Financial And Ratio Analysis Of Wesfarmers Limited

Introduction to Wesfarmers Limited

The company being considered is Wesfarmers Limited, which is one of the pioneer companies in Australia and is a market leader. The company is one of the oldest in Australia and has been operative for more than 100 years. The report highlights the financial aspects of the company, which has grown by large size and volume in the past years. For any business to survive and grown in the long run, it has to be compliant of laws and regulations and also meet the expectation of the consumers by being ethical and corporate governance compliant and the same has been discussed about (Belton, 2017).

Description of company’s core business 

The company is a conglomerate dealing in the retail sector, coal mining, fertilizers, chemicals and industrial and safety products. It has presence all over the world in the form of the subsidiaries but the major presence is in Australia, New Zealand, Bangladesh, Ireland and United Kingdom. The company has largest revenue in Australia in terms of revenue and has leapfrogged BHP Billiton and Woolworths in the recent past. Furthermore, it is the largest Australian private company in terms of employing people having over 220000 employees (Alexander, 2016).

The company started as a co-operative, which was involved in providing the goods and services to the local farmers in Western Australia. It was listed back in 1984 and has grown multiple times since then. The company has a number of businesses like Coles, department stores, Officeworks, industrial and other businesses. The company’s primary objective and the long term vision is to provide satisfactory returns to its shareholders through excellent discipline and good management of the diversified resources of businesses in which Wesfarmers deals in (Chron, 2017).

The consolidated income statement, the balance sheet and the cash flow statement of the company as on 30^th June 2017 has been attached below. It shows the comparative values in the year 2016 as well. As per the financial analysis, we can see that the income of the company has increased from $ 65981 Mn to $ 68444 Mn, which is an increase of more than 3% in revenue (Dichev, 2017). Besides this, the direct costs have increased by meagre 1% from 45525 Mn to 56359 Mn, which has added to the bottom-line of the company. All the other costs like the employee benefits costs, freight and other related logistic expenses, depreciation and amortization and other expenses have increased marginally except the impairment expenses which have decreased drastically as compared to last year (2017: 49 MN, 2016: 2172 Mn). All this has resulted in the increase in the net profits of the company over the last year (2017: 2873 Mn; 2016: 407 Mn).

Consolidated Income Statement, Balance Sheet, and Cash Flow Statement

Besides the changes in income statement, there have been substantial changes in the balance sheet as well. Some of the major changes include increase in the cash and cash equivalents of the company from 611 Mn in 2016 to 1013 Mn in 2017, rest of the current assets (being inventories, receivables, derivatives, others) remaining more or less constant. Among the non-current assets of the company, the balance of deferred tax assets, the property, intangible assets and goodwill has decreased marginally whereas all the other non-current assets like the plant and equipment and investment in associates and joint ventures has increased marginal (Goldmann, 2016). The acquisitions and disposals made by the company during the year in the plant, property and equipment has been shown in the individual notes on accounts. In terms of liabilities, the current liabilities namely trade payables, income tax payable and other current liabilities has increased as compared to the last year and interest bearing loans and borrowings, provisions and derivatives have declined as compared to the last year. The overall current liabilities was more or less same being 10417 Mn in 2017 (2016: 10424 Mn). Amongst non-current liabilities, the interest bearing loans and borrowing declined drastically indicating the repayment of old loans by company, the provisions and other non-current liabilities remaining constant. Amongst equity. The balance of the share capital increased indicating issuance of shares during the year under dividend reinvestment plan and Employee share acquisition plan and retained earnings increase from $874 Mn to $1509 Mn because of profit earned during the year.

From the above shown cash flow statement of the company, it can be seen that amongst cash flows from operating activities, the receipt from customers as well as the payment to creditors has increased as compared to the last year rest of the line items being more or less same. The overall net cash flow from operating activity has increased from 3365 Mn to 4226 Mn. On the other hand, the company invested less in property, plant and equipment as compared to last year. Also the proceeds from the sale of Property, plant and equipment and sales of business and associates (2017: $947 Mn; 2016: $1 Mn) increased by good amount. The overall net outflow from investing activity was $2132 Mn in 2016 and $53 Mn in 2017. Amongst the financing activity, the company increased borrowings during the year ($220 Mn in 2017; $2360 Mn in 2016 and made repayment of the past borrowings (1994 Mn in 2017 and 1424 Mn in 2016). Furthermore, the company has also paid dividends in both the years. The overall net outflow from financing activities has increased from $ 1333 Mn in 2016 to $ 3771 Mn in 2017. Similarly, the net cash inflow from the all the activities during the year increased from $ 611 Mn to 1013 Mn in 2017 (Jefferson, 2017).

Ratio Analysis of Profitability and Liquidity

The ratio analysis in terms of profitability and liquidity ratios for two consecutive years is shown below:

Name of the ratio	Formulas	2017	2016	Data collected from annual report (Pg. No.)
Part A: Liquidity Ratios
Current Ratio or Working Capital Ratio	Current Assets / Current Liabilities	0.9x	0.9x	Pg. 96
Quick ratio or Acid test ratio	(Current Assets – Inventory) / Current Liabilities	0.3x	0.2x	Pg. 96
Cash flow Ratio	Net cash flow from operating activities / Current Liabilities	0.4x	0.3x	Pg. 96, 97
Part B: Profitability Ratios
Return on Equity	Profit available to owners / Average Equity *100	12.30%	1.70%	Pg. 94, 96
Return on Assets	Profit (loss) / Average total assets *100	6.20%	4.90%	Pg. 94, 96
Gross Profit Margin	Gross Profit / Sales Revenue *100	31.70%	30.40%	Pg. 94
Profit Margin	Profit (loss) / Sales Revenue *100	4.20%	0.60%	Pg. 94
Cash Flow to Sales	Cash Flow from operating activities / Sales Revenue *100	6.17%	5.10%	Pg. 94, 97

From the above ratio analysis, it can be seen that the current ratio has been almost same for both the years at 0.9 times as against the industry trend of 2 times and the quick or the acid test ratio has decreased from 0.3 times in 2016 to 0.2 times in 2017 as against the ideal trend of 1 times (Marques, 2018). The cash flow ratio which indicates what proportion of the current liabilities can be covered by the cash flow from operating activities has also been on the lower side at 0.4 times as against 1 time. All this shows that the company needs to improve on its liquidity or else it would not be able to pay off its short-term liabilities on time (Guragai, Hunt, Neri, & Taylor, 2017).

In terms of profitability, the return on equity has increased considerably from 1.70% in 2016 to 12.30% in 2017, which indicates that the company is earning profitability and meeting the shareholders expectations. Furthermore, the return of assets has increased marginally from 4.9% to 6.2% indicating better use and return from the assets. At the same time, the gross margin as well as the net margin (0.60% in 2016 to 31.70% in 2017) has also increased indicating that the company has been growing and improving on the margins amidst heavy competitions from the new entrants in the industry (Schoenberger, 2016). Lastly, the cash flow to sales ratio has improved from 5.10% to 6.17% indicating the improvement in cash from operating activities. The overall profitability of the company has been on rising side and thus it can be said that the company is a good avenue for the investors to invest in, as it is a market leader in the industry, has been growing being profitable amidst heavy competition (Linden & Freeman, 2017).

Corporate governance practices and ethical considerations

The company has a number of social and ethical considerations, which it takes in to accounts while doing business (Raiborn, Butler, & Martin, 2016). The company has been corporate governance compliant and has been continuously contributing towards the society out of its profit shares. Some of the major contributions include encouraging gender diversity in the workforce (54% of the current workforce is women and 46% men), generating a sense of inclusiveness in the company (more than 10-15% of the employees cater from different countries outside Australia, total number being more than 4000 in 2017), more focus on the indigenous supplies (more than $ 47 Mn of products and raw materials were procured from them in 2017), encouraging safety norms and testing on shop floor for the employees, reducing the carbon emission and contributing ethically to the society and community by reducing pollution. It also held a number of training programmes for the development of the personnel and employees (Farmer, 2018). The company has been focusing of ethical sourcing off late and has contributed millions of dollars towards child development and education and to help the overall community.

Conclusion and Recommendation

From the above discussion and analysis, we can see that the company is a market leader in industry, has been thriving from more than a 100 year and has a long history behind it. The company has also been compliant in all the laws and regulations and has been practising corporate governance. However, the company needs to work on some liquidity measures, but the overall profitability of the company has been on rising side. Therefore, it is a good avenue for the prospective investors to invest in.

References

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Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Chron. (2017). five-common-features-internal-control-system-business. Retrieved december 07, 2017, from https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html

Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), 617-632. doi:https://doi.org/10.1080/00014788.2017.1299620

Farmer, Y. (2018). Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, 33(1), 1-12.

Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), 103-112.

Guragai, B., Hunt, N., Neri, M., & Taylor, E. (2017). Accounting Information Systems and Ethics Research: Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017, 31(2), 65-81.

Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland . Technological Forecasting and Social Change, 353-354.

Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1

Marques, R. P. (2018). Continuous Assurance and the Use of Technology for Business Compliance. Encyclopedia of Information Science and Technology, 820-830.

Raiborn, C., Butler, J., & Martin, K. (2016). The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), 10-21.

Schoenberger, E. (2016). Environmentally sustainable mining: The case of tailings storage facilities. Elsevier, 119-128. doi:https://dx.doi.org/10.1016/j.resourpol.2016.04.009