Wesfarmers Financial Ratios Analysis

This assignment requires an in-depth analysis of Wesfarmers' financial performance using key ratios. It specifically focuses on the changes in debt-to-equity ratio and leverage from 2014 to 2016, highlighting the increased reliance on loans and borrowings for financing assets. The analysis also explores the implications of these trends on Wesfarmers' overall capital structure.

Running head: FINANCIAL ACCOUNTING
Financial accounting
Name of the University
Name of the student
Authors note

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FINANCIAL ACCOUNTING
Table of Contents
Brief of company:............................................................................................................................2
Discussion:.......................................................................................................................................3
Brief summary of director’s report:.................................................................................................3
Brief summary of auditor’s report:..................................................................................................4
Analyzing the financial health of Wesfarmers limited:...................................................................5
Evaluating the financial health of Wesfarmers limited using ratio analysis:..................................6
References:......................................................................................................................................9

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FINANCIAL ACCOUNTING
Brief of company:
Wesfarmers is the largest retrial company listed on Australian stock exchange that was
originated in year 1914. The business operations of organization is diverse that involves hotel
and convenience stores, supermarkets, liquor, office supplies, home improvement, energy and
fertilizers, chemicals, industrial division in office supplies, coal and safety products. The primary
objective of organization is to create wealth for shareholders and provide them with satisfactory
return. Openness, accountability, integrity and boldness are the core values of organization.
Wesfarmers is the largest private sector employing 220000 employees and has a shareholder
base of 530000 (wesfarmers.com.au 2017). The positioning of business would help organization
in improving their range, service and value along with growth achievement. Group concentrates
on improving operational efficiency and in this regard, the outlook seems to be challenging in
short-term. Performance of group has been offset by challenging trade conditions and
restructuring activities of one of its group that is Target. Wesfarmers have continued to deliver
long-term growth and improved return to shareholders by continuing making investment in
customer value, service, online stores and merchandize ranges so that they are able to sustaining
the competitive environment. The performances of industrial division have been significantly
affected by depressed conditions across retail sector. Earning of respective divisions has declined
considerably (Reeve et al. 2014). Organization has good corporate governance, excellent
employees and their business portfolio has helped in generating cash over time.

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Discussion:
Brief summary of director’s report:
The managing director of Wesfarmers group is Richard Goyder AO and Rob Scott is
managing ditector of Wesfarmers industrials in year 2015. Guy Russo joined group as managing
director of Kmart and John Durkan was appointeds as managing director of Coles in year 2014.
Director report incorporates indemnification and insurance of directors and officers,
remuneration of directors and other officers, significant changes in state of affairs and reviewing
of operations and results. It involves discussion about corporate governance, environmental
performance and regulations, auditor’s declaration to directors of Wesfarmers limited. The
organization has entered into deeds of Insurance indemnity and access with each of directors in
accordance with constitution of company (Hoskin et al. 2014). Premium has been paid by group
in respect of contracts insuring officers and directors and against certain liabilities that are
incurred in capacity. Report also discusses about the remuneration that is paid to senior
executives and directors and policies that determines the amount and nature of remuneration
payable.
Some of significant changes in the state of affairs of group are discussed in director’s
report and they involve:
 There has been increase in revenue generated from ordinary activities to $ 65981 million
from $ 62447 million.
 Total value of shareholder’s equity decreased to $ 22949 million as compared to $ 24781
million in last year to $ 65981 million
 Fall or decline in net cash from operating activities to $3365 million from $ 3791 million.

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FINANCIAL ACCOUNTING
 Value of total assets increased to $ 40783 million from $ 40402 million
(wesfarmers.com.au 2017).
 Profit of group has declined significantly to $ 407 million as against $ 2440 million that
reduced the dividend that is paid to shareholders. Dividend per share in year 2015 stood
at $ 2 cents per share in financial year 2015 as against $ 1.86 in year 2016.
Ernst and Young is the auditor of company that has also provide non audited services to
consolidated entity of group and they make provision of services. Report also incorporates
discussion about company secretary and it depicts that Lenda Kenyon was appointed as secretary
of company in year 2002. They are member of leadership team of Wesfarmers and company
secretary of number of subsidiaries of group. As legal counsel, Lenda join Wesfarmers in year
1987.
The declaration of auditors to the directors of Wesfarmers is provided in director’s report
that discloses that there have been no contraventions regarding applicable and professional code
of conduct while carrying audit (Weil et al. 2013). Moreover, it also depicts that there is no
contraventions of the requirement of Corporation act of auditor’s independence.
Brief summary of auditor’s report:
The auditor of Wesfarmers is Ernst and Young that provided non audited services to the
consolidated entity of group as well. Audit report incorporates report on financial report,
responsibility of auditors, responsibility of directors to the financial report, report on
remuneration report and their opinion. All the financial statements involving consolidated
balance sheet, consolidated income statement, consolidated statement of changes in equity,
consolidated statement of comprehensive income and consolidate cash flow statement have been

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audited by auditors. Moreover, they have also audited notes to financial statements and all
explanatory information from time to time or at the end of financial year.
Responsibility of director to express an opinion on financial statements based on audit
and audit has been conducted by auditors according to auditing standards of Australia. Audit
plan and engagement have complied with ethical requirements and indicating that financial
statements are free from any material misstatement by obtaining reasonable assurances (Otley
and Emmanuel 2013).
Analyzing the financial health of Wesfarmers limited:
As depicted from annual report of Wesfarmers limited that there has been increase in
value of sales in financial year 2016. Net sales for year 2016 were recorded at $ 65981 million as
against $ 62447 million in year 2015. Revenue from departmental stores increased up to $ 8. 6
billion. Some of subsidiary of Wesfarmers group such as Coles Express has recorded higher
volume of sales due to lower fuel price and lower fuel volume (wesfarmers.com.au 2017). Sales
of convenience store have also increased due to compelling value offering that continuously
resonated with customers. Earnings before interest and taxes were improved due to productivity
gains, good trading and disciplines of operating costs (Kemp and Waybright 2016). Across all
the areas of business, group experienced growth in value of sales.
The net cash flow from operating activities witnessed decline in year 2016. Value of net
cash flows from operating activities was recorded at $ 3791 million in financial year 2015 as
against $ 3365 million in year 2016 respectively. This indicates that operating cash flow has
reduced by 11.2% or reduced by $ 426 million. Fall in net operating cash flow reflects that

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FINANCIAL ACCOUNTING
across retail portfolio there has been higher working capital investments. Moreover, this decline
was also attributable to initiatives taken fir improvement in availability of stocks.
As observed from the figures provided in consolidated balance sheet of group, there has
been reduction in value of retained earnings. Retained earnings stood at $ 2742 million in year
2015 as compared to $ 874 million in year 2016. Wesfarmers has interest bearing loan and
borrowing and the amount of loan borrowed has increased in year 2016. The value of
borrowings and interest bearing loan has increased from $4615 million in year 2015 to $ 5617
billion in year 2016 respectively. However, no loans were made by group in year 2016 between
the management and key personnel and any other related parties. Amount of borrowing and
loans is initially recognized at fair value by deducting transaction costs that is measured at
amortized cost subsequently using the effective method of interest rate (Maynard 2017).
Evaluating the financial health of Wesfarmers limited using ratio analysis:
Profitability ratios:
Years 2016 2015 2014
Net Profit
Margin
0.62% 3.91% 4.47%
Return on
Assets
1.62 1.55 1.51
Return on
Equity
1.71% 9.61% 10.34%
The profitability position of group has been evaluated by calculating net profit margin,
return on assets and return on equity generated. It can be depicted from above table that there has
been decline in net profit margin of group from 4.47% in year 2014 to 3.91% in year 2016 and
further to 0.62% in year 2016 respectively. Return on assets have improved from 1.55 in year
2015 to 1.62 in year 2016 that indicates that assets have been utilized efficiently. Considerable

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decline is witnessed in return from equity from 10.34% in year 2014 to 1.71% in year 2016. It is
indicative of the fact that organizations ability to generate profit from shareholders investment
has reduced (Crawley and Wahlen 2014).
Liquidity ratios:
Liquidity position is analyzed by calculating current and quick ratio.
Current Ratio 0.93 0.93 1.13
Quick Ratio 0.33 0.37 0.48
Cash flow from operations to current
liabilities
0.322812
7
0.3897799
7
0.39202
8
Current ratio has remained constant at 0.93 for two consecutive years; however it has
declined from 1.13 in year 2014 that reflect that liquidity position has not improved. Cash flow
ratio has also fallen by some points. This depicts that Wesfarmers management has not been
efficient in utilizing their current assets for paying off their short-term obligations (Hoskin et al.
2014).
Efficiency ratios:
Accounts
Receivable
Turnover Ratio
21.34 20.49 15.33
Inventory
Turnover Ratio
7.27 7.83 7.76
Asset turnover
ratio
0.27139832
6
0.0859613
9
0.05909
6
Accounts receivable ratio has increased from 15.33 in year 2014 to 21.34 in year 2016
that indicates that receivables are collected more frequently that is good for business. Inventory
turnover, on other hand has reduced by fewer points from 7.83 in year 2015 to 7.27 in year 2016

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FINANCIAL ACCOUNTING
respectively. It reflects that inventories are converted into sales at regular intervals. Asset
turnover ratio has increased from 0.08 in year 2-015 to 0.27 in year 2016 that indicates that
organization has efficiently utilized assets for profit generation (Spieceland et al. 2013).
Therefore, it can be said that overall efficiency of organization has improved in recent years.
Leverage ratios:
Leverage position of organization is analyzed by calculating debt to total assets, debt to
equity and capital structure leverage
Debt to Equity
Ratio
0.32 0.26 0.19490
5
Capital Structure
Leverage
1.29 1.59 1.89133
9
Debt to total assets 0.4372
9
0.38663
9
0.34586
Debt to equity ratio has increased from 0.19 in year 2014 to 0.32 in year 2016 that
reflects that proportion of dent to total value of equity has increased. It depicts increased
dependence of Wesfarmers on loan and borrowings. Debt to total assets has increased to 0.43 in
year 2016 compared to 0.38 in year 2015. Organization for financing assets is making use of
borrowed capital that is not regarded as good sign. Capital structure leverage has reduced
considerably from 1.89 in year 2014 to 1.29 in year 2016. It reflects that proportion of debt to
total value of capital has declined.

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References:
Crawley, M. and Wahlen, J., 2014. Analytics in empirical/archival financial accounting research.
Business Horizons, 57(5), pp.583-593.
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Pearson Higher Education AU.
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Wiley Global Education.
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Kemp, R. and Waybright, J., 2016. Financial accounting. Pearson.
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financial accounting theory: A counter view. Critical Perspectives on Accounting, 27, pp.209-
218.
Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control.
Springer.

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Reeve, J.M., Warren, C.S., Duchac, J.E. and Wang, W., 2014. Principles of financial accounting
with conceptual emphasis on IFRS. Cengage Learning Asia Pte Limited.
Spieceland, D.J., Thomas, W. and Herrmann, D., 2013. Financial accounting. McGraw-Hill
Higher Education.
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methods and uses. Cengage Learning.
Wesfarmers.com.au. (2017). Home . Available at: http://www.wesfarmers.com.au/ [Accessed 15
Sep. 2017].
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.