Accounting and Financial Management (PDF)
Added on 2021-05-31
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Accounting and Finance1
Solution 1: Comparison of the financial results of the Wesfarmers group over the two yearsThe comparison of the financial results of the company can be done using financialinformation published in its annual report. The annual review disclosed by the company providesan overview of the significant improvement that has been occurred or not in its financial positionin the current year as compared to the previous year. It has been analyzed by examining theannual report published by the company over the years 2015-2017 that it has reported an increasein the net profit after tax (NPAT) of about $2,466 million as compared with that of the previousyear. The earnings per share has also recorded a net increase of about 21.6 per cent incomparison to that of previous year. Also, there is increase in return on equity to 12.4 per cent ofthe company in the year 2017 as compared with that of 2016. The directors of the company havedeclared an increase in the fully-franked dividend to about $1.20 per share (2017 full-yearresults, 2017). This indicates that the company is placing high focus on maximizing the returnfor shareholders (Robinson, 2015). It has been analyzed from the information presented in the annual report of the companythat the major reason for the growth in net profit after tax is due to its conglomerate structure.The continued investment made by the company in improving the range of its merchandise hasresulted in delivering higher returns. This has been identified as the main reason for the increasein the value of net profit after tax from $2,440 to $ 2,873 during the financial years 2015-2017.The return on equity has also increased correspondingly during the financial years of 2015-2017from 9.8% to 12.4%. This is also an increase in the operating cash flow from $861 million to$4,226 million over the financial year 2015-2017 reflecting the improvement in its managementof inventory in all its retail divisions (Wesfarmers Limited: Annual Report, 2017). The group haslowered its capital expenditure by 11.5 per cent in the year 2017 as compared from the previousyear. This is largely due to less number of openings of stores in its retail divisions of BunningsAustralia and New Zealand (Wesfarmers Limited: Annual Report, 2016). The free cash flow hasalso improved during the years 2015-2017 from $1,893 to $4,173 due to sales proceeds realizedfrom divesting the credit card receivables of its Coles unit (Kline, 2007). The statement of financial position has been strengthened in the year 2017 as comparedwith the previous year due to reduction in the net financial debt. It has been reduced to $2,216million in the year 2017 as compared with that of $4,321 in the previous year. This is mainly due2
to the strategy adopted by the company to diversify its funding sources and repaying the debt bydivesting the Coles credit card receivables. There is also reported a decline in the financing coststo 14.3 per cent in the current year as compared with that of previous years driven by the activemanagement of debt sources (Wesfarmers Limited: Annual Report, 2017). The higher earningsand improvement in the cash flow position of the company has resulted in causing a significantincrease in the dividend paid to the shareholders (Alexander, 2007). There is a corresponding risein the dividend paid from 200 cents to 223 cents during the financial years 2015-2017 that issupported by its strong credit position in the year 2017. The individual retail division ofWesfarmers has also reported a significant increase in the revenue position during 2015-2017.There is increase in the revenue realized by its retail division of Coles, Bunnings, departmentstores, Kmart and other significant retail divisions. However, there is reduction in the revenuerealized in its retail division of Target from $3,438 in the year 2015 to $2,950 million in the Year2017. The significant decline in the revenue realized is because the major decision taken by theGroup for transforming the Target. This is done to reduce the operational costs for achieving itsstrategic objective of everyday low prices. As such, there has been loss-making products andreduction in the promotional activities resulting in decline of its sale and thus revenue(Wesfarmers Limited: Annual Report, 2017). Key Financial Ratios that compares the financial performance Wesfarmers over last two yearsCalculation of Financial Ratios of WesfarmersRatios201520162017Net Profit Margin3.91%0.62%4.20%Current Ratio0.930.930.93Debt Equity Ratio0.630.780.68EPS$ 2.16$ 0.36$ 2.54(Note: Financial Data provided in Appendix)Net Profit Margin: Net profit ratio is used to evaluate the profitability performance of thecompany. This ratio determines net profit earned by the company on total sales period. It iscalculated as net profit earned divided by total sale revenue. The net profit ratio has beendeclined in year 2016 due to key significant items such as $ 1249 million non-cash impairmentof Target, $ 595 million non-cash impairment of Curragh and lastly $ 102 million ofrestructuring cost and other provisional costs to reset the Target. In year 2017, Wesfarmers hasachieved the net of 4.20% which was highest of all three years (Nikolai, 2009).3
Current Ratio: This ratio helps to determine the liquidity position of the company. It is calculatedas current assets divided by current liabilities. It tells ability of company to pay the short-termliabilities through using the assets. The liquidity performance of Wesfarmers was poor in allthree years in review. The current ratio was 0.93 times in all the three years (Diamond, 2017).Debt equity Ratio: This ratio determines the solvency position of the company through analyzinglevel of debt capital in comparison to equity capital. The debt equity ratio of Wesfarmers washighest in year 2016 due to increase in debt capital taken by the company whereas it was gainreduced in year 2017. Overall Wesfarmers has maintained moderate leverage position in lastthree years.Earnings per Share: Earnings per share was highest in year 2017 and it was lowest in year 2016that clearly indicates poor profitability position in year 2016 as compared to year 2017.4
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