WOW share price in focus
Founded in 1924, Woolworths is a retail operator in Australia and New Zealand with over 3,000 stores and over 100,000 employees. It is one of Australia’s largest companies in terms of revenue and market share.
Woolworths’ main operations include supermarkets (under the Woolworths brand in Australia and Countdown in New Zealand), retailing through its discount department stores under the Big W brand, and business-to-business (B2B) brands like PFD. However, its 35%+ market share of Australian groceries is undoubtedly its crown jewel.
Woolworths is a very popular choice for many ASX investors seeking dividend income. Historically, it has consistently paid a fully franked dividend, usually at a yield of over 3%, and offers a very defensive earnings stream with most revenue coming from consumer staples. Its competitive advantage is best summarised as scale (distribution, low costs, etc.) and proximity (most shoppers still shop based on distance to the supermarket).
Let’s talk profits
Annual reports and income statements can be very complex and hard to get your head around as a new investor. While there are any number of figures you could pull from the income statement, three key ones are revenue, gross margin, and profit.
Revenue is sometimes referred to as the ‘top line’ – everything starts here. If you can’t generate revenue, you can’t generate profit. What we’re interested in is not so much the absolute number, but the trend. WOW last reported an annual revenue of $67,922m with a compound annual growth rate (CAGR) over the last 3 years of 6.8% per year.
Gross margin is the next big number on the income statement. The gross margin tells us how profitable the core products/services are – before you take into account all the overhead costs, how much money does the company make from selling $100 worth of goods? WOW’s latest reported gross margin was 56.0%.
Finally, the number we’re most interested in – profit. Last financial year Woolworths Group Ltd reported a profit of $1,711m. That compares to 3 years ago when they made a profit of $2,074m, representing a CAGR of -6.2%.
A pulse check on WOW shares
The next thing we need to consider is the capital health of the company. Is the company generating a reasonable return on their equity (the total shareholder value) and do they have a decent safety buffer? One measure we can look at is net debt. This is simply the total debt minus the company’s cash holdings.
In the case of Woolworths Group Ltd, the current net debt sits at $15,424m. High net debt can mean higher interest payments, greater instability, and higher sensitivity to interest rates. A negative value on the other hand indicates the company has more cash than debt – a good position to be in.
Another figure we can look at is the debt/equity percentage. This tells us how much debt the company has relative to shareholder equity. In other words, how leveraged is the company? WOW has a debt/equity ratio of 300.2%, which means they have more debt than equity. This isn’t always a red flag if the company has stable revenue and good cash flow, but it certainly creates more risk.
Finally, we can look at the return on equity (ROE). The ROE tells us how much profit a company is generating as a percentage of its total equity – high numbers indicate the company is generating a lot of value for investors, while a low number raises concerns that capital isn’t necessarily being allocated efficiently. WOW generated an ROE of 1.9% in FY23.
What to make of WOW shares?
With profit trending downwards, low revenue growth, and low return on equity, WOW doesn’t look like the most inspiring pick, but it could still be worth digging deeper to understand their current situation and identify opportunities.
Please keep in mind this should only be the beginning of your research. It’s important to get a good grasp of the company financials and compare it to its peers, but it’s also important to make sure the company is priced fairly. To learn more about share price valuation, you can sign up for one of our many free online investing courses.
