected in this assignment both operate in
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Woolworths Group PLC where also capable to attain growth from its inception in 1909. In fact they managed to build and operate 801 main chain stores located in small towns and city suburbs. The company also adopted a diversification strategy and commenced publishing and wholesaling together with retailing (Woolworths Group PLC 2008, p 2 and 4). 1. 1 Financial Performance of Companies Examined The application of proper accounting ratios in the latter section of this assignment shows that an increasing trend in the profitability of Harvey Norman Holdings Limited is occurring in the time frame analyzed from 2006 to 2007.
On the contrary, the profitability of Woolworths Group Plc deteriorated during the years examined. The utilization of the firm’s resources was more efficient for Harvey Norman Holdings Limited as depicted by a significant increase in the return on capital employed of 5%. A material percentage in the return on capital employed is always desirable, because it signifies that the profits of the organization are substantially safe from any unforeseen changes in the business environment, such as an economic recession, new competitive actions and more (Lucey 2003, p 254-525).
This positive argument cannot be applied for Woolworths Group PLC, which faced a fall of 15% in such ratio and holds an efficiency level significantly lower than the other firm. A positive movement was also noted in the net profit margin of Harvey Norman Holdings Limited. The net profit margin ratio signifies the net profit generated by the company from every $100 of service revenue attained. A higher ratio therefore reveals effective controls on the operational costs of the enterprise. Woolworths Group PLC faced a slight decrease in the net profit margin ratio.
However, the net profit margin of Harvey Norman Holdings Limited exceeds that of the other company by 6%, showing excellence in such facet. Therefore we can contend that Harvey Norman Holdings Limited is financially superior to Woolworths Group PLC when compared to profitability. 1. 2 Utilization of Resources of the Corporations Analyzed The ability to generate sales from the resources of the company also improved for Harvey Norman Holdings Limited as portrayed by the utilization of resources ratios determined in the latter section of this assignment.
The fixed assets turn and net working capital ratio indicate the effectiveness with which the corporation has been using its fixed assets and net working capital to derive sales (Randall 1999, p 467-468). This is an important element for an organization, because it is the key drive that sustains a good financial performance. Woolworths Group PLC portrayed a decrease in the fixed asset turn ratio, which is in line with the deteriorating profitability.
However, the net working capital ratio increased significantly during the years considered. This contradicts with the diminishing profitability noted in the previous section. Further analysis of this ratio is necessary in order to properly read behind the lines and correctly outline the financial health of the organization. Woolworths Group PLC incurred a drastic decrease in net current assets, during the periods under consideration amounting to 159%. Such decrease stemmed a rapid rise in the net working capital ratio.
Therefore the increase in this ratio is not mainly the result of higher profitability from net current assets, but from a decrease in such resource. One of the main responsibilities of management is to ensure that the resources provided by the stakeholders are utilized effectively in line with the firm’s mission and vision statement. In this respect, the managers of Harvey Norman Holdings Limited should be acclaimed for their appropriate application of managerial techniques that enhanced an efficient use of the company’s factors of production to attain their corporate objectives.
Even though there is a positive increasing trend for Harvey Norman Holdings Limited, it is important to outline that both the fixed asset turn ratio and net working capital ratio of Woolworths Group PLC are significantly higher. 1. 3 Financial Position of Firms under Consideration A deteriorating financial position is noted for both Harvey Norman Holdings Limited and Woolworths Group PLC in the years under analysis, as highlighted by the decrease in the current ratio.
This shows a significant weakness on the working capital of the organisation, since the aforesaid ratio shows the ability of the company to meet its current liabilities out of the current assets (Wood et al 2002, p 569-570). This weakness is further emphasized by the drastic deterioration in the capability of the most liquid assets to cover the current liabilities, portrayed through the acid test ratio. Harvey Norman Holdings Limited, however, still holds prominence on Woolworths Group PLC on working capital management.
This is revealed by the fact that both the current ratio and acid test ratio of Harvey Norman Holdings Limited are at a higher rate than the other company. Therefore we can state that the working capital of Harvey Norman Holdings Limited is sounder than that of Woolworths Group PLC. The debtors’ ratio however improved during the years for Harvey Norman Holdings Limited. This ratio diminished by 51 days from 2006 to 2007, meaning that the company’s debtors are taking 51 days less to pay the debts due (Randall 1999, p 469). This is a positive feature on the cash flow of the organization.
Indeed the net cash from operating activities portrayed in the cash flow statement increased by 178%. Such increase stems from the fall in such ratio. In light of such decrease, we can therefore contend that the credit control department on debtors control is adopting more effective controls. This is a positive element for the cash management and working capital of the corporation. In view of the above one would ponder on why there was a drastic deterioration in the working capital management of Harvey Norman Holdings Limited as outlined in the previous paragraph.