Comparative Analysis and Investment Decision

The provided content discusses the cash flow statements of two companies, Harvey Norman and Wesfarmers, over a specific period. It highlights changes in their operating, investing, and financing activities, and notes that Harvey Norman's net profit analysis and ratios are progressively better than Wesfarmers'. The assignment also touches on strategy analysis at an industry level, competitive benchmarking with competitors, and accounting discipline according to IFRS guidelines. Additionally, it explores the importance of financial ratios in understanding a company's financial position, highlighting interrelationships between different ratios.

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Assignment -2
Financial Statement Analysis
Student Roll No:

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Part-1
The two companies that are selected are Harvey Norman and Wesfarmers limited. Both these
companies represent conglomerates in the retail domain across different sectors, and yet
represent comparable ventures with financial and business significance based in Australia.
Wesfarmers Limited has interests that span to a predominant extent across Australia as well as
New Zealand markets focusing on retail, fertilisers, chemicals, industrial / safety products, and
coal mining. Harvey Norman represents multi-national retailer for bedding, furniture,
communications products, consumer electrical products, and computers. So on the strategy based
on the buyers potential, the HN should focus to open their new stores to those areas where the
potential of the buyer are higher and the buyer population should targeted instead of open in a
vacuum. In terms of Wesfarmers, the potential to growth is higher so the services should be
spread to other countries as well to test and drive the sales potential.
In terms of competitive business, the HN sales has been improved and carry out much more
potential in the market so the company should focus to operate as per the policy framed vs. to
jump into the new areas without the significance idea and motive. The competitors are there in
the business but the vision will lead the business to growth and sustainability. The product is at a
optimum range and is influencing the buyer than the competitors product so it should be on the
same strategy. For WF, there are multiple product/services offered but only one product is giving
higher growth i.e. coal, so they must benchmark with the competitor to check the idea of loss to
the business and should grow in the market.
For both the companies the update is required to be made, as there potential in the market is
higher and both the company needs to work on their strategy to grow the business. The
accounting analysis of the firm are to be widespread to good ERP system and the control
techniques should be adopted. The company should follows the IFRS discipline also to prepare
the financials as per the IFRS guidelines and report their financial statement every year to the
revenue authorities. Also, the benchmark should be done with the competitors so to move ahead
and identify the areas where needs to work on. The business development are subject to change
so, we believe the change is required in terms of:
- Good governance system;
- MIS reporting of the company;
- Market strategy of the company;
- Working on operational efficiency to increase the profit margins and get the turnover
over cycle to mark
- Financial ratios should be improved.
Part -2

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Assessing and reporting Operating Management decomposition analysis.
Harvey Norman
The Company is working under the broad hierarchy and good governance. The company has
been lead by the shareholders who perform the decision activity for the major chucks of
elements. Followed by the Board of directors, who are responsible to decide the and conclude the
major operations of the company after getting the MIS and reporting from the each division of
the operating team. Normally the Chief operating officer is handling the operational issues and
reporting the same to the board and executing directors. This is how the operating management is
been decomposed by the company.
Company has structured to work in a retail segment, which is similarly spread across the world.
All these retails MIS are been reported to the regional managers who further report to the country
head and the country head reports to their respective Vice-presidents and vice-presidents to the
CEO of the company. This is how the management presents its hierarchy in terms of reporting
and resolving the operating issues within the management. The board meeting is usually held
once or twice the quarter where all the key operating management issues are been discussed and
resolved to any point of term.
Other operation of the company has been spread in terms of Franchisee. Each franchisee owns
and controls the franchisee business of the that franchisee. They themselves control over the day-
to-day operations of the franchisee business and they posses the power to decide necessary sales
drivers, control over margins, operating cost so that they can maximize profitability of their own
franchisee business. This franchising operation segment in Australia records the total fees
received from franchise holders including the rent, fees and outgoing the use of a branded
complex and interest on the financial accommodation facility that the company provides to all
franchise before they operate in the market.
Wesfarmers
The company operates with the major division where each division are been reviewed by the
division head and the division heads are been working with the company operating officers and
the executing officers who are responsible to decide the work and provide inputs to the board.
Further to this, the company has its division in terms of:
- Burnings;
- Coles
- Departmental Stores
- Officer works
- Industrials

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All these wings are operating within the Australia and New Zealand and deliver their services to
the citizen of the company. These services are been operating in terms of stores in near places of
the countries. The operation of the company is been responsible to achieve good improvements
in terms safety performance, maintain a strong work force, enrich to the person who seek for the
product and service of the company. As the company is also in the business of the chemicals and
other potential hazards materials the company needs to take care of the safety of the operational
staffs and have to hear the complaints of the customers who are receiving the service from the
company. These are to be done in terms of the divisions head managers and it further engage the
operational heads if the things are not been resolved within the division head managers. The
operation of the company should not be diluted with the short provisions as the services provided
by the company should be sustainable and should be served to the person in need.
Ratio 's
HV
2018 HV HALF WES
2018
WES
HALF
GROSS PROFIT MARGIN 33.48% 32.00% 6.07% 11.43%
EBIT MARGIN 27.91% 28.13% 6.07% 11.43%
EBITDA MARGIN 32.17% 31.91% 7.86% 13.28%
Harvey Norman
During the year 2018 the gross margin was improved than 2017, which has been reported less
during first half year of 2019. The cost of goods sold has been excess during the first half period.
EBIT margin gives a significant influence to represent the earnings of the company before
interest and tax. Interest and taxes are two component which are payable to the stakeholders of
the company, these costs are not related to operating business of the company. During the year
2018 the operating margin of the company has been reported at 27.91%, which has been
increased during half year 2019. This shows that company has been able to reduce the indirect
cost related to the business despite the gross margin has decreased the EBIT margin has
increased. Further the EBITDA margin further improved for firms operating profitability by
excluding depreciation cost which can also be termed as non-cash expenses. EBITDA margin
has been reduced during the first half year, which states that the depreciation cost may have
increased due to increase in fixed assets during the year.
Wesfarmers
Gross margin has been increased tremendous during the first half year of 2019, due to increase in
revenue by 36% and decrease of cogs by 23%. The total effect has increased the gross profit
margin to 11.43%. The operating profits margin before interest and tax is also higher than the
last year. There was least depreciation effect during the first 6 months of 2019, due to which the
EBDITA margin has been increased to 13.28%.
Comparing to the Harvey Norman the ratios has been increased during the first half year of 2019.

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Evaluating and reporting Investment Management decomposition analysis
Harvey Norman
The company has its own property segment which focus on the property portfolio. This portfolio
keeps them a step ahead and ready to evolving and dynamic needs of a consumer. They invest in
the various types of assets including the joint venture assets, land and buildings in different
countries and properties of the business. As per the company policy these property are been
subject to semi-annual review to fair market value at each reporting period. The one-sixth of the
total portfolio is been independently valued and the remaining five-sixths are been reviewed for
fair value by the directors, in the process of that the whole portfolio is to be reviewed once in 3
years of times.
The total value
Total property segment
Particulars 2017
June,
2018
Dec,
2018
Investment properties
$2.242b
n
$2.245b
n
$2.429b
n
Owner-occupied land and
building in various parts
of the world
$413.85
m $135m
$432.46
m
Joint venture assets $2.05m
$51.646
m $2.54m
Total property segment
Assets $2.66bn
$2.823b
n $2.86bn
As per the reports of the company the current value of the property so invested in the different
property are been reported. The value of investment in property are been reported in every half
year and the market value of this invested properties are been reported to the management.
Followed by the land and building investment which are been reported increasing in New
Zealand, Australia: Franchised complexes, Slovenia and Singapore. The increase in the
investment properties are been directed and been decided by the management of the company.
Further to this the Joint venture investment is to have a joint agreement with another company to
invest in a common property of any company or any business and to share the profits or margins
equally or in the proportion as been decided between the companies. These are been well
described by the board of the respective companies.
Wesfarmers
The company engage in the investment their cash assets in various certain types of investments
like:

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- Investment in the baking;
- private equity investments;
- Non-controlling assets of the company
- Investment in the associates and joint ventures
- Investment in rental properties
- Derivative investment
- Investment in associates
- Companies of chemical, coal mining
During the period the investment of the company has been increased and the potential shares of
the respective companies are been shown below:
The overall investment in each sectors are increasing by each year and the company is focusing
more in investing in the customers service than in holding new projects. The joint ventures are
also increasing so to go diversified in terms of investment.
Ratio
Particulars HN2018($m) HN HALF($m) WES 2018($000) WES
OPERATING WORKING CAPITAL 1,242,504 1,221,218 2,122 3,167

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SALES 1,993,760 1,175,249 66,883 14,38
OWC TO SALES RATIO 0.62 1.04 0.03 0.22
OWC TURNOVER 1.60 0.96 31.52 4.54
AR TURNOVER 2.92 1.48 40.66 10.84
DAYS RECEIVABLE 124.98 247.03 8.98 33.68
INVNETORY TURNOVER 4.01 2.00 10.08 2.50
DAYS INVENTORY 90.98 182.14 36.21 146.1
AP TURNOVER 5.02 2.37 9.61 2.43
DAYS PAYABLES 72.74 154.18 37.99 149.9
LON-TERM ASSETS MANAGEMENT
NET LONG-TERM ASSET TURNOVER 2.89 1.62 2.45
PP&E TURNOVER 3.10 1.74 7.49
Working capital of the company shows that how much funds are available after repaying the
current obligation of the company. The liquidity of the company is been analyzed on the basis of
working capital of the company. Usually, the working capital shows that basis operation of the
company is streamlined and operating cycle is up to mark. During the year 2018, operating
working capital sales is below the standard point of 1, which needs to streamlined, so that the
company can repay for procurement cost for the sales demand and as management efficiency on
using the current assets to support the sales after mitigating current liabilities. The ratio has been
increased during the half year of 2019 which illustrated the higher potential to support the sales.
AR to turnover means that how much sales is done on credit basis, the lower the ratio will
decrease the cash cycle of the company. This will also indicate that the company's ability to
repay their debt is lower as company is selling the procured goods on credit. During the half year
2019 the ratio has been improved to 1.48.
Receivable days means to recover the cash from the debtors. The lower receivable days, the
higher the potential to recover the money else as per standard business, the days higher than
90,180 days are termed as bad debts. During the half year the receivable days has been increased

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to 247 days, which means that most of the receivables are in criteria of bad debts, so sooner the
company needs to take action to recover the money.
Inventory turnover means how much inventory the company is keeping in stock in comparing to
the sales demand. The higher the ratio, it blocks the working capital of the company and the
company will unable to repay their debts and other obligation on due dates. During the half year
2019, these ratios has also done down to 2 from 4, which means that the stocks are moving.
The Inventory days means, how frequent the inventory are been sold out from the date of
purchased. So lower the inventory days the higher the working capital cycle will move. During
the half year 2019 the ratio has been moved to 182 days as the old inventory were moved first so
to reduce the total inventory of the company.
Accounts payable to turnover means the total creditors of the company in ratio to the turnover of
the company. This ratio will show the current liabilities obligation of the company in comparing
the turnover. The lower the ratio is expected to be good for the business. During the half year,
2019 the ratio has been decreased and it reach to 2.37.
Creditor's payable days has been increased to 154, due to higher stock blockage by the company.
In terms of long term management, the support of the long term assets to the turnover means how
much the utilization has been increased from the last cycle. It shows the optimum utilization of
the assets to the business. The higher the ratio is better to the business. During the half year
2019, the long term asset turnover has been decreased to 1.62 in comparing to 2.89 and further
the PPE has also been decreased to 1.74 in comparing to 3.10
Wesfarmers
As compared to HN, the working capital ratios of the company is better and influencing for the
first half year of 2019.
In terms of working capital to turnover the ratio has been decreased to 4.54 from 31.52 means
that there is lower support to sales with the working capital of the company.
Accounts receivable turnover is reported less to 10.84 from 40.66 means there is lower credit
sales during the first half year which is positive effect to cash flow. But the remaining receivable
collection period has been increased to 33.68 days, but which is still under good days and can be
recovered.
Inventory turnover has been shown at positive mark to 2.50 means the company has lower stock
to the turnover and met the demand and also block less working capital.
The inventory days has been increased tremendous which means there is issue on the logistic and
operation of the business i.e. procurement planning and delivery days, this has been increased to
146 days from 36days, this is due to delay in consignment.

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Creditors are recorded less than previous year and so reduced to 2.43 from 9.61. Also, the
payable days are 149 days which increase the working capital but effect the policy of the
company.
On the long term utilization the company has not able to utilize the fixed assets of the company
to the mark, it has to be and has reduced the ratio to 0.84 on the overall long term assets of the
company.
Evaluating and reporting Financial Management financial leverage analysis.
In the prospect of the capital management policy,
- Company is more into the equity than in the debt;
- The investment in the new project are been governed with the equity
- The total liabilities of the companies are relatively more in terms of the other companies
- Deferred liabilities of the company are also been increasing in lower than the total assets
of the company
Current Liability and Short term Liquidity:
Particulars HN2018 HN
HALF
WES
2018
WES
HALF
CURRENT RATIO 158.76% 150.60% 86.84% 144.03%
QUICK RATIO 117.16% 105.89% 26.88% 69.97%
CASH RATIO 20.55% 12.19% 6.81% 49.24%
AVERAGE CURRENT LIAB 786694.
5 920837 10221 8000
OPERATING CASH FLOW RATIO 57.73% 15.79% 39.92% 24.84%
Current ratio means the ability of the company to repay their current obligation. The standard
ratio should be above 1, so that it means that the company has higher assets to repay their current
obligation for short terms.
Current ratio of HN has been decreased during the year by 0.8%, but WES ratio has been
increased by 44%, which means the ability to repay their current obligation has been increased
during the first half year, 2019.
Quick ratio means those assets which are ready to sold in the market and can be utilized to repay
the current obligations i.e. cash and cash equivalent. It excludes the inventory and other assets
which will take to get the funds for current obligations. This ratio has been gone down in first
half year for HN but has been improved for WES to 69%.
Cash ratio means only the cash availability in terms of current obligation. The ratio of both the
companies are lower than 1 which needs to be at a standard point so that they can repay their
obligation on current cash availability.
Assessing and reporting Sustainable Growth Rate analysis.

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Harvey Norman
The company report sustainable growth rate analysis in terms of:
- Environment and social sustainability
- Capital Risk Management Policy
These two reporting aspects are been reported to the shareholders in each annual report and it
will show that the company is regressively working to maintain the environment sanitation and
capital risk and work for the short term decision so that the risk can be avoided.
Wesfarmers
The sustainability of the company considers the opportunity to drive strong and long term
shareholders returns. The progress are been reported in terms of:
- Safety where the injury rate has been reduced by 15%
- Ethical sourcing and human rights, where the supply chain has been improved in 4003
factories;
- Diversity, where the 24% increase in employees are been identified as indigenous
- Community contribution has been done to $86.6million during the year.
Particulars HN 2018 HN
HALF
WES
2018
WES
HALF
DIVIDEND PAID OUT RATE 71.57% 90.18% 211.36% 95.97%
ROE 12.94% 7.18% 5.26% 40.19%
SUSTAUNABLE GROWTH RATE 3.68% 0.71% -5.86% 1.62%
Sustainability also means how much a shareholder believes to get their funds invested into
business. If the shareholders are not getting the benefits then they will take their funds back. So,
for the company needs to provide the returns to the business.
During the half year, 2019 the dividend pay out ratio of both the company is higher and reached
to 90.18% and 95.97%. So, the investors are getting their returns on time with higher dividend
rates.
Return on equity means the amount invested to the total profit of the company, the ratio has been
reduced to 7.18% in case of HN half year 2019 but the ratio has been increased to 40.19% in
case of WES.
The Sustainability ratio has been reduced which means the equity holders are not much trusted
the company and the funds are taken back. The rate has been reduced in first half year for HN
but has been improved in terms of WES. This ratio provides the good leverage to the company
than the debt funds.

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Analyzing Cash Flow Information analysis
Harvey Norman
Cash Flow
Particulars 2,018 2,017
Cash Flow from operating
Activities 454,170 425,140
Cash Flow from Investing
Activities
(303,485
)
(198,765
)
Cash flow from Financing
Activities (68,104)
(287,124
)
Net Cash & Cash equivalent 82,581 (60,749)
As stated above the cash flow in terms of operating activities has been increased due to payment
to suppliers and employees has been increased by 13% during the year, further the GST (tax)
amount has also been reported to increase for the year along with the income tax for the year.
Along with that the Investment activities has been increased due to increase in purchase of
Investment properties and loans grated to joint ventures entities.
Financing activities has been increased as the proceed from syndicated facility has been
increased during the year.
Wesfarmers
Particulars 2,018 2,017
Cash Flow from operating
Activities 4,080 4,226
Cash Flow from Investing
Activities (658) (53)
Cash flow from Financing
Activities
(3,752
)
(3,771
)
Net Cash & Cash equivalent (330) 402
During the period the operating activity cash flow has been reduced as the payment to borrowing
cost has been reduced and there has been low payment to suppliers and employees.

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Respectively the cash flow from investment activities has been increased due to payment more
for properties, plant and equipment, and there is less proceeds from the sale of PPE. So, the cash
flow is very less for the period.
Cash flow from the financial activities has been decreased due to lower proceed from borrowing
and higher payment for borrowing for the period.
Select of your two companies to invest $50,000 into the purchase of shares
As above two companies are been selected to invest $50,000, but the net profit analysis and
ratios of the Harvey Norman is progressively better than Wesfarmers so it is better to invest more
funds into Harvey Norman than the Wesfarmers. But the potential of the both the companies are
very positive as the market review is sustainable and the size of market is increasing to invest the
funds.
As competitors analysis the both companies are operating in their own industry and rising in
higher terms and as the potential of the company is higher so they will sustain and move higher
in near future subject to the operation of the company will be effective.
Part -3
a. The idea has been changed as to believe that the strategy analysis has to be done on the
basis of industry level's to see what are the elements which are driving the company's
growth, further it make a sense that how some company makes it and how much
companies cannot. So, strategy analysis after the study has given a clear idea to how to
grow with good strategy and to grow with the business. The competitive analysis study
helped to analyze the benchmarking strategy with the competitors. It helped to
understand how the market movers are present in the market and driving the pace, so the
company should also learn, execute and represent the things in the market vs. working on
their own strategy. Further accounting discipline helped to learn on the working as per
the IFRS guidelines, which is a statutory obligation of the company. So the accounting
framework should be adopted vs. making an different set of accounts for their own
business. The company should have to prepare their financial statement and reports as per
the IFRS compliance and should file to the reporting bodies after they gets approved form
their shareholders and boards.
b. I was informed about the ratios but after this course I can identify the reason and the
areas where the ratios needs to work on and why this ratio is important for the companies.
Like the working capital ratios in terms of Turnover is important to identify where the
working capital of the company has been blocked. Also, it helped me to understand the
turnover days of debtors, creditors and inventories. The working capital is the

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identification of the repaying of the current obligation and funds available for the future
planning of the company instead of borrowing the funds. Further, it helped to understand
about the current ratio's, liquid ratios, cash ratios and liquidity factor of the company. So,
in terms of solvency how the ratio's of the company will work, is a reasonable area where
this course has guide me to understand. Also, cash flow analysis and its terms are clear to
me after the study.
c. The interrelationship among the financial ratios is a clear picture of the company's
financial position as the shareholder/ stakeholders of the company are more interested to
review the returns and obligation of the company and instead of analyzing the financial
statement it is better and effective to review the ratios of the company which will give the
effective idea on the growth, sustainability, obligation, turnover, investment and
operational margin overview. So, ratios are effective to represent the financial position of
the company.
Example: current assets and current liabilities of the company helps to understand the
obligation of the company but the quick ratio, cash ratio helps to understand the potential
of the company to repay their obligation on the stand by situation instead of recovery
from the market.
References:
1. Investopedia.com, 2018, "Working capital Analysis", Available from:
https://www.investopedia.com/terms/w/workingcapitalturnover.asp
2. Corporate finance institute, 2017, "Ratio's definition", Available from :
https://corporatefinanceinstitute.com/resources/knowledge/finance/accounts-receivable-
to-sales-ratio/
3.