Discuss about the Woolworths and Wesfarmers in Retail Business Field.
Due to weak economic growth opportunity and rapidly changing flexible consumer sentiment in the consumer goods retail subdivision market of Australia, most of the retail organizations are struggled with unstable financial market condition (Lucas et al. 2013). The higher rate of the household saving ratios indicates that consumers are more cautious with their spending. Furthermore, increasing number of consumer goods retailers in Australia are also raised relative competitiveness among companies. In this condition, retailers like Woolworths and Wesfarmers have placed their business in the densely populated areas across Australia. With the proud association with 445,000 shareholders, Woolworths Group serves over twenty nine million customers by ensuring maximize brand accessibility on weekly basis. On the other hand, Wesfarmers is continuously delivering satisfactory returns to shareholders by the diversified business portfolio. However, the Coles division is extensively working as the national full service supermarket retailers and this retail segment of Wesfarmers is currently operating more than 770 supermarkets. In this way, Wesfarmers holds relative competitive position with Woolworths in the retail industry of Australia.
In this report, both the company’s quantitative performance elements have been discussed. This report has used the financial figures of both companies by extracting details from the annual report 2016.
Both the companies are followed direct method for the ascertainment of the statement of cash flow as recorded in the financial reports. Generally, the direct method uses major classes of cash receipts from customers at the starting point of the statement of cash flow. In the operating section of the cash flow, the company followed the direct method, needs to note different sources of cash receipt along with the details of disbursements which are incurred in a particular financial year.
During the disclosure of the cash and cash equivalents, Wesfarmers has made perfect reconciliation under following the indirect method. In this notes, all the non-cash transactions are adjusted with the net profit after tax. Items like “depreciation”, “amortization of intangible assets” “preliminary expenses” and debenture discounts and many others non-cash items are incorporated in the notes to the accounts (Wesfarmers.com.au 2017). Moreover, the changes in working capital are also clearly disclosed in the reconciliation part. Thus it is evident that all the non-cash items and changes in working capital are appropriately reconciled with the figure of the new profit after tax. Interestingly, the outcome of the net cash flows from operational activities is same which has been derived in the statement of cash flow in the financial report of 2016.
On the other hand, Woolworths has also considered the non-cash items while ascertaining figure of the operating activities from the profit after income tax expense (Woolworthsgroup.com.au 2017). Maintaining a clear disclosure about the changes in working capital, the details of cash and cash equivalents are also appropriately recorded under the section of notes to the account.
In the statement of cash flow, three sections of cash and cash equivalents activities are ascertained and evaluated. Under the cash coming from operating activities, the company listed down cash inflows and outflows incurred from the business activities of selling and buying merchandise, providing services and many others. Wesfarmers has also disclosed the operating activities for the year ended 30th June 2016. Here the operating activities like net receipt from customers and cash payments from different sources under the use of direct method has been mentioned in their cash flow. After the careful observation, it has been observed that Wesfarmers has increased cash collection from their corresponding customers relative to the figure of 2015. It indicates that the company has successfully diversified the portfolio of the business activities in the present reporting year. Furthermore, it is indeed not positive that the net figure of the payments to suppliers and employees are also increased in 2016 compare to 2015. It has been occurred due to the continuous business expansion and an expended diversified portfolio of Wesfarmers (Wesfarmers.com.au 2017) In the second part, the net cash flow in activities of the investment is also included in the statement of cash flow. In the year of 2016, Wesfarmers has less involved in the investment activities compare to the previous one. Evidence clearly indicates that property, equipments, plant and intangibles have less invested in the current year. Lastly, the cash associated with the financial activities of the company also indicates that Wesfarmers has been repaid majority of the loans or borrowings. The cash detail provided in the note section clearly disclosed that the total capital expenditure has also been reduced compare to the previous year (Wesfarmers.com.au.2017). It means that Wesfarmers has maintained a moderately stable financial condition within their diverse portfolio of the business. It is indeed positive fact that Wesfarmers is currently holding a strong financial position recognizing all non cash and cash transaction while developing the statement of cash flow. However, the company has not secured the same cash equivalents position at the end of the financial year which was maintained earlier in the year. In short, this cash flow statement clearly indicates that majority of the cash inflows are coming from operating activities which indicates that the operational excellence of the company throughout the year.
On the other hand, less operating activities have been observed in the cash flow statement of Woolworths compare to the prior year. Unfortunately, the company has not received any further cash against the sales in 2016. In spite of investment made by the company for further business establishment, the average operating gain has not been realized within the reporting date. Lastly, Woolworths has used less cash and cash equivalents for their financial activities. Under the financial activities, the net dividend payment towards the non-controllable interest has been increased compare to the figure of 2015. Equity shares have not been issued further. On the contrary, it has been observed the management of Woolworths have shown their more interest to repay the loan and dividend to their shareholders to achieve shareholder’s confidence for the company’s retail operation.
Items under the operating cash flow of Wesfarmers have slightly been reduced to $3365 in 2016. By this figure it indicates that the company has made higher working capital investment by lowering operating cash flows across the portfolio of retailers. These initiatives have made to improve the availability of stock in Home-bases business of the company along with providing support their comprehensive sales growth as well. Interestingly, the company has successfully realized costs by 99.7 percent at the end of the fiscal year. Considering the financial perspectives, the dividend policy of Wesfarmers ensured the dividend growth and simultaneously cash flows and franking credits availability. Therefore, a sufficient level of cash flow has been observed by analyzing the details of cash flow of Wesfarmers.
In the case of the Woolworths, the cash flow from investing activities have been reduced which indicates that cash outflow for payments of fixed assets has been incurred throughout the financial year. The net cash provided from the operating activities have also been decreased compare to 2015. Despite the receipt amount from customer have remain same along with payment to suppliers and employees, no operational growth has been observed in term of the retail selling units or overall cost accumulation as in the case of the operational activities. For this reason, cash inflow coming from the operating activities before tax and interest, has been decreased $1215.8 million to $3495.3 million. The management of Wesfarmers opined these fact that lower trading performance and the impact of timing of payment to creditors relative to the reporting date. The annual report 2016 clearly disclosed that Woolworths has been realized total significant items of $4013.7 million before the accumulation of tax which unfortunately, did not have a material impact on inflows of the cash from operating activities before tax and interest. However, lower cash outflow in terms of decreased interest paid of $289.3 million annually implies that the company’s lower average net debt funded by proceeds received from the source of the selling property assets. Furthermore, the company has made less tax due to lower trading outcomes in the fiscal year 2016.
Moreover, the company’s involvement related to the investment activities was $1266.7 million which has been decreased of $67.2 million on the previous year. On the other hand, the payment for the business acquisition has been decreased in 2016 which indicates that the company has been less involved or engaged in the investment activities. The amount of $473.3 million has been realized as the expenditure on property development which was the reduced figure of $122.4 million caused by lower activity in the current period. However, a significant amount of investment on PPE has been made by the management of Woolworths with the amount of $1465 million for the expansion of the new retail stores and its renovations, IT asset initiatives and supply chain related expenses.
Both the company’s information about cash can be analyzed with the help of financial ratios. The capital adequacy ratio uses to protect depositors and encourages the financial system. Wesfarmers has lower cash adequacy ratio compare to Woolworths indicates high sensitiveness which ensured that banks have enough exposure to absorb a considerable amount of losses before the company become insolvent. On the other hand, Woolworths has better debt coverage ratio compare to Wesfarmers which indicates that the company has better ability to generate enough income in its operational activities to cover the debt or expenses. The financial ratio also indicates that Woolworths has better liquid position compare to Wesfarmers.
After examining both the company’s cash flow, it can be observed that the condition of the cash inflow of Wesfarmers has been better compare to Woolworths as per the financial report provided in 2016. Contrasting on the above, results of the financial ratio indicate Woolworth’s financial stability over Wesfarmers.
Woolworths has the better position to cover short term credit risk because they have stable debt coverage ratio which indicates that the company has the ability to cover credit against the least cash utilization.
Both the companies have adequate resources. However, Woolworths has the better liquid positive compare to Wesfarmers which indicates the company has sufficient liquid cash to cover the short term obligations.
Currently Woolworths has more potentiality to gain profit in the long run due to stable liquid and solvency condition of the company over Wesfarmers.
As per the results of the financial ratio, Woolworths has more ability to turn sales into cash over Wesfarmers. Thus, the company is in better position at generating cash from their sales.
References:
Babalola, Y. A., & Abiola, F. R. (2013). Financial Ratio Analysis of Firms: A Tool for Decision Making. International journal of management sciences, 1(4), 132-137.
Brunnermeier, M. K., & Sannikov, Y. (2014). Monetary analysis: price and financial stability. Navigating Monetary Policy in the New Normal 8, 61.
Jayaram, K., & Tissot, B. (2016). Combining micro and macro data for financial stability analysis-Overview. IFC Bulletins chapters, 41.
Lucas, T., Cunningham, R., & Lamberton, G. (2013). Small business engagement with sustainability in regional Australia.
Wesfarmers.com.au. (2017). Retrieved 5 January 2017, from https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=8
Woolworthsgroup.com.au. (2017). Retrieved 5 January 2017, from https://www.woolworthsgroup.com.au/icms_docs/185865_annual-report-2016.pdf
Xu, W., Xiao, Z., Dang, X., Yang, D., & Yang, X. (2014). Financial ratio selection for business failure prediction using soft set theory. Knowledge-Based Systems, 63, 59-67.
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