Overview Of Wesfarmers And Its Diverse Business Operations

Wesfarmers’ Business Operations

Question:

Discuss About The Overview Of Company And Its Operations?

Wesfarmers limited was established in year 1914 that grew into largest retail company listed on Australian stock exchange. Organization has diverse business operations that involve supermarket, convenience store and hotel, department stores, liquor, home improvements and office supplies. Moreover, it has industrial business with divisions in energy, chemicals, industry, fertilizers, and coal and safety products. Wesfarmers is a largest private sector having s shareholder base of 530000 and employing 220000 employees. Group mainly focuses on creating wealth for its shareholders and contributing to communities in a meaningful ways. Core values of organization lies in integrity, boldness, accountability and openness. Business activities of organization is operated in accordance with environmental and community principles. Retail business of the group is positioned in such a way that it will help in achieving growth and further making improvement in service, range and value. In the short-term, outlook of group seems to be challenging while remaining concentrated on operational efficiency improvement.

Restructuring of target activities and challenging trade conditions have offset the strong performance of group. Wesfarmers group have continued to make investment in service, customer value, online stores and merchandise ranges for sustaining in competitive environment and continue to deliver improved return to shareholders and long-term growth. Nonetheless, depressed conditions across the retail sector have significantly affected the industrial division performance. There was considerable decline in underlying earnings for division. It is ensured by group that there is strong management capability in each of its division that is accountable for day-to-day performance of operations, strategy execution and development. The framework of business model of organization is Wesfarmers way that aims at obtaining primary objective and comprise of growth enablers, core values and value creating strategies. Portfolio diversification was reflected in financial results of year 2016 and non-cash impairment was made in few divisions of group (wesfarmers.com.au 2017). Business portfolio of organization helps in cash over time because of its excellent employees, god corporate governance and creating shareholders value.

he net operating profit of the group for the financial year 2016 was recorded at $ 407 million and the operating cash flow of group was less compared to previous financial year by 11.2% (wesfarmers.com.au 2017). Strategy of group involves diversification of its funds source and maintaining presence in key markets.

The sustainability issues of the group is addressed by ten principles that involve people development, safety, robust governance, resilience to climatic change, product safety, contributions to community, ethical sourcing, obligations to suppliers and diversity. Environmental regulations regulate the activities of consolidated entities and they are granted the license for regulating the management of water quality and quantity, disposal of waste and environmental matters, carriage and storage of hazardous materials and other environmental matters that is related with operations of consolidated entity (Gigler et al. 2013)

Core Values and Environmental Principles

Social responsibility at Wesfarmers is about managing and understanding the ways in which the operations of business activities impacts the communities that helps in ensuring value creation in future. In order to improve their environmental and social practices, sourcing of products from suppliers is done in a responsible manner. They intend to maintain leading position in industry for which engagement is done with groups such as WWF and green peace.  Social and environmental issues are related engagement with such partners. Inclusive and cohesive community environment helps in underpinning the strong business environment as believed by Wesfarmers. Businesses intend to reduce the intensity of emission and making improvement in their resilience to climatic change.  Group takes steps for reducing the emission of greenhouse gases, as they are able to recognize that human actions are the reason behind the climatic change. Several measures are taken by group for reducing carbon emission, improving efficiency of energy, making investment in renewable and low emission technologies (Picker al. et 2016). Adoption of technological improvement in industry processes assist in managing the intensity of emission. Managing the electricity usage and continuous monitoring are the drivers of reducing the emission.  

Some of retail stores made an investment in upgrading of LED lights that leads to reduction in consumption of energy. It has been analyzed by the group that risk related to weather change will be exacerbated and increased weather volatility would also impact the supply chain and operations of organization. Risk associated with climatic change is reduced by adopting mitigation strategies. At divisional level, climate resilience planning helps in improving the understanding of issues of material climatic change. Process of risk management of organization incorporates the business robustness against climatic change. Wesfarmers is committed towards contribution to resilience of ecosystem and one of material issue is biodiversity protection (wesfarmers.com.au 2017).

Natural resources used in business operations and critical part of efforts of organization are reducing the emission of greenhouse gases for managing the forests. The benchmarking tool for measuring the performance of climatic change is the carbon disclosure project. Organization has made investment in coal assets and has adopted steps for helping customers reducing emission of carbon.  Group also strives for reducing water usage and waste reduction for water fill. When it comes to recycling of waste, some of initiatives have been taken by organization that involves recycling of flexible cardboard and plastic, better separation and recycling and reduction of polystyrene packaging. Making investment in community initiatives leading to social and economic outcomes is the long-term commitment of organization. Furthermore, Wesfarmers is actively engage with some stakeholders and social justice non-government organizations for addressing social issues. In order to address the labor practice in some countries in which it operates, group engages in some key social improvement program. Supplier base of organization is continuously rationalized by establishment of more meaningful relationship with suppliers and for making improvement in social relationship with suppliers (). 

Financial Performance of Wesfarmers using Ratio Analysis

		2016	2015	2014
Profitability	Net profit margin	0.62%	3.91%	4.47%
	Return on assets	1.62	1.55	1.51
	Return of ordinary shareholders’ equity	1.71%	9.61%	10.34%
	Asset turnover	0.033	0.085	0.06
Efficiency	Accounts receivable turnover	21.34	20.49	15.33
	Inventory turnover	7.27	7.83	7.76
Short-term solvency	Current ratio	0.93	0.93	1.13
	Quick ratio	0.33	0.37	.48
	Cash Flow from operations to current liabilities	.322	.389	0.392
Long-term solvency	Debt to equity	.32	.26	0.194
	Debt to total assets	0.43	.386	0.345
	Leverage ratio	1.29	1.59	1.89
Market-based ratios	Price/Earnings ratio	1.07	.1696	.1487
	Earnings yield	0.926	5.893	6.72
	Dividend yield	58.11	70.82	61.90

Ratio analysis is a vital tool for making investment decision as it depicts the trend and financial performance of company. In the present report, several ratios have been calculated that demonstrates the financial position of Wesfarmers limited.

Profitability position of organization is analyzed using the net profit margin, return on assets, asset turnover and return on equity ratio. Net profit margin has a declining trend from 4.47% in year 2014 to 3.91% in year 2015 and further to 0.62%. This is indicative of the fact that net profit of Wesfarmers has fallen. Return on assets has increased considerably from 1.51 in year 2014 to 1.62 in year 2016 that depicts assets have been utilized for generating income. Return on equity has fallen significantly from 9.61% in year 2015 to 1.71% in year 2015. It depicts that organization ability to generate profit from shareholder’s investment has reduced. Asset turnover has witnessed a declining trend from 0.08 in year 2015 to 0.03 in year 2016 that indicates that assets of organization is not efficiently utilized.

Long-term solvency position of Wesfarmers group is evaluated by calculating the debt equity ratio, leverage ratio and debt to total asset ratio. Debt to equity ratio of group has increased from 0.19 in year 2014 to 0.26 in year 2015 and further to 0.32 in year 2016. An increase in ratio depicts that organization has been relying increasingly on dent for financing their assets. Debt to total assets has increased from 0.34, 0.38 and 0.43 in year 2014, 2015 and 2016 respectively. Increase in ratio is not considered favorable for organization as they are relying more on debt for asset financing. Leverage ratio has decreased from 1.89 in year 2014 to 1.29 in year 2016. Lower ratio is indicative of the fact that organization has not been aggressively financing its growth with debt.

Market based ratio is analyzed using price earnings ratio, dividend yield and earning yield. Price earnings ratio of group has initially decreased and subsequently increased from 0.148 in year 2014 to 1.07 in year 2016. There has been considerable decline in earning yield and substantial increase in dividend yield.  Short-term solvency position of organization is analyzed by calculating current ratio, quick ratio and operating cash flow ratio (Nobes 2014). Current ratio of group has remained constant at 0.93 for two consecutive year and quick ratio has continuously declining. Quick ratio has decreased from 0.48 in year 2014 to 0.33 in year 2016. This is indicative of the fact that organization has not been efficiently utilizing current assets for meeting their short-term obligations. Operating cash flow ratio has declined from .38 in year 2015 to 0.33 in year 2014 respectively. Lower cash flow ratio is not a good indicator of financial health of company, as sufficient cash flow is not generated from operating activities (Bhandari and Adams 2017).  

Efficiency position of Wesfarmers limited is analyzed by calculating inventory turnover and accounts receivable turnover ratio. Accounts receivable turnover ratio has increased significantly from 15.33 in year 2014 to 21.34 in year 2016 respectively. This indicates that organization is employing tighter credit policy and has a number of high quality customers. 

References:

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Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L., 2016. Applying international financial reporting standards. John Wiley & Sons.

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Wesfarmers.com.au. (2017). Home . [online] Available at: https://www.wesfarmers.com.au/ [Accessed 13 Sep. 2017].