Return on assets is a used to assess the profitability position of a company. Over the period of last 5 years under consideration i.e. from 2014 to 2018, the ROA ratio has shown an inclining trend except for the 2016 where there was a sudden decline in the profits of the company because of incurrence of heavy impairment losses. Though, the sales of Wesfarmers Ltd has increase in 2016 as compared to the last 2 financial years i.e. 2014 and 2015 but the earnings before tax and interest had reduced significantly.
After 2015 there was a significant increase in the profits of the company on account of reduced impairment losses and other expenses which strengthened its profitability position. This ratio shows that company had utilised its overall assets in generating better returns for its shareholders with each passing year except in 2016. Further, Return on equity ratio of Wesfarmers shows that even the profits that were attributable to the shareholders of the company have reduced since 2014 to 2016 and this shows that the company could not generate sufficient returns for its shareholders in 2015 and 2016 as it generated in 2014 by making efficient utilisation of the funds of its shareholders. In 2016,
the company generate minimum returns for its shareholders and in 2017 highest returns were offered to its shareholders at the rate of 12.25%. Year 2017 has been a golden years for the shareholders as there was a steep increase in their returns because of increased profitability of the company in that particular year. After 2017, there was a considerable decline in company’s profits that were to be allocated to the shareholders, was reported which reduced back their returns. Operating profit margin is used to calculate profits of the company that are remained after meeting the operating expenses of the business.
From the ratio analysis, it can be said that company had generated maximum profits out of the sales of its products in 2017 as highest percentage of sales was made in this year. However in 2016, there was a significant reduction in company’s operating profits on account of recording of impairment losses on its assets. After 2017, the operating profits of the company again reduced slightly even though the sales were increased because of incurrence of more operating expenses.
The gross profit margin ratio shows the quantum of earnings that were available with the company after meeting its cost of goods sold (Tracy, 2012). After analysing the gross profits of Wesfarmers Ltd, it has been identified that the company was successful in maintain a consistency in maintaining its gross profit margins in accordance with its sales pattern. Highest percentage of gross margins was achieved in 2018.
From the above analysis, it can be said that the profitability position of the company was strongest in 2017 and thereafter it had again declined to some extent even with the increase in sales revenue. It was reported as weakest in 2016 after the periods of growth of 2014 and 2015. This was not due to the sales factor but on due to the heavy impairment losses which occurred in 2016. Thus the investors of the company must have obtained highest returns in 2017 despite of the fact that there was a decline in level of sales made by the company as compared to 2016.
Efficiency position
Efficiency position of Wesfarmers Ltd over the period of last five financial years is assessed using various ratios such as asset turnover ratio, inventory turnover ratio and accounts receivables settlement period ratio. These ratios help in determining the level of efficiency with which company’s assets are managed during the course of its business. An increasing asset turnover ratio reflects the improving efficiency of the company in managing its total assets to generate higher sales (Forster, 2004). In 2018, the asset turnover ratio was highest which shows that company has most efficient utilised its assets to generate sales.
This might be due to reduced level of total asset investment which made it possible for the company to manage and utilise its assets in the more efficient way. Except 2017, there has been reported an incline in the asset efficiency of Wesfarmers. Further, inventory turnover ratio is assessed to evaluate the company’s operating cycle. It has been found that the number of days taken to convert the inventory into sales have increased over the past four years since 2014 to 2017 after which there has been a reduction in number of days taken to turn down inventories of business into sales. Therefore, it can be said that company could not efficiently manage its inventory since 2014 to 2017 but there after the inventory management practices of the company had improved slightly which is a positive indicator for its efficiency position (Annual Report, 2014).
Also, the settlement period of debtors has been calculated to determine the average number of days taken by company to convert its accounts receivables into cash. Since 2014, there had been a reduction in the average duration to collect the monies due from the trade receivables of the company. This shows that Wesfarmers Ltd had efficiently managing its cash collection practices till 2016 after which the average duration to collect money from its accounts receivables increased. However, in 2018 it seems that company has improved its cash collection practices which have resulted in reduction of average collection days. This is a positive indicator towards the improved that the cash conversion cycle of company (Papadopoulos, 2011). From the above analysis it can be said that the company’s efficiency position was weakest in 2017 and it improved in 2018.
Liquidity position
The liquidity position of Wesfarmers could be analysed using the current ratios and quick ratios. It had been found that liquidity position of the company was not sound in all the periods reported hereunder in this report because the company did not have sufficient current asset balances to meet its short term liabilities. The current liabilities were higher in amount than the current assets which must have made the company face tight liquidity position in market.
As the inventories of the business are not among those assets that could be readily converted into cash as and when required hence they are excluded to calculate the quick ratio. It has been found that Wesfarmers did not have adequate level of quick assets which worsened its liquidity position. The liquidity position of business had been worsening further since 2016 and 2018 was the year where the company had to face highest level of liquidity crunch. Year 2016 was relatively better for the company than other years in terms of its liquidity state.
Financial Gearing
The financial gearing of Wesfarmers is determined using interest coverage ratio and debt to assets ratio. Since 2016, the debt to asset ratio has declined which is a good indicator of its solvency position. This ratio shows the percentage of total assets financed through the funds of creditors. In 2016, the company had to face highest level of financial leverage because of highest debt to asset ratio (Annual Report, 2016). Thereafter, Wesfarmers had managed to reduce its risk of insolvency. Further, the interest coverage ratio of the company shows that it had made sufficient earnings to meet its interest obligations on the funds borrowed from the market. Highest level of interest coverage ratio in 2018 shows that the solvency position of the company is strong and it has improved since last 3 years (Annual Report, 2018).
Investment Valuation
As the company could not generate sufficient profits in 2016, the EPS of its shareholders was lowest in 2016. However, as it has been identified that 2017 was the golden year for the Wesfarmers’s shareholders so they had received highest earnings per share in 2017. The market price of the company had been kept on fluctuating over the period of last 5 years. As in 2018, the market price of Wesfarmers’s stock has increased from $ 40.12 to $ 49.36, the PE ratio has also increased which is a positive indicator of company strong growth perspectives. In 2017, the company had paid highest dividend yield to its shareholders (Higgins, 2012).
Part 2
The cash position of Wesfarmers had kept on fluctuating over the period of last 5 years on account of changes in the level of operating activities, investing activities and the financing activities. This part of the report deals with the changes that occurred in the cash flows in the last two financial years i.e. 2017 and 2018 and the prime reasons for such changes.
|
Activities |
2017 |
2018 |
Change % |
|
Operating activities |
4226 |
4080 |
-3% |
|
Investing activities |
-53 |
-658 |
1142% |
|
Financing activities |
-3771 |
-3752 |
-1% |
While examining the cash flows statement for the year end 2017 and 2018 it has been found that there has been a net decline of 3% in the cash inflows of Wesfarmers in 2018 as compared to 2017. This is majorly on account of higher amount of incomes taxes that were paid in 2018. Also, the interest income in 2018 was relatively lower than that of 2017 which had caused reduced operating cash flows in 2018 (Annual Report, 2018).
In the areas of investing activities, Wesfarmers had to experience huge difference in its net cash outflows in 2018 as compared to 2017 because in 2018 the company had invested more of its funds in purchasing property, plant and equipment which led to higher amount of outflow of cash from its business. Also, it had disposed-off lesser business assets and units which have resulted in reduced cash inflows (Annual Report, 2018).
The net cash outflow in case of financing activities of Wesfarmers has reduced slightly in 2018 as compared to 2017 because company had generated more amounts of funds by way of borrowings in 2018 which had resulted in higher cash inflows in 2018. This was the major factor which had caused reduction in the net flow of cash out of the business (Annual Report, 2018).
References:
Foster, G., 2004. Financial Statement Analysis, 2/e. Pearson Education India.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Papadopoulos, P. 2011. Investment Report – Fundamental Analysis/ Ratio Analysis. GRIN Verlag.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
Wesfarmers Ltd, 2014. Annual Report, 2014. Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2014-annual-report.pdf?sfvrsn=0 Accessed on: 01.12.2018.
Wesfarmers Ltd, 2016. Annual Report, 2016. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=8 Accessed on: 01.12.2018.
Wesfarmers Ltd, 2018. Annual Report, 2018. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?sfvrsn=4 Accessed on: 01.12.2018.
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