For conducting the financial analysis of Coles for the years 2016 and 2017, the financial ratios have been used to evaluate its financial performance. The following financial ratios are used to compare the financial position and performance of Coles:
Profitability analysis:
|
Profitability Ratios:- |
|||
|
Particulars |
Details |
2016 |
2017 |
|
Revenue |
A |
65,981 |
68,444 |
|
Net income |
B |
407 |
2,873 |
|
Operating income |
C |
1,346 |
4,402 |
|
Total assets |
D |
40,783 |
40,115 |
|
Current liabilities |
E |
10,424 |
10,417 |
|
Net margin |
B/A |
0.62% |
4.20% |
|
Return on capital employed (ROCE) |
C/(D-E) |
4.43% |
14.82% |
According to the above table, it could be stated that the net margin of the organisation has increased from 0.62% in 2016 to 4.20% in 2017. As commented by Cooper, Ezzamel & Qu (2017), the net margin denotes the percentage of profit that an organisation earns after it has incurred all its expenses and taxes from the revenue made. The higher the percentage, the better is the position of the organisation in the operating market. In case of Coles, the trend is increasing, which denotes that the organisation has improved its performance in 2017 mainly due to reduced amount in impairment expenses.
The similar trend is observed in case of ROCE, as it has increased to 14.82% in 2017 from 4.43% in 2016 (Wesfarmers.com.au, 2018). A higher ratio is always favourable, since it denotes the efficiency of the firm in generating higher returns from the invested amount. In this case, the ratio has increased for Coles mainly due to increase in operating income and fall in current liabilities. Hence, from the profitability point of view, Coles has shown improved performance in 2017.
Liquidity analysis:
|
Liquidity Ratios:- |
|||
|
Particulars |
Details |
2016 |
2017 |
|
Current assets |
A |
9,684 |
9,667 |
|
Inventories |
B |
6,260 |
6,530 |
|
Current liabilities |
C |
10,424 |
10,417 |
|
Current ratio |
A/C |
0.93 |
0.93 |
|
Quick ratio |
(A-B)/C |
0.33 |
0.30 |
Based on the above table, it could be found that the current ratio of Coles has remained the same at 0.93 in 2016 and 2017. An ideal current ratio in the Australian retail industry is considered as 2 (Crawford, 2016). In this case, the ratio is well below the stated ideal standard, which denotes that the organisation is struggling to meet its current obligations with the available short-term asset base. Quick ratio is considered as the advanced liquidity ratio, since it does not consider the value of inventory in assessing the liquidity position of a firm (Edmonds et al., 2016). In case of Coles, the quick ratio has fallen from 0.33 in 2016 to 0.30 in 2017. An ideal quick ratio in the above-stated industry is considered as 1 (Engel, 2016). In this case, the ratio is below the industrial standard; thus, denoting that the organisation is going through a poor liquidity position in the Australian retail sector.
Efficiency analysis:
|
Efficiency Ratios:- |
|||
|
Particulars |
Details |
2016 |
2017 |
|
Revenue |
A |
65,981 |
68,444 |
|
Cost of sales |
B |
46,603 |
47,455 |
|
Opening receivables |
C |
2,269 |
2,463 |
|
Closing receivables |
D |
2,463 |
1,633 |
|
Average receivables |
E=(C+D)/2 |
2,366 |
2,048 |
|
Opening inventory |
F |
5,497 |
6,260 |
|
Closing inventory |
G |
6,260 |
6,530 |
|
Average inventory |
H=(F+G)/2 |
5,878.50 |
6,395 |
|
Opening payables |
I |
5,761 |
6,491 |
|
Closing payables |
J |
6,491 |
6,615 |
|
Average payables |
K=(I+J)/2 |
6,126 |
6,553 |
|
Receivables turnover (in days) |
365/(A/E) |
13 |
11 |
|
Inventory turnover (in days) |
365/(B/H) |
46 |
49 |
|
Payables turnover (in days) |
365/(B/K) |
48 |
50 |
The above table clearly inherits that the receivables turnover of Coles has declined from 13 days in 2016 to 11 days in 2017. A lower turnover in terms of days is desirable, since it would help an organisation in accumulating cash from the debtors, which would increase its working capital (Fullerton, Kennedy & Widener, 2014). In the above case, the ratio has declined for Coles, which denotes that the organisation has tightened its credit policy for increasing its working capital base in order to invest in business operations or for expansion programme. The inventory turnover in terms of days has risen from 46 days in 2016 to 49 days in 2017; however, a lower turnover is desirable, since a firm is able to discharge its inventory at a faster rate (Jones, 2015). In this case, the ratio has fallen for Coles, which signifies falling demand in the market in contrast to the supply situation in the same.
On the other hand, the payables turnover of Coles has increased to 50 days in 2017 from 48 days in 2016. The higher payables turnover in terms of days is effective from the organisational perspective, as it helps the organisation to retain greater cash in hand for greater amount of time (Lai & Samkin, 2017). The ratio is on the increasing scale for Coles, as it has used its brand image in the market to extend the payment terms from the creditors. Hence, from the efficiency point of view, Coles is in an average position in the Australian retail market.
Solvency analysis:
|
Solvency Ratios:- |
|||
|
Particulars |
Details |
2016 |
2017 |
|
Non-current liabilities |
A |
7,410 |
5,757 |
|
Equity |
B |
22,949 |
23,941 |
|
Operating income |
C |
1,346 |
4,402 |
|
Interest expense |
D |
308 |
264 |
|
Gearing ratio |
A/(A+B) |
24.41% |
19.39% |
|
Interest cover ratio |
C/D |
4.37 |
16.67 |
From the above table, it could be seen that the gearing ratio of Coles has fallen from 24.41% in 2016 to 19.39% in 2017. An ideal gearing ratio is below 50%, since it denotes lower debt burden on the organisation (Malmi, 2016). In this case, the ratio is well below the above-stated standard, which denotes that the organisation has minimised its debt burden largely. This is because it has decided to raise funds from the market by issuing equity shares, instead of obtaining bank loans.
On the other hand, the interest cover ratio for Coles has increased from 4.37 times in 2016 to 16.67 times in 2017. The interest cover ratio signifies the ability of an organisation to meet its interest expense with the operating income earned. The higher the ratio, the better is the ability of the organisation (Pelger, 2016). In this case, the ratio has increased largely, which denotes that from the solvency point of view, Coles is enjoying a healthy position in the Australian retail industry.
Based on the above discussion, it could be inferred that Coles has improved its financial performance in the market in 2017; however, it needs to devise ways in order to improve its liquidity position and its efficiency position to some extent.
With the increasing public awareness about the way of raising farm animals for food, the organisations need to provide adequate significance and attention to the farm animal health and welfare in the current era (Simkin, Norman & Rose, 2014). The business operations of Wesfarmers are involved in wholesale and food retail business. As a part of its business, the organisation raises farm animal and it needs to maintain animal welfare on its farms coupled with the supply chain.
According to the sustainability report of Wesfarmers, its animal welfare policies rely on minimising the overall number of products from close systems of confinement like sow stalls and battery cages. Its brand fresh eggs are cage free since January 2013 and fresh pork has been sow stall free since January 2014 (Sustainability.wesfarmers.com.au, 2018). The animal welfare approach of Wesfarmers for the farmed animals is built around five freedoms:
This policy takes into account beef, dairy, poultry, lamb, eggs, aquaculture species and pigs. The assessments of the farm program provide unswerving monitoring and maintenance of standards related to animal welfare. In order to ensure this program, it has created a producer steering committee for all the key species so that it could review the policies of the organisation and the outcomes from the assessments of the farm program. The brand fresh pork of Wesfarmers is obtained from farms using only gestation stalls for a maximum of one day in contrast to the industrial standard of 10 days.
Its free range pork is the only “RSPCA Approved” fresh pork, which is stocked nationally on the part of an Australian supermarket. As it has entered into long-term contract, it has helped in increasing the number of “RSPCA Approved” pigs, which are grown exclusively for the organisation in Western Australia. As a result, it has lead to rise in farm employment.
All the brand poultry of the organisation is sourced completely from “RSPCA Approved” farms since January 2014. It has been observed that at the time Coles made its path towards greater welfare chicken, below 5% of the chicken production in Australia was approved on the part of RSPCA. In the current day, above 70% of national production satisfies this greater welfare standard, since the other organisations operating in the market and industry have followed the lead of the organisation (Taleb, Gibson & Hovey, 2015).
However, there are certain risks involved with the Farm Animal Welfare Program of Coles. These risks are depicted briefly as follows:
It has been found out in the “The Business Benchmark on Farm Animal Welfare (BBFAW)” report that Wesfarmers was provided with the “Tier 5” rank in 2016. After that period, the ranking of Wesfarmers did not move upwards, which denotes that the organisation is on the process of business agenda; however, the evidence of implementation is limited. This is because of the following reasons:
Hence, it could be inferred that the organisation has lost marks under the category of animals’ right and it could be rated under Tier 5.
|
Date |
Particular |
L Ref |
Debit |
Credit |
|
01 |
Depreciation Expense – Plant & Equipment(120000-20000*25/100+20000*25/100*3/12) |
26250 |
||
|
Accumulated Depreciation- Plant & Equipment |
26250 |
|||
|
02 |
Drawings (500*52) |
26000 |
||
|
Cash/Bank |
26000 |
|||
|
03 |
Insurance Expense(3500-2000) |
1500 |
||
|
Prepaid Insurance |
1500 |
|||
|
04 |
Rent Expense |
11000 |
||
|
Rent payable |
11000 |
|||
|
05 |
Salary Expense |
13200 |
||
|
Salary payable |
13200 |
|||
|
06 |
Sales Return & Allowance |
42000 |
||
|
42000 |
||||
|
Inventory loss |
20000 |
|||
|
Cost of Sales |
20000 |
Income $ $
Sales 675,000
(-) Cost of Sales 392,000
Net Sales 283,000
(-) Sales Return 42,000
Gross Profit 241,000
Expenses
Depreciation 26,250
Salaries & wages 90,200
Rent 44,000
Utilities 5,200
Insurance Expense 1,500
General Expense 2,800
Inventory Loss 20,000
Total Expense 189,950
Profit/ loss 51,050
Fig and Olive Capital 01 July 2016 310,000
(+) Profit/ Loss 51,050
(-)Fig and Olive Drawing (63300+26000) 89,300
Fig and Olive Capital 30 June 2017 271,750
Current Assets
Cash at Bank (20,300-26,000) (5,700)
Account Receivable (45200-42,000) 3200
Inventory (180,300-20,000) 160,300
Prepaid Insurance 2,000
Total Current Assets 159,800
Non-Current Assets
Land 200,000
Plant & Equipment 120,000
(-) Accumulated Depreciation (75000+26250) 101,250
Total Non-Current Assets 218,750
Total Assets 378,550
Liabilities:
Current Liabilities
Account Payable 30,300
Salary Payable 13,200
Rent Payable 11,000
Unearned Revenue 52300
Total Current Liabilities 106,800
Non-Current Liabilities 0
Total liabilities 106,800
Net Assets 217,750
Equity
Fig and Olive Capital 271,750
Total Liabilities 106,800
Total liability + Equity 378,550
Sales Revenue 241,000
Profit & Loss Summary 241,000
Profit & Loss Summary 189,950
Depreciation 26,250
Salaries & wages 90,200
Rent 44,000
Utilities 5,200
Insurance Expense 1,500
General Expense 2,800
Inventory Loss 20,000
Profit & Loss Summary 271,750
Fig and Olive Capital 271,750
Fig and Olive Capital 89,300
Fig and Olive Drawing 89,300
References:
Cooper, D. J., Ezzamel, M., & Qu, S. Q. (2017). Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research, 34(2), 991-1025.
Crawford, C. W. (2016). ACTG 201.05: Principles of Financial Accounting.
Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental managerial accounting concepts. McGraw-Hill Education.
Engel, C. J. (2016). A Primer on the Accounting and Reporting Requirements for Not-for-Profit Organizations. Journal of Public Management Research, 2(1), 14.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), 414-428.
Jones, S. (2015). Development of financial accounting theory. The Routledge Companion to Financial Accounting Theory, 1.
Lai, A., & Samkin, G. (2017). Accounting history in diverse settings-an introduction.
Malmi, T. (2016). Managerialist studies in management accounting: 1990–2014. Management Accounting Research, 31, 31-44.
Pelger, C. (2016). Practices of standard-setting–An analysis of the IASB’s and FASB’s process of identifying the objective of financial reporting. Accounting, Organizations and Society, 50, 51-73.
Simkin, M. G., Norman, C. S., & Rose, J. M. (2014). Core concepts of accounting information systems. John Wiley & Sons.
Sustainability.wesfarmers.com.au. (2018). Retrieved 27 January 2018, from https://sustainability.wesfarmers.com.au/media/2224/2017-wesfarmers-sustainability-full-report.pdf
Taleb, M. A., Gibson, B., & Hovey, M. (2015). Fifty years of Sustainability Accounting: does accounting for income in business sustainability really exist?. International Journal of Accounting and Financial Reporting, 5(1), 36-47.
Walters, M. (2015). Keeping up with practice: integrating contemporary practice issues into management accounting coursework. Journal of Business Cases and Applications, 13, 1.
Wesfarmers.com.au. (2018). Retrieved 27 January 2018, from https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0
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