Free Cash Flow Of Woolworths Limited

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Question :

The company selected for this report is: Company Name: Woolworths Limited Ticker code: WOW.AX 

Your analyst team (comprising 5 students) must advise a well-diversified high net-worth individual who is interested in investing in shares with a fundamental value greater than the share price. As financial analysts, you are required to write a detailed recommendation report on whether to invest in the selected company. 

Your report shall be divided in 5 Sections (preceded by a brief executive summary) to address the following questions of your client: 

  1. Analyse how the market is pricing the firm using different relative (or market) valuation tech- niques. Please use the same group of industry peers identified in the previous section (please re- fer to Lectures 3 and 4); 
  2. Estimate the free cash flows of the company (please refer to Lectures 8 to 10); 
  3. Estimate the target price of the company, issue a buy/hold/sell recommendation to your client, and draw your conclusion. (please refer to Lectures 11 and 12). 

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Answer :


As per CFI, the definition of a Free cash flow statement is that it is a statement of a company that calculates the cash available to the company after reducing Capital Expenditures from Cash from Operations.  The statement calculated the amount of cash generated by a business, after accounting for investment in long term/ fixed assets and net increase/decrease in working capital to be utilized by the company. 

Mathematically, FCF is calculated as-

FCF = Net Operating Profit After Taxes - Net Investment in Operating Capital

For Woolworths Limited, we have utilized the annual financial statements available on the website for the past 5 years to prepare the FCF statement.

Following are the assumptions on the basis of which we have made the calculations-

  1. All the information provided on the website is correct 
  2. All the calculations made in the financials and reports are accurate
  3. There is not any other expenses like lease or interest expense apart from those stated in the financials
  4. Tax Rates have been applied correctly to determine the tax payable amount (which is 30% of income in this case)

To start off, we considered the Income of the company before the extraordinary and non-cash items as the starting point of our calculation, and then adjusted the profits with the required items, i.e. depreciation and amortization expenses, deferred taxes and other miscellaneous items.

The profit trend for the continuous 5 years is as shown below-

              Profit trend for 5 years


Woolworth Limited
Free Cash Flow Statement from 2014-2018


Net Income before Extraordinary items1,7951,593(2,311)2,1372,458
Add: Depreciation1,1031,0611,0761,064996
Add: Deferred Taxes98122(362)(93)(50)
Add: Other extraordinary items/ funds(52)3622,0751062
Net operating profits after tax (NOPAT) [A]2,9443,1384783,2143,406

Capital expenditures (only fixed assets)--(1,938)(2,131)(1,841)
Less/Add: Increase/ Decrease in Working capital [Refer table 1}-10-12188313674
Total Operating Capital [B]-10-12-55-1,995-1,767

Less: Net Investment in  Operating Capital-10-12-55-1,995-1,767
Free Cash Flows [A – B]2934312642312191639

Table 1:  Calculation for change in working capital


Change in Receivables-142329-28-21
Change in Inventories-60305204-161-421
Change in Accounts Payable129323-172407524
Change in Income Taxes Payable2845-60-59-42
Change in Other Assets/Liabilities35-6881,882-2334