Financial Reporting And Its Analysis: A Comparison Of Wesfarmers Limited And Woolworths Limited

Identification and Evaluation of the Company Financing Sources

Discuss about the Financial Reporting and Its Analysis.

To begin the study, two companies have been selected for the purpose of comparison from the industry of supermarket namely Wesfarmers Limited and Woolworths Limited.

Wesfarmers Limited – Company Wesfarmers was established in January 1914 as one of the leading cooperatives for farmers in Australia under the chairman ship of Deanne Hammond. The company has diversified lines of business ranging from liquor to chemicals, fertilizers, coal, safety products for the industry, home and office related supplies and thus supermarkets. The company operates its business through the major five major divisions namely Coles, Home betterment and improvement, Stores, supplies for office, industrial products and other related businesses. The first division was formed in the year 2007 on the Coles group acquisition. Cole group has been itself a bunch of divisions which provides different goods or products to the different customers including food, groceries, liquor products and financial services. Second division is home improvement which contains Bunning, as a leading and required retailer in the field of home betterment and other living products and Home base, as second number retailer for home products and garden services in United Kingdom. Third division is department stores containing two major segments – Knart and Target and has been formed in the month of February for the year 2016. Fourth division is office works and for which the company has been regarded as leading supplier of office products and services. Fifth division is Industrial which includes chemicals and fertilizers and safety products for industry. The organizational structure of the companies works from Managing Director, Chief executive and finance officer, Director of respective functions like finance, purchase, logistics and sales, etc, company secretary, managers  and lower level employees.

Woolworths Limited – Another company is Woolworths Limited that has been formed on fifth of December, 1924 in Sydney. On that day the then CEO of company has mentioned that every part of the world shall be Sydney where all the things and products are available to anyone at cheaper price with good quality and since then the company is striving to achieve the same. The main activity of the company is to have supermarket only where all the products are made available for the customers. The company operates the main activities through its three major divisions – Food Group, Endeavour Drinks and Portfolio business. Food group again contains six branches – Rewards, supermarkets, countdowns, Thomas dux, petrol and financial services. Second group contains four branches – Dan Murphy’s, BWS, Cellarmasters and Langtons and last group contains three branches – Big W, Ezi buy and hotels. The organizational structure of the team is vertical form of structure ranges from top level management including Board of Directors and Executive Committees, middle level management including managers and executives and lower level management including supervisor and their subordinates. The company has been achieving growth since the year of its establishment and has become one of the leading companies in supermarket industry in Australia and New Zealand.

Analysis of Capital Structure and Other Ratios

Both the companies are at equal pace and thus have been selected for comparison. In the forthcoming headings and subheadings, the comparison has been made with regard to their financial statements and the framework within which the financial report has been framed.

The financing resources of each of the company will be identified through the financial statements stated in the annual report and will be evaluated through the computation of different financial ratios.

First Company Wesfarmers limited

Financing Sources – The Company has been financed by equity component as well as debt component. As per Note Number 12 of the Annual Report of the company:

• Equity – Equity component of the company includes ordinary equity shares that have been issued to the promoters and shareholders of the company and also includes the shares issued under the scheme of Employees stock option plan wherein the shares are issues to the employees of the company as reward for their performance.(Annual Report, 2016.)
• Debt – The company’s debt component includes both the long term debt and short term debt and has been classified as Non Current liabilities and Current Liabilities respectively. Both the heads of debt have classified under the sub heading of Interest bearing loans and borrowings. As per Note number 14 of the annual report, the company has availed short term debt in the form of corporate bonds and other bank loans and has outstanding balance of $1632 million at the year ending 30^th of June 2016. Similarly, the company has availed long term debt and have outstanding balance of $5631 million at the year ended on that date.(Annual Report, 2016) Both the facilities availed are unsecured and as per the reported significant items in the annual report, the company has renewed the facilities of $500 million in June 2016 and thus have intermediate debt in its financing sources.

• Debt to equity ratio has been increased from 0.63 for the year ending 30-06-2015 to 0.78 for the year ending 30-06-2016 which shows that the company has increased its reliance on the banking funds and that too which are unsecured. Simultaneously the equity ratio has been decreased from 0.61 as at 30-06-2015 to 0.56 as at 30-06-2016. As per the norms of practice, acceptable debt equity is 2:1. Therefore, the company is still within the ambit of having the going concern assumption as high debt equity ratio gives an indication that the company will soon go for liquidation.
• Net profit margin ratio has been gradually decreased from 6.02 to 2.04 which has alarmed the situations of the investors as to whether to invest further in the company or take back the amount invested so far.
• Current ratio has been intact at 0.93 times which shows that the liquidity of the company is similar to earlier year. Along with this, the net working capital of the company seems better than as generated in the earlier year.
• Earnings per share have been gradually decreased from 216.1o for the year ending 30^th June 2015 to 36.20 for the year ending 30-06-2016. The major shift has been suffered by the investor and the company only due to low profit margins.
• Along with the earning per share the company’s dividend per share has been decreased from 230 to 201.90.   

The reporting of financing structure of the company has been made within the conceptual framework of financial reporting. All the relevant disclosure have been made and that too in accordance with the Australian Accounting standards and International Reporting Financial Standards (AASB,2015).

According to the nature of its business the company’s financial structure is adequate. Debt equity ratio as per the supermarket industry should be less than or equal to one. As whole business of the company is of wholesale thus the current liabilities and current assets including creditors and debtors and stock respectively comes in equal proportionate as compared to previous year. 

Second Company Woolworts limited :

Financing Sources – The Company has been financed by equity component as well as debt component. As per Note Number 20 of the Annual Report of the company:

• Equity – Equity component of the company includes ordinary equity shares that have been issued to the promoters and shareholders of the company and also includes the shares issued as a result of share rights and exercised under the scheme of Employees stock option plan wherein the shares are issues to the employees of the company as reward for their performance and also includes the shares issued under the long term incentive plans for the employees.(Annual Report, 2016.)
• Debt – The company’s debt component includes both the long term debt and short term debt and has been classified as Non Current liabilities and Current Liabilities respectively. As per Note number 23 of the annual report, the company has availed short term market loans and revolving credit facility from the bank amounting to $82 million. The short term securities also includes US senior notes and medium term notes. The long term debt includes bank loan in consortium with other banks and also the US senior notes and European Medium term notes. The company has also financed through the issue of debenture namely – Woolworths Notes II. (Annual Report, 2016)

• Debt to equity ratio has been increased from 1.28 for the year ending 30-06-2015 to 1.68 for the year ending 30-06-2016 which shows that the company has increased its reliance on the banking funds and that too which are unsecured. Simultaneously the equity ratio has been decreased from 0.44 as at 30-06-2015 to 0.37 as at 30-06-2016.
• Net profit margin ratio has been gradually decreased from 6.02 to 2.75 which has alarmed the situations of the investors as to whether to invest further in the company or take back the amount invested so far.
• Current ratio has been intact at 0.84 times which shows that the liquidity of the company is similar to earlier year. Along with this, the net working capital of the company seems better than as generated in the earlier year.
• Earnings per share have been gradually decreased from 170.80 for the year ending 30^th June 2015 to (97.70) for the year ending 30-06-2016. The major shift has been suffered by the investor and the company only due to low profit margins.
• Along with the earning per share the company’s dividend per share has been decreased from 122.50 to 93.80.  

The reporting of financing structure of the company has been made within the conceptual framework of financial reporting. All the relevant disclosure have been made and that too in accordance with the Australian Accounting standards and International Reporting Financial Standards (AASB,2015).

Analysis and Comparison of Company’s Financial Sources

Similarities

• Debt equity ratio of both the companies has been decreased from the year ending 30-06-2015 to 30-06-2016.
• Debt equity ratio of both the companies has been decreased from the year ending 30-06-2015 to 30-06-2016.
• Net profit margin has been decreased of both the companies.
• Both the companies have made the current ratio intact in spite of having gradual decrease in the net profit margin in the current year as compared to the earlier year.
• Both the companies earning per share and dividend per share has been decreased gradually and for the Woolworths it is in negative figures.
• Both the companies have followed same set of accounting standards and have disclosed adequately.

Diffirences

• The pace at which the debt equity ratio has been increased in case of Woolworths Limited is higher than that of Wesfarmers Limited.
• The current and non – current liabilities has been given in detail by the Woolworths Limited than the Wesfarmers Limited.
• The equity component of the Woolworths Limited is different from Wesfarmers because of inclusion of Right shares.
• The debt component of the Woolworths Limited is different from Wesfarmers because of the inclusion of debentures.

Reason for Similarities and Diffirences

• The reason for similarity in ratio is that both the company operates in the same industry and has to follow the pre defined financial ratios that is acceptable.
• Both the companies having similar increasing and decreasing trend in the ratios. It is so because the net profit margins of the both companies have been gradually decreased.

Significant Points

• First of all the main history of the both the companies have been discussed in detail along with the main activities of the companies. Also the products that is being catered to the customers along with different services has been detailed in connection with the various divisions being operated by both the companies.
• Secondly, financing sources have been discussed with reference to the annual report of the company. Debt and equity component reported in the financial statements have described with the help of capital structure ratios.
• Thirdly, financial ratios like net profit margin ratio, current ratio, EPS and DPS, etc have been calculated so as to make the comparison easier.
• Fourthly, the conceptual framework within which the financial statements have been reported is discussed with reference to accounting standard.

From the study of this report, our recommendation for the investors is to invest in Wesfarmers Limited instead of Woolworths Limited in order to have high earning on the amount invested. 

References

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