WOOLWORTHS GROUP LIMITED

Executive Summary:
This report talks about the capital structure of Woolworths Group and dissects it into its further
components. This makes it easier to understand the division of debt and equity. Trend analysis
and value chain analysis are utilized to calculate the usability of its capital structure. This report
also discusses the types of long term borrowing the company has and dives deep into the terms
and rates. Moreover, it also talks about the calculation of WACC for the estimation of its returns
as compared to industry averages. The report concludes that this company is worth investing as it
is stable (even during COVID 19) and has greater future prospects.

Contents
Introduction:...............................................................................................................................................3
Data Analysis:..............................................................................................................................................3
Capital Structure Analysis:.......................................................................................................................3
Performance Analysis:.............................................................................................................................4
Long term bonds:.....................................................................................................................................6
Cost of Capital:........................................................................................................................................7
Conclusion and Recommendations:............................................................................................................8
Limitations:..................................................................................................................................................9
Citations:.....................................................................................................................................................9
Introduction:
Woolworths Group Limited is occupied with retail tasks. They are in a food retail business which
can be a subcategory of Food and Lifestyle. The Company’s fragments incorporate Australian
Food, New Zealand Food, and portfolio. Australian Food fragment is occupied with acquisition
of food and related items for resale and arrangement of administrations to clients in Australia. It
works around 1,052 Woolworths Supermarkets and Metro Food Stores. New Zealand Food is
occupied with acquisition of food and beverages for resale to clients in New Zealand. Its
portfolio section comprises of BIG W that works around 179 stores, which is occupied with
obtainment of rebate general product items for resale to clients in Australia. The Company
additionally has online tasks for its essential exchanging divisions. The Company works
fundamentally in Australia and New Zealand and works around 3,357 stores.
SWOT investigation of Woolworths examinations the brand by its qualities, shortcomings,
openings, and dangers. In Woolworths SWOT Analysis, the qualities and shortcomings are the
interior components while openings and dangers are the outside factors.
SWOT Analysis is a demonstrated administration system which empowers a brand like
Woolworths to benchmark its business and execution when contrasted with the contenders.
Woolworths is one of the main brands in the way of life and retail area. Its strength is that the
company has many private label brands which are working under its hood. The weakness is that
the company has limited global presence if we compare it to its competitors. An opportunity
which is right there for the company is that it can open its stores in newer geographies for the
expansion of business. A very big threat is the rise in raw material prices which is leading to a
shrink in profit margins for this industry.
Some competitors of the company include TESCO, LIDL, Carrefour, Walmart, Coles Group,
Kroger.
The primary buyers of this industry are the end users which include normal consumers, whereas
the sellers in this industry are companies operating in the food raw material provision. They can
range from organic farmers to huge industries producing these materials.

Data Analysis:
Capital Structure Analysis:
Breaking down capital structure is a decent method to evaluate risk based on your conditions.
Venture examiners use asset report examination to decide both the current soundness of a
business just as its probability for development. You can decide similar proportions and
perceptions to give yourself a reasonable thought of how an organization is promoted.
The optimal capital structure of a firm is frequently characterized as the extent of debt and value
that outcomes in the most minimal weighted average cost of capital (WACC) for the firm. This
specialized definition isn't constantly utilized by and by, and firms regularly have a vital or
philosophical perspective on what the ideal construction ought to be. To improve the design, a
firm can issue either more obligation or value. The new capital that is procured might be utilized
to put resources into new resources or might be utilized to repurchase obligation/value that is as
of now remarkable, as a type of recapitalization.
“Empirical studies have found that managers choose debt rather than equity to avoid EPS
dilution and buy back outstanding shares to boost EPS, we thus explore the resulting effect of
EPS on leverage” (Chen and Chou, 2021). A company's leverage is contrarily affected by the level of
its EPS. We likewise find that vacillations in EPS significantly affect leverage, and these impacts
persevere for something like 10 years. Also, the adverse consequence of EPS on influence turns
out to be a lot more grounded after the section of SOX, where period directors participate in
more activities of debt value decisions or stock repurchases with the sole reason for controlling
EPS. Besides, administrators' value motivators and corporate administration are two financial
instruments through which EPS adversely impacts influence.
The EBIT-EPS way to deal with capital design is an apparatus organizations use to decide the
best proportion of obligation and value that ought to be utilized to fund the business' resources
and activities. At its center, the EBIT-EPS approach is an approach to numerically project what
an asset report's construction will mean for an organization's profit. The ratio between these two
measurements can show financial backers and the executives how the primary concern results,
the organization's EPS, identifies with its exhibition autonomous of its capital design, its EBIT.
For instance, suppose an organization needs to keep up with stable EPS yet is thinking about
taking out another advance to develop its asset report. With the end goal for EPS to stay steady,
the organization's EBIT should likewise increment essentially as much as the new interest cost
from the obligation. On the off chance that EBIT builds equivalent to the following interest cost,
EPS ought to stay steady, expecting no change in charges.
The capital structure theory says that for any organization or speculation there is an ideal blend
of debt and equity financing that limits the WACC and augments value. Under this hypothesis,
the ideal capital structure happens where the minimal expense of debt is equivalent to the
negligible cost of equity. This hypothesis relies upon presumptions that infer that the expense of
one or the other debt or equity financing change concerning the level of leverage. The
conventional theory can be contrasted differently in relation to the Modigliani and Miller (MM)
hypothesis, which contends that assuming monetary business sectors are effective, debt and
equity money will be basically tradable and that different powers will demonstrate the ideal
capital construction of a firm, for example, corporate expense rates and duty deductibility of
premium installments.
Performance Analysis:
The debt to-equity (D/E) proportion is utilized to assess an organization's financial leverage and
is determined by partitioning an organization's complete debt by its equity value. The D/E ratio
is a significant measurement utilized in corporate money. It is a proportion of how much an
organization is financing its tasks through obligation versus entirely claimed reserves. All the
more explicitly, it mirrors the capacity of investor value to cover all remarkable obligations in
case of a business slump. The debt-to-equity ratio is also known as gearing ratio.
The debt-to-equity ratio for Woolworth Ltd. For years 2017-2021 is given below:
 Debt-to-Equity Ratio
120

100 95.6

80 76.5

57.1
60 56.2
53.6

40

20

0
2017 2018 2019 2020 2021

It seems that this ratio has increased over years showing a higher leverage being accumulated in
the company for many years. This shows a higher risk to maintain obligations but gives it more
stability.
Industry average of Debt-to-equity ratio is 91.1 which is almost equivalent to the value of
Woolworth. This shows that company is doing the same as compared to its competitors and is
almost the industry average. It also means that the leverage and risk the company is facing is the
same and the whole industry might have the same method of financing.
By and large, a decent debt-to-equity ratio is anything lower than 1.0. A proportion of 2.0 or
higher is typically viewed as dangerous. In the event that a debt to equity ratio is negative, it
implies that the organization has a larger number of liabilities than assets—this organization
would be considered amazingly unsafe. A negative ratio is for the most part a pointer of
liquidation. Remember that these rules are comparative with an organization's industry. In certain
enterprises, organizations might will in general have higher debt to equity ratio, while the normal
debt to equity ratio is lower in different areas
Times interest earned ratio is a proportion of an organization's capacity to meet its debt
commitments dependent on its current income. The recipe for an organization's TIE number is
earnings before interest and tax (EBIT) partitioned by the absolute interest payable on bonds and
other debts.
The outcome is a number that shows how frequently an organization could cover its interest
payables of its pretax profit. Times interest earned ratio is also known as interest coverage ratio.
 Times interest earned ratio
16
13.8
14 12.9
12
10.2
10

4 3
2

0
2017 2018 2019 2020

The industry average of times interest earned ratio is 4.5 which is higher than the company in
2020 but historically it has been lower. In 2020, this fall in Times interest earned ratio for the
company might be due to the effect of COVID 19 and is unusual. A lower value of this ratio
presents more risk as it presents a higher risk in terms of solvency and the company might be
facing difficulties fulfilling its interest payments. Whereas company’s historical trend shows a
different story where the value of this ratio has been higher than industry’s average. This higher
value is favorable for the operations of company as the company is providing less risk to
investors and creditors in terms of its solvency. It is considered as a rule of thumb that any
company with a times interest earned ratio value above 2.5 has an acceptable amount of risk.
Any company which has a times interest earned ratio less than 2.5 is deemed to be close to
bankruptcy and default, therefore investors and creditors consider such companies as unstable.
Albeit a higher times interest earned ratio is great, it doesn't really imply that an organization is
dealing with its debt payments or its financial leverage in the most productive manner. All things
being equal, times interest earned ratio that is far over the industry average focuses to
misappropriation of profit. This implies the business isn't using any excess profits for
reinvestment in the organization through development or new undertakings, yet rather squaring
away debt commitments excessively fast. An organization with a high times interest earned ratio
might lose favor with long haul financial investors.
Based on the solvency ratios, Woolworth’s financial leverage is somewhat balanced representing
a stable outlook of it as compared to the industry. This shows that company is doing good when
it comes to in obliging to debt and staying away from bankruptcy.
Long term bonds:
Bonds have an inverse relationship to interest costs. At the point when the expense of acquiring
cash rises (when interest rates rise), bond costs normally fall, as well as the other way around.
From the start, the negative relationship between loan fees and bond costs appears to be to some
degree counter intuitive. Notwithstanding, upon closer assessment, it really starts to bode well.
Bond financial investors, similar to all equity investors, ordinarily attempt to get the most ideal
return. To accomplish this objective, they for the most part need to monitor the fluctuating
expenses of getting a simple method to get a handle on why bond prices move the other way of
interest costs is to consider zero-coupon bonds, which don't pay customary interest and on
second thought infer the entirety of their worth from the contrast between the price and the
standard coupon paid. Zero-coupon securities are given at a rebate to face value, with their yields
an element of the price tag, the coupon value, and the time staying until maturity. Nonetheless,
zero-coupon bonds additionally lock in the security's yield, which might be appealing to certain
financial investors.
The company deals in various types of borrowings with varying terms. In September 2020, the
$654 million US Senior Notes developed. In November 2020, the $229 million European
Medium Term Notes additionally developed. The Group renegotiated these developments with a
$1 billion homegrown Medium Term Note issuance in May 2020. In December 2020, the Group
went into a $384 million bank ensure office and $398 million direct guarantee bond office. The
bank ensure office is supported by the global guarantee market. The offices support the Group's
laborers' remuneration commitments as a self-guarantor, where bank ensures are given for
Australian specialists' pay specialists. These exchanges renegotiated the Group's $500 million
bank ensure office, which developed in January 2021. In April 2021, the $424 million US Senior
Notes developed, and the Group reimbursed this with its current overflow money and bank
offices.
Woolsworth pays all dividends at 30%.The DRP stays dynamic. Qualified investors might take
part in the DRP in regard of all or part of their shareholding. There is as of now no DRP rebate
applied and no restriction on the quantity of offers that can take an interest in the DRP. Offers
will be designated to investors under the DRP for the 2021 last profit at a sum equivalent to the
normal of the day by day volume weighted normal market cost of customary portions of the
Company exchanged on the ASX over the time of 10 exchanging days starting on 7 September
2021. The last date for receipt of political race sees for the DRP is 6 September 2021. The
Company means to give new offers to fulfill its commitments under the DRP. During the period,
14.0% (2020: 12.6%) of the profits paid were reinvested in portions of the Company.
Cost of Capital:
Debt financing has a number of benefits, which can help a company to grow significantly. Debt
financing gives the company a lot of control over its dealings and finances. At the point when
you want to utilize debt financing from a borrowing company, the bank has nothing to do with
how you deal with your organization. You settle on every one of the choices. The business
relationship closes once you have reimbursed the credit in full. Another benefit is the easiness to
plan such financing. You know well ahead of time precisely how much principal and interest you
will take care of every month. This makes it simpler to financial plan and make monetary
arrangements. The greatest benefit which one can get from debt financing is the tax levy. In most
corporate duty frameworks, debt financing is for sure preferred through the tax deductibility of
interest installments. All in all, organizations can deduct interest payments on their debt from
their corporate income tax base. At the point when this deductibility is considered, the worth of
the utilized firm is equivalent to the worth of the unleveraged firm, increased by the tax shield
value of debt. This tax shield addresses the duty benefit and equivalents the measure of debt
times the corporate tax rate: VL = VU + tD. Henceforth, an organization could in principle
amplify its worth by being financed 100% through debt.
When a company’s cost of capital increases from zero, the cost of debt increases whereas there is
a decrease in cost of equity. Also, there is an inverse relationship between WACC and financial
leverage which leads to a decrease in WACC.
Cost of capital is the necessary return important to make a capital planning project, like structure
another production line, beneficial. At the point when experts and financial backers talk about
the expense of capital, they ordinarily mean the weighted normal of a company's expense of
obligation and cost of value mixed together.The expense of capital measurement is utilized by
organizations inside to decide whether a capital task merits the consumption of assets, and by
financial backers who use it to decide if a venture merits the danger contrasted with the return.
The expense of capital relies upon the method of financing utilized. It alludes to the expense of
value if the business is financed exclusively through value, or to the expense of obligation in
case it is financed exclusively through obligation. Many organizations utilize a mix of obligation
and value to fund their organizations and, for such organizations, the general expense of capital
is gotten from the weighted normal expense of every capital source, broadly known as the
weighted normal expense of capital (WACC).

WACC
7.55
7.5
7.45
7.4
7.35
7.3
7.25
7.2
7.15
7.1
7.05
2021 2020 2019 2018 2017

The company has a WACC of almost 7.5% in 2021 which is below the average of industry. This
does not represent much in terms of company’s performance but based upon IRR, the company
seems a good enough investment.

Conclusion and Recommendations:

Limitations:
The major limitations of this study are the exclusion of economic activities explaining the
movements of cost of capital and debt. It was considered as an externality and it makes some
trends difficult to explain.
Citations:
Chen, Y. and Chou, R., 2021. The Effect of EPS on Capital Structure. [online] Papers.ssrn.com.
Available at: <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2646423> [Accessed 20
September 2021].
My Accounting Course. 2021. Weighted Average Cost of Capital (WACC) Formula | Example |
Definition. [online]
My Accounting Course. 2021. Weighted Average Cost of Capital (WACC) Formula | Example |
Definition. [online] Available at: <https://www.myaccountingcourse.com/financial-
ratios/wacc#:~:text=The%20WACC%20formula%20is%20calculated,by%20the%20cost%20of
%20debt> [Accessed 20 September 2021].
FortuneBuilders. 2021. What Is A Good Debt-To-Equity Ratio: An Investor's Guide. [online] Available at:
<https://www.fortunebuilders.com/what-is-a-good-debt-to-equity-ratio/

Goyal, A., Subrahmanyam, A. and Swaminathan, B., 2021. Illiquidity and the Cost of Equity Capital:
Evidence from Actual Estimates of Capital Cost. SSRN Electronic Journal,.