Financial Performance Analysis Of Wesfarmers Ltd And Woolworths Ltd

Company Backgrounds

The research and study of the two companies namely Wesfarmers Ltd and Woolworths Ltd has been done primarily with the motive of financial statement analysis. Both the companies are the pioneer companies of Australia, which have been existent for a long time and are listed on the Australian Stock exchange. Woolworths Ltd is an extensive retail super market and deals in products like merchandise, liquor, petrol, hotel industry, etc. It is the second largest revenue generating company in Australia and largest in New Zealand (Belton, 2017). It employs more than 202000 people. On the other hand, Wesfarmers is another Australian giant and conglomerate, which is dealing in Australia, New Zealand, Ireland, Bangladesh and United Kingdom. It is dealing in products like fertilizers, chemicals, retail, coal mining, safety and other industrial products. In 2016, it became the largest revenue generating company in Australia overtaking other major giants like Woolworths and BHP Billiton. It also employs more than 220000 employees in Australia and is the largest private employer.

Woolworths is a market leader in the product market in which its deals, it has major focus and objective to ensure customers put them first. Its five major priorities include building a store and customer led culture in the team, empowering the business to deliver value to the shareholders, becoming a lean retailer by the way of doing end to end processes and ensuring system excellence, creating sustainable sales and providing more value and convenience to customers in the Drinks business. On top of all this, the company has a fierce marketing strategy and has a dominant position in the liquor, grocery and general merchandise market (Bizfluent, 2017). Thus, it is being seen as one of the most trusted and reliable brand in Australia.

Wesfarmers in another pioneer company in Australia which is again a leader in its products like fertilizers, chemicals and has the primary objective of delivering satisfactory value to its shareholders through ensuring financial discipline and excellent management of the diverse portfolio of the products in which the company deals in (Chron, 2017). It is also committed in engaging with the local communities and minimising the environmental impact at the same time as one of its long-term goals. It is one such company in Australia, which has presence in the lives of almost all the Australians, which shows the dominant positioning of the group in the marketplace.

Below shown is the income statement of the company Wesfarmers Ltd that shows the performance over both the years 2016 as well as 2017. As per this, we can see that the company was able to increase the revenue by more than 3.5% from $ 65981 MN to $ 68444 Mn due to diversified portfolio of the products. On the other hand, the increase in cost of goods sold particularly the raw materials was to the tune of 1.5% from $ 45525 Mn to $ 46359 Mn. Other expenses including the employee benefit expenses, freight and other related expenses, occupancy related expenses, depreciation and amortization expenses and other indirect expenses increased marginally which which had a direct impact in terms of EBIT which rose from 1346 Mn in 2016 to 4402 Mn in 2017 (Vieira, O’Dwyer, & Schneider, 2017). This shows tremendous growth in terms of profitability for the company which is under heavy competition from the small companies and new entrants in the marketplace. The impairment in 2016 ($ 2172 Mn) was comparatively much more than in 2017 ($ 49 Mn). All this has together led to an increase in the profit attributable to the shareholders from $ 407 Mn to $ 2873 Mn in 2017.

Income Statement Analysis

Above shown is the balance sheet of the company, which reflects that there has been a considerable increase in the cash balance of the company whereas the company no longer holds any finance advances and loans. All this reflects that the collection policy of the company has been strong and therefore it has been able to reduce the risk of collection from debtors. The other current assets including trade receivables, inventories and others have been more or less constant over the 2 years (Choy, 2018). About property, plant and equipment the company has made an addition of $ 1559 Mn in 2017 as against $ 1738 Mn in 2016. Similarly, the company made disposals and write-off amounting to $ 615 Mn in 2017 as against $ 1446 Mn in 2016. This shows that the efficiency with which the company has started to use fixed assets has increased and the depreciation costs over 2 years have almost been constant. In terms of intangibles assets, the company is carrying goodwill, brand, contractual and non-contractual relationships, liquor licenses and software as assets in the books and they have had no significant addition or deletion to the intangibles in 2017, however, in 2016, the company made an addition to the goodwill balances amounting to $ 1018 Mn (Werner, 2017).

In terms of the current liabilities of the company, all of them including trade payables, interest bearing borrowings, provisions, derivatives and others, all have remained more or less constant except income tax payable, which has increased from $ 29 Mn to $ 292 Mn. Amongst, the non-current liabilities, the interest bearing loans and borrowings have come down from $ 5671 MN to $ 4066 Mn and the other provision and derivative liabilities have remained the same.

In terms of equity, the company has issued the equity shares under the dividend reinvestment plan and employee share acquisition plan as per which a net addition of over $ 320 Mn has been done to the equity balance of the company (Alexander, 2016).

Below shown is the cash flow statement of Wesfarmers for the year 2016 and 2017. As per this, a proper reconciliation of the cash flow from operating activities has been shown in the notes to accounts both as per the direct as well as indirect method. IN the cash flow statement, the major contributor to the inflows was operating activities, whereas to the outflow were investing and financing activities. In the operating activities, we can see that the receipts from customers has improved over the last year by nearly $ 2900 Mn whereas the payment to the creditors was increased by only $ 1900 Mn (Dichev, 2017). Rest of the heads almost remained constant which includes borrowing costs, income tax paid, dividend received from associates and interest received. Amongst investing activity, the payment because of property plant and equipment was $ 1899 Mn in 2016 and $ 1681 Mn in 2016. The proceeds from the sales of property plant and equipment amounted to $ 563 Mn in 2016 and $ 653 Mn in 2017. The company also made a major receipt from sale of business and associate amounting to $ 947 Mn in 2017 (mere $ 1 Mn in 2016). However, in the year 2016, the company had acquired subsidiaries amounting to $ 748 Mn, which was a major outflow. In investing activity, the company had major borrowings in 2016 amounting to 2360 Mn ($ 220 Mn in 2017) whereas the repayment amounted to $ 1994 Mn in 2017 ($ 1424 Mn in 2016), other heads almost remaining constant. The net increase in cash flow for the year was $ 402 Mn in 2017 as against $ 100 Mn outflow in 2016 (Goldmann, 2016).

Balance Sheet Analysis

Below shown is the profit and loss account of the company as per which the company was able to increase the revenue by 4% from $ 53473 Mn in 2016 to $ 55475 Mn in 2017. On account of this, the cost of sales increased only by 2.5% from $ 38538 Mn tin 2016 to $ 39739 Mn in 2017. The other revenue, the branch expenses and other administration expenses remained more or less constant during 2016 as well as 2017 (Heminway, 2017). The earnings before interest and tax amounted to 1495 Mn in 2016 and $ 2326 Mn in 2017, which is nearly an increase of 70% in profits. In addition, the earning per share of the company increased from -97.7 to 119.4 cents per share, which shows that the company has been grown not only in terms of profits and business but also in terms of shareholder returns.

From the above shown consolidated balance sheet, we can see that in current assets, apart from the inventories, rest of the assets like the cash and cash equivalents, the receivables and other financial assets all have remained constant. The overall inventories level has come down from $ 4558 MN to $ 4080 Mn, which shows the effective management of inventory levels. Amongst, the non-current assets, there was substantial change in the balance of the property, plant and equipment where the company made the addition of $ 1862 Mn in 2017 and $ 1842 Mn in 2016 and also made the disposals amounting to $ 111 Mn in 2017 and $ 132 Mn in 2016 (Gooley, 2016). The other non current assets like trade and other receivables, the financial assets, the intangible assets and he deferred tax assets remained fairly constant over these 2 years. In terms of current liabilities, the balance of trade payables increased whereas the borrowings decreased in 2017. Amongst the non-current liabilities, the borrowings, provisions and other financial liabilities, all of them decreased, showing that the company has focused on making repayment of the borrowings in 2017 and reducing the debt burden. There was issuance of equity shares as per the dividend reinvestment plan due to which the equity balance has increased both at the end of 2016 and 2017.

Above shown is the cash flow statement of the entity, it can be seen that there has been no substantial increase in the receipt from customers or payment to creditors, both the balances have remained fairly constant over the 2 years. In terms of investing activity, the payments for property, plant and equipment has increased by nearly $ 170 Mn and the proceeds from the sale of subsidiaries and investments was $ 200 Mn in 2017 ($15 Mn in 2016). Altogether, the cash outflow from the investing activity has increased from $ 1266 Mn in 2016 to $ 1431 Mn in 2017 (Jefferson, 2017). Amongst the financing activity, the proceeds from borrowings decreased in 2017 and the repayments increased as compared to 2016 showing a double impact in reducing the debt balance in the capital. The dividends on the other side almost halved in 2017 as compared to 2016. Considering all these effects, it can be seen that the net decrease in cash and cash equivalents was $ 384 Mn in 2016 and $ 38 Mn in 2017 (Trieu, 2017).

Current and Non-Current Liabilities

Based on the chapter on different ratios, the ratio computation has been shown below for both the companies for the years 2016 and 2017.

Wesfarmers Limited and Woolworths Ltd > Ratios Analysis
Ratios		Wesfarmers Ltd.	Woolworths Ltd.
For the Fiscal Period Ending	Formulas	12 months Jun-30-2016	12 months Jun-30-2017	12 months Jun-30-2016	12 months Jun-30-2017
Profitability Ratios
Return on Assets %	Net Profit/ Total Assets	4.9%	6.2%	3.8%	6.4%
Return on Capital %	Net profit to shareholders/Equity Shareholders’ funds	6.4%	8.4%	6.4%	11.3%
Net Income Margin %	Net Profit/ total sales	0.6%	4.2%	(2.3%)	2.8%
Efficiency Ratios
Total Asset Turnover	Sales / Total Assets	1.6x	1.7x	2.2x	2.4x
Fixed Assets Turnover	Sales / Fixed Assets	6.7x	7.2x	5.9x	6.7x
Accounts Receivable Turnover	Sales / Accounts Receivables	57.2x	55.6x	255.9x	NM
Inventory Turnover	Sales / Inventory	7.8x	7.3x	8.2x	9.2x
Liquidity Ratios
Current Ratio	Current Assets/ current Liabilities	0.9x	0.9x	0.8x	0.8x
Quick Ratio	Current Assets – Inventory – Prepaid Expenses/ current Liabilities	0.2x	0.3x	0.2x	0.1x
Working capital Ratio	Working capital / Current Liabilities	0.3x	0.4x	0.3x	0.4x
Gearing Ratios
Total Debt/Equity	Total Debt/Equity	31.8%	22.6%	49.7%	30.7%
Total Debt/Capital	Total Debt/Capital	24.1%	18.4%	33.2%	23.5%
EBIT / Interest Exp.	EBIT / Interest Exp.	11.9x	18.3x	5.8x	11.7x
Investment Ratios
Price Earning Ratio	Market price per share/ EPS	122.06	16.20	23.32	22.74
Earning per share	Distributable earnings/No. of equity shares	0.36	2.54	(0.98)	1.19
Price/Book Value	Market price per share/ Book value per share	2.2x	2.1x	4.1x	3.7x

Based on the above computation, when the ratio analysis is done, we can see that in terms of profitability ratios, Wesfarmers and Woolworths both the companies have improved the net margin over the last year, but Wesfarmers (4.2%) is much ahead than Woolworths (2.8%). However, n terms of returns on assets and the return on capital, Woolworths has progressed better over the last year showing a considerable improvement and therefore the shareholders would be happy with the increase in return (Linden & Freeman, 2017). Wesfarmers on the other hand, need to improve on the return on capital as it is far behind the market expectations.

In terms of Efficiency ratios, we can see that, Woolworths in doing far better than Wesfarmers as it indicated by total assets turnover ratio, fixed assets turnover ratio, accounts receivables turnover ratio and inventory turnover ratio, etc. For Woolworths, the receivables is getting churned at the level of 261 times in the year whereas for Wesfarmers, it is getting churned only 55.6 times, which shows that Woolworths have great control over collection and are able to manage the receivables well (Saeidi, 2012).

In terms of the liquidity ratios, both the companies are performing almost on the same lines as all the ratios including current ratio, quick ratio and Working capital ratio are almost the same for both the companies. However, they are much below the industry ideal trend (current ratio: two and quick ratio: 1) and hence the companies need to work on the same. In addition, the working capital ratio seems to be too low for both the companies, which indicates that they are not having sufficient liquidity (Raiborn, Butler, & Martin, 2016).

The gearing ratio of the company measures the debt capital being used in the company. Woolworths has been able to bring the debt equity ratio down to 30.7% in 2017 as compared to 49.7% in 2016, which shows that the company has enough cushion to use low cost debt capital in future. On the other hand, Wesfarmers has even better debt equity ratio of 22%. Since both the companies are enjoying lesser debt capital ratio, it shows that the company is trading with the help of equity capital and can raise additional capital at lower costs in future. In addition, the interest service coverage ratio for Wesfarmers is 18 times as against Woolworths 11.7 times, which shows that both the companies are having sufficient EBIT to cover the interest expenses on the loan capital taken.

Finally, in terms of the investment ratios, we can see that the price earnings ratio which shows that how many times the earning of the company the investors are willing to pay for the shares of the company has dropped considerably for Wesfarmers from 122 times in 2016 to 16.2 times in 2017. For Woolworths, it has almost remained constant showing similar growth of the company. The earning per share has grown almost equally for both the companies. The Price/ book value ratio is an indicator of what number of times prices is in comparison to the book values of the company (Visinescu, Jones, & Sidorova, 2017). The P/B ratio for Wesfarners is 2.1 times whereas for Woolworths is 3.7 times, which shows that both the companies are trading at premium.

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