Critical Evaluation Of Ratio Analysis Of Wesfarmers Limited For 2010 And 2011

Ratio Analysis

Wesfarmers was founded in 1914. It is headquartered in Australia. This is a diversified company dealing into coal mining, industrial safety products, and chemicals. The key people of the company are Michael Chaney, he is the chairman of the company, and Richard Goyder; he is the CEO of the company. It is a public company serving the market area of Australia, Ireland, Bangladesh, United Kingdom, and New Zealand (IBIS world, 2017).

Ratio analysis is a quantitative concept that helps in analyzing the financial position of the company. It helps in comparative analysis either from its competitive company or from its past results. The data of ratio analysis is accessed from financial statement of the company those are balance sheet, income statement, and cash flow statement. The report has considered wesfarmers limited for understanding of ratio analysis. In analyzing ratios, the report has described about liquidity or solvency ratio, efficiency ratios, profitability ratio, long term solvency or leverage ratio, and market based investment ratios (Wesfarmers).

The following is the financial data of wesfarmers limited of period 2010 and 2011.

Ratio analysis of wesfarmers limited ($m)
Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2009	2010	2011
Current assets		9674	10218
Total assets		39236	40814
Quick assets		5016	5231
Intangible assets including goodwill		20534	20580
Tangible assets		18702	20234
Current liabilities		7852	8722
Inventory	4683	4658	4987
Average inventory		4670.5	4822.5
Cash flow from operations		3327	2917
Debtors	1893	1767	2149
Average debtors		1830	1958
Sales		49865	52891
Interest cost		654	526
Earnings before interest and tax		49202	51887
Net profit		1565	1922
Total liabilities		14542	15485
Debt		5049	4613
Equity		24694	25329
Ordinary equity shares		23235	23245
earnings per share		1.357	1.667
market price share		27.48	31.85
dividend		1.25	1.5

(Wesfarmers, 2011)

Table 0-1 Liquidity ratio

Short term solvency or liquidity ratio	Industry average
	2010	2011
Current ratio	1.232042792	1.171520294	0.91
Quick ratio	0.638818136	0.599747764	0.33
Cash flow from operations to current liabilities	0.423713704	0.334441642

Table 0-2 Efficiency ratio

Efficiency ratio	Industry average
	2010	2011
Debtors’ turnover	4%	4%
Average debtor collection period	13.39516695	13.51212872
Inventory turnover	9%	9%	6.90%
Average inventory collection period	34.09545774	34.41521242

Table 0-3- Profitability ratio

Profitability ratios	Industry average
	2010	2011
Net profit margin	3%	4%	3.45%
Interest cost as a percentage of sales	1%	1%
Asset turnover	127%	130%
Return on assets	4%	5%	5.96%
Return on ordinary shareholder’s equity	0.063375719	0.075881401

 Table 0-4- Financing ratios

Long term solvency or financing ratios	Industry average
	2010	2011
Debt to equity	20%	18%	16.44%
Debt to total assets	0.128682842	0.113024942
Interest coverage	0.013292143	0.010137414
Cash flow from operations to total liabilities	0.228785587	0.188375848

Table 0-5- Market ratio

Market based investment and other ratios	Industry average
	2010	2011
Price/earnings (P/E)	20.25055269	19.10617876	18.85
Dividend yield	5%	5%	4.94%
Dividend cover	1252
Net tangible asset backing	0.804906391	0.870466767

In calculation of ratio, it has been assumed that all the sales recorded are credit sales. In calculation of average days in collection from debtors and average collections from inventory, the days are taken as 365 days. Due to absence of full information only those industry averages are considered which were from authorized source. This is done for effective evaluation of ratio analysis of wesfarmers limited.  Following is the critical analysis over ratio analysis as done by report on Wesfarmers limited.

This ratio defines the relationship between short term assets and short term liabilities. Liquidity ratio can be classified into current ratio and quick asset ratio. Current ratio considers current assets and current liabilities. While quick asset considers quick assets and current liabilities, here quick assets can be calculated by subtracting inventories from current assets. This ratio calculates the relationship into times (Friedlob and Welton, 2008).

While doing comparison of current ratio and quick ratio with the industry averages, it is said that wesfarmers limited has better current ratio and quick ratio as compare to that of industry. This creates a positive impact on the management of current assets and current liabilities from the side of company. Liquidity ratio depicts that whether the company has a command over its current liabilities and current assets. According to liquidity ratio, a company current asset must be sufficient to pay off its current liabilities. Hence in analyzing the wesfarmers financial data, it can be said that the company has a good command over its liquidity as compare to that of industry.

In efficiency ratio, the report has considered debtor turnover ratio, average days in collection from debtors, inventory turnover and collection of inventory in days. Efficiency ratio is also called as turnover ratio. This ratio is calculated into times. This ratio defines the relationship between the assets and generation of sales. It gives an overview in times about changes in the company sales due to involvement of various assets in the company (Adedeji, 2014).  

Financial Data of Wesfarmers Limited of Period 2010 and 2011

The industry average is only available for inventory turnover. By analyzing inventory turnover ratio it is said that the company has more ratio as that of industry. This shows that the company is in a better position to manage its inventory over the sales. By analyzing average inventory collection period, it is said that the company takes 34.41 days to realize cash from its inventory. While in doing evaluation of debtor turnover ratio, the company has maintained this at 4%. The company takes 13.51 days to realize cash from its debtors. There are not many variations in inventory turnover ratio and debtor turnover ratio. Efficiency ratio describes that whether the company is able to generate sales from its inventory and debtor. Hence by analyzing inventory turnover ratio and debtor turnover ratio it is said that company generates 4% sales from its debtor and 9% sales from use of inventory (Bragg, 2012).

This ratio defines the relationship between the company profits and sales and return on its fixed costs as well as fixed assets. The report has calculated net profit margin, interest cost as a percentage of sales, asset turnover, return on assets and return on ordinary shareholders equity for analysis of profitability of wesfarmers limited. Here the ratios are calculated into percentages over the earnings of the company (Tracy, 2012).

While comparing the wesfarmers profitability ratio with industry average, it is said that wesfarmers limited has increased in net profit margin by 1% as from 2010 to 2011. The net profit margin of the company is more than the industry average this shows a positive affects for the company. While comparison in return on assets, the company has increased return by 1%, but with comparing to industry average, the company has low return on assets.

Leverage ratio defines the relationship between company earning and its fixed costs. The report has considered debt to equity, debt to total assets, interest coverage and cash flow from operations to total liabilities for analyzing that whether the company is in better positions to pay off its debts (Altman, Edward).

While doing comparison of leverage ratios, wesfarmers limited has more debt to equity ratio as compare to that of industry. This gives an interpretation that; the company has more debt involvement. The increase in debt gives tax advantage to Wesfarmers limited, but gives a risk to shareholders as it would affect their earning. While doing comparison of debt to total assets, interest coverage with the previous ratio of wesfarmers limited, a reduction is noticed, this is due to decrease in debt.

 In market based investment ratio, market price, net earnings of the company which is distributable to shareholders, dividend paid are taken into consideration. The report has calculated price earnings ratio, dividend yield, dividend cover, net tangible asset backing for analyzing the market position of wesfarmers. Market based valuations are calculated for investors to motivate them to invest in the company (Nuhu, 2014).

By analyzing over investment ratio of Wesfarmers with the industry averages, it is said that that the company has decreased its price earnings ratio in 2011 by 1%.  The reduction was due to increase in market price of share of the company by 3$. However besides this reduction, the company is in a better position as compare to that of industry average. In case of dividend yield, the company has maintained its dividend return at 5%, which is more than the industry average. This shows a good remark from the point of investment by shareholders. But in case of company, this does not shows a good remark, as if wesfarmers would pay more dividends it would have lesser retained earnings due to which, there are more chances of uncertainties in the business (Investing.com, 2017).

Conclusion:

By analyzing the given report it is concluded that wesfarmers is at a good position in the industry in terms of financial aspects. The company has a good command over liquidity that is wesfarmers better manages its current assets and current liabilities. It has been analyzed that wesfarmers involves more debt in its capital structure, though this gives the tax advantage to the company, but also impact the shareholders in terms of risk. While in doing analysis of other ratios, it can be said that the company is at a satisfactory level in the market.

References:

Adedeji, E, A,. 2014 A tool for measuring organization performance using ratio analysis, Research journal of finance and accounting, 5 (19), pp (16-22)

Altman, Edward, I,. (n.d.) Financial ratios, Discriminant analysis and the prediction of corporate bankruptcy. Retrieved on 8^th March, 2017 from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1968.tb00843.x/full (1968) pp (589-609)

Bragg,S,M.(2012) Business ratios and formulas: A comprehensive guide, John Wiley & Sons, New Jersy

Friedlob,G,T and Welton,R,E,. (2008) Keys to reading an Annual Report, Barron’s Educational Series

IBIS world,. (2017) Wesfarmers limited-Premium Company report Australia. Retrieved on 8^th March, 2017 from https://www.ibisworld.com.au/enterprise/wesfarmers-limited.html

Investing.com,.(2017) Wesfarmers Ltd (WES). Retrieved on 8^th March, 2017 from https://www.investing.com/equities/wesfarmers-limited-ratios

Nuhu, M,. (2014) Role of ratio analysis in business decisions: A case study NBC Maiduguri plant,  Journal of educatioanal and social research, 4(5), pp (105-118)

Tracy, A. (2012). Ratio Analysis Fundamentals, Ratio analysis. Net

Wesfarmers,. (2011) Wesfarmers annual report. Retrieved on 8^th March, 2017 from https://www.wesfarmers.com.au/docs/default-source/reports/2011-annual-report.pdf?sfvrsn=0

Wesfarmers,. (n.d.) Who we are, Wesfarmers- a diversified corporation. Retrieved on 4^th March, 2017 from https://www.wesfarmers.com.au/who-we-are/who-we-are