ACC10707: Financial Ratio Analysis of Woolworths and Wesfarmers

This report presents a financial ratio analysis comparing Woolworths and Wesfarmers, two major Australian companies, over a three-year period (2016-2018). The analysis encompasses key financial ratios, including profitability (net profit margin, gross profit margin, return on equity), liquidity (current ratio, quick ratio), solvency (debt to assets), and efficiency (inventory turnover, accounts receivable turnover). The report calculates and interprets these ratios, highlighting trends and comparing the performance of the two companies. It delves into the profitability of each company, examining their operational expenses and sales volume. It assesses the liquidity of both companies, evaluating their ability to meet short-term obligations. Solvency ratios, including debt-to-asset ratios, are analyzed to assess the companies' reliance on debt. Efficiency is measured through inventory and accounts receivable turnover. The report concludes with a comparative assessment of the companies' overall performance and provides recommendations for improvement. All ratios are calculated, and the results are presented in a clear and organized manner. The analysis is conducted to provide insights into the financial health and performance of both companies, as well as to identify areas for potential improvement. The report uses data available from the DatAnalysis database to provide a comprehensive overview of the financial performance of both companies.

Running Head: ACCOUNITNG AND FINANCE FOR BUSINESS
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ACCOUNITNG AND FINANCE FOR BUSINESS

Running Head: ACCOUNITNG AND FINANCE FOR BUSINESS
Introduction
The regularly known Wollies, one of the greatest Australian Company is the Woolworths
grocery stores. This is claimed by the Woolworths Limited. The organization was set up in
the year 1924 with the matter of the products of the soil vegetables and expanded the portions
to bundled nourishments moreover. The organization is likewise occupied with the matter of
magazines, wellbeing and the results of the magnificence and the family unit materials
(Woolworths, 2018). This report is set up to do the proportion investigation of the
organization over the time of the three years whereas in case of the Wesfarmers the company
is also an Australian Conglomerate the which is prominently dealing in the business of the
chemical, coal mining and fertilizers alongside the safety products. The company came into
existence before the Woolworth’s in the year 1914. The company major serves the New
Zealand, India, Ireland and United Kingdom. A detailed comparison of both these companies
is undertaken in this report to analyse the situation from the point of view of the competitor
(Wesfarmers, 2018).
Ratio Analysis
Ratio analysis is one of the techniques that is utilised by the company to analyse the impact
of the different parameters on the financial performance of the business. Under this section, a
detailed analysis of the ratio has been undertaken for the period of the last three years for the
Woolworth’s Company. The competitor company has also been analysed in terms of the
ratios, namely Wesfarmers (Wesfarmers, 2018).

Running Head: ACCOUNITNG AND FINANCE FOR BUSINESS
Particulars Woolworths Wesfarmers
Ratios Category 2016 2017 2018 2016 2017 2018
(Net) Profit margin 2.34% 3.84% 4.22% 1.40% 5.83% 5.61%
Asset turnover 0.44 0.41 0.42 0.56 0.59 0.61
Current ratio 0.83 0.79 0.78 0.87 0.93 0.93
Quick ratio 0.32 0.33 0.32 0.27 0.30 0.33
Debt (to assets) ratio 0.06 0.03 0.06 0.03 0.03 0.04
Days Inventory 43.17 37.48 38.38 48.19 51.41 49.98
Days Debtors 5.21 4.90 5.15 9.17 8.71 8.88
Days Creditors 59.35 61.40 63.11 52.44 52.08 51.82
Cash Cycle Result -10.96 -19.02 -19.57 4.92 8.04 7.04
Profitability
The profitability of the company is one of the finest measurements, in deterring whether the
firms are performing in the prudent manner or not. The profitability is measured in terms of
the net profit, gross profit as well as by return on equity.
The net profit of the Woolworth’s tends to improve over the period of the last three years.
The ratio increased from 2.34% to 4.22% overall, whereas the same in case of the
Wesfarmers is low yet the annual increase was higher than in case of the Woolworth. The net
profit ratio of the Wesfarmers was 1.40% in the year 2016 whereas the same increased to
5.83% in the year 2017 and still it’s higher than the Woolworths in the year 2018 at 5.61%.
The gross profit margin of the Wesfarmers is again higher than the Woolworth’s at 32% in
comparison to 29%. Under the section of the return on equity the Woolworth’s is ahead of the
Wesfarmers at 16%, whereas the progress with which the company is working it’s not far
from reaching the target (Laitinen, 2017).
Overall in case of the profitability the Wesfarmers is ahead of Woolworth’s and is giving the
tuff competition to the company. In order to increase the overall net profit of the company the
operational expenses needs to be reduced and more diversification shall be implemented to
generate the sales volume (Wesfarmers, 2018).

Running Head: ACCOUNITNG AND FINANCE FOR BUSINESS
Liquidity
The liquidity parameter of the company determines the ability of the company to pay back
the contractual; obligation with the help of the current assets acquired by the business. The
liquidity parameter is measured by the current as well as the quick ratio.
The current ratio of the Woolworth’s was 0.83 in the year 2016 and the same tends t decrease
over the years as it reached close to 0.78 in the year 2018. On the contrary the current ratio of
the Wesfarmers has improved over the years from the year 2016 where the ratio was 0.87
times and the same increased to 0.93 times. This indicates the Wesfarmers is trying to
improve the performance by getting rid of the non-productive and the obsolete assets. The
assets are used in the best potential manner to generate the sales (Öztürk and Karabulut,
2017). The performance of the Woolworth’s decline due to the decrease in the overall current
liabilities of the company and they are not able to pay back the liabilities of the current nature
on time. The quick ratio, also known as the acid test ratio of both the companies has been
nearly to 0.33 (Mwangi and Murigu, 2015).
Solvency
Under the solvency ratio of the companies the debt to total asset and times interest coverage
ratio has been analysed. The debt to total asset of the company is lower for both the
companies between the ranges of 0.03 to 0.06. This indicates the debt to total assets of both
the Wesfarmers and the competitive company and the Woolworth’s is similar and they both
do not rely much over the debt to finance the assets of the company. This can also be seen
from such an angle that the companies can take the risk to finance the assets from the debt to
accompany the tax advantage. The financial liabilities are also settled at the speed of 15 times
and in case of the Wesfarmers it is at the rate of 17 times. The long term debt of the
Woolworth’s is less at $2199 and the same is $5671, yet the ratios are similar. This indicates

Running Head: ACCOUNITNG AND FINANCE FOR BUSINESS
the liabilities are handled better in case of the Wesfarmers. The Wesfarmers play a positive
role in case of the Solvency ratios (Nimtrakoon, 2015).
Efficiency
The efficiency of the companies can be measures with the help of the two major ratios
namely the inventory turnover ratio and the accounts receivables ratio as they are majorly
involved in deterring the cash cycle. In case of the Woolworth’s the ratio has been improved
from 43.17 to 38.38 days. This means the cash is being realized at the faster pace whereas in
case of the Wesfarmers the ratio decreased but not to an acceptable level at 49.98 days from
51 days. The accounts receivables ratio of the Wesfarmers is 8.88 and it’s higher than the
Woolworth’s at 5.15 which is progressive in collection of the cash from the debtors. Overall
the Woolworth is potential and more successfully operating along with greater efficiency
(O’Neill, Sohal and Teng, 2016).
Conclusion
From the overall analysis it can be concluded that Woolworth’s is performing better yet it has
scope to improve the overall performance of the company. It is recommended to the company
to increase the net profit margins and the ability to use the assets wisely. Though,
Wesfarmers provide the tuff competition, Woolworth’s can cope up with their strengths.

Running Head: ACCOUNITNG AND FINANCE FOR BUSINESS
References
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Entrepreneurial Finance, 19(2), pp.1-28.
Mwangi, M. and Murigu, J.W., (2015) The determinants of financial performance in general
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O’Neill, P., Sohal, A. and Teng, C.W., (2016) Quality management approaches and their
impact on firms׳ financial performance–An Australian study. International Journal of
Production Economics, 171, pp.381-393.
Öztürk, H. and Karabulut, T.A., (2017) The Relationship between Earnings-to-Price, Current
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https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-annual-
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on 15th August 2019]
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