Financial and Non-Financial Analysis of Wesfarmers Limited

This report provides an insight into the financial and non-financial analysis measures of Wesfarmers Limited, an Australian conglomerate. It includes significant changes in financial results, interpretation of the changes, and recommendations for investors.

Executive Summary
This report is being developed for providing an insight into the financial and non-
financial analysis measures into a selected ASX listed company. The company selected for the
purpose is Wesfarmers Limited that is an Australian conglomerate involved in business activities
of retail, chemicals, fertilizers, coal mining, liquor, hotels, home improvement and industrial and
safety products. The purpose of the report is to provide recommendations to an investor about
sustainability of investment within the company. The financial analysis is being conducted with
the use of ratio analysis while non-financial analysis is carried out through evaluation of varying
information about the business activities.
Analysis
Ratio Formula 2017 2018 Change in %
Current Ratio Current assets/Current liabilities 0.93 0.87 -6.42%
Net profit Ratio Net Profit/Net Sales 4.43% 4.14% -6.36%
Return on assets Net Profit/Average total assets 7.10% 7.20% 1.31%
Operating cash flow ratio Cash flow from operations/Net
Sales 6.51% 6.10% -6.30%
Dividend Yield ratio Annual Dividend per
share/Market Price per share 8.82% 6.75% -23.46%
Market performance
Financial Performace of Wesfarmers for year 2017 and 2018
Liquidity Performance
Cash management
Profitability Performance
(Wesfarmers: Annual Report, 2018)
Significant Changes in the financial results
 Profit after tax reported by Wesfarmers for year 2018 was $1197 but this profit also
includes the loss of $1407 from the discontinued operations. Net profit excluding the
significant items was $2772 million in year 2018 and $2873 million in year 2017,
reflecting the decrease of 4% in current year.
 Earnings per share was $ 2.54 in year 2017 and it was decreased by 4% to $2.45 in year
2018
 Free cash flow from operations was $ 4173 million in year 2017 and it was decreased to
$3422 million in year 2018 reflecting a downfall of about 18% in current year
 Current ratio has also declined in current year by 6.42% that reflects poor liquidity
performance
 Return on assets has increased by 1.31% despite of decrease in net profit after tax
because value of total assets has decreased drastically in year due to demerger of Coles
and disinvestment has been made from two of its sub business units BUKI and Curragh.
 Dividend Yield ratio has also been impacted in current year as it has been decreased from
8.82% in year 2017 to 6.75% in year 2018, reflecting a net decrease if 23.46%
(Wesfarmers: Annual Report, 2018).
Interpretation
Causes of changes in financial performance
Liquidity performance
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The main reason of decline in current ratio was due the decrease in value of current assets
as compared to current liabilities. It has been noticed that bank balance has been used to capital
expenditures as per report of CEO. Value of finished inventory has been declined in year 2018
due to demerger of Coles and some of finished goods have been removed due to shutdown of
two business units BUKI and Curragh (Hatch, 2019)
Profitability Performance
The year 2018 reflects the major change in profitability position of Wesfarmers as
management has decided to demerge one of its business unit “Coles” and disinvestment of BUKI
and Curragh (Smyth, 2018). Profitability performance has been expected to be improved in next
year as per the CEO report because company has disinvested two of its loss making business
units and demerge Coles from Wesfarmer (Letts, 2018).
Market performance
Share price of the company has increased from $25.29 (On June, 2017) to $33.04 (On
June, 2018) but dividend has been fixed at $2.23 per share that is the main reason of decrease in
dividend yield ratio in year 2018. Wesfarmers follows stable dividend policy as it pays constant
dividend in year 2017 and 2018. It can also be reason of poor dividend yield ratio in year 2018.
Overall market performance has been improved as market price has increased in year 2018 that
provides good holding period return to share (News Corp Australia Network, 2018).
Cash Management
Cash from operations has been reduced due to demerger of Coles from the main business
that has diverted the sales collection.
Non Financial Performance
Wesfarmers Limited operates in the business area of supermarkets, liquor, hotels and
convenience stores and hotel improvement. Besides this, it also possesses industrials division and
conducts its business operations predominantly in Australia and New Zealand. The company
conducts its operations through various subsidiaries that are Kmart, Coles, Bunnings, Office
works and many others (Wilkins, 2017). It has delivered a strong financial result with growth in
the earnings due to increasing sales realized from its subsidiaries such as Bunnings. The
demerger of Coles is a significant event that resulted in causing repositioning of Wesfarmers and
providing higher returns to the shareholders (Sprague and Mitchell, 2018).
Wesfarmers aims to deliver higher returns to the shareholders through strong
management of its different business sections. It aims to achieve this strategy by developing a
diverse workplace environment. It has maintained its distinctive position in the topmost grossing
retailers across the world. Despite of the challenging retailing conditions present at a global
level, Wesfarmers has depicted a continued growth due to its high sales momentum. The changes
in the economic conditions within Australia and other parts of the world with increase in
inflation and interests’ rate have resulted in negatively impacting the consumer spending power
thus influencing the sales of Wesfarmers (Wesfarmers Limited, 2018).
The strong financial performance of Wesfarmers can be linked to its competent
management team having high experience supporting its sustainable growth. There have been
financial deductions in the remuneration of the key executives of the company owing to the
impairments, write downs and forecasting losses in the subsidiary of Bunnings. The Board
provides non-wage benefits to the employees such as annual leave, long service leave and
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incentives. The Board appoints the key management personnel such CEO and managing director
for conducting daily business activities for creating higher return for the shareholders
(Wesfarmers: Annual Report, 2018).
It can be said from overall analysis that Wesfarmers though at present is struggling to
maintain its profitability position but it’s expected to deliver strong financial results analyzed on
the basis of its higher earnings growth due to divestment of its non-performing subsidiaries and
thus improving its business portfolio growth by investing in its core business activities.
Conclusion and recommendation
It is highly recommended to buy the shares of Wesfarmers in current year as it is highly
expected that in next year performance will certain improve due to disinvestment of loss making
business units and Coles has also been removed as it provides very less profit. Market price
shows the increasing trend and dividend payout was also constant that reflects holding period
return will be improve in next year.
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References
Hatch, P. 2019. Coles sales fall back to earth after Little Shop, profit falls 29 per cent. [Online].
Available at: https://www.smh.com.au/business/companies/coles-sales-fall-back-to-earth-after-
little-shop-profit-falls-29-percent-20190218-p50yn4.html [Accessed on: 8 June 2019].
Letts, S. 2018. Wesfarmers net profit plunges nearly 87pc to $212 million on Target and
Bunnings UK write-downs. [Online]. Available at:
https://www.abc.net.au/news/2018-02-21/wesfarmers-profit-falls-87pc-on-target-bunnings-uk-
write-downs/9469302 [Accessed on: 8 June 2019].
News Corp Australia Network. 2018. Wesfarmers: Poor Bunnings UK, Target performance
drags down profit. [Online]. Available at:
https://www.news.com.au/finance/business/retail/wesfarmers-poor-bunnings-uk-target-
performance-drags-down-profit/news-story/19a6f05696ffeb33676e9b2077dff125 [Accessed on:
8 June 2019].
Smyth, J. 2018. Wesfarmers profit halves in wake of Homebase retreat. [Online]. Available at:
https://www.ft.com/content/46225f10-a04d-11e8-85da-eeb7a9ce36e4 [Accessed on: 8 June
2019].
Sprague, J. and Mitchell, S. 2018. $20b Coles carve-off puts Wesfarmers back in growth frame.
[Online]. Available at: https://www.afr.com/business/retail/20b-coles-carveoff-puts-wesfarmers-
back-in-growth-frame-20181115-h17y08 [Accessed on: 8 June 2019].
Wesfarmers Limited. 2018. Our Businesses. [Online]. Available at:
https://www.wesfarmers.com.au/our-businesses/our-businesses [Accessed on: 8 June 2019].
Wesfarmers: Annual Report. 2018. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?
sfvrsn=4 [Accessed on: 8 June 2019].
Wilkins, G. 2017. Woolworths, Wesfarmers among world's top-20 retailers. [Online]. Available
at: https://www.smh.com.au/business/woolworths-wesfarmers-among-worlds-top20-retailers-
20140113-30quy.html [Accessed on: 8 June 2019].
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Appendix
Financial Data of Wesfarmers used to calculate the ratios
Items 2016 2017 2018
Amount in $M
Current Assets
$
9,667.00
$
8,706.00
Current liabilities
$
10,417.00
$
10,025.00
Net profit
$
2,873.00
$
2,772.00
Net Sales
$
64,913.00
$
66,883.00
Total Assets
$
40,783.00
$
40,115.00
$
36,933.00
Average Total Assets
$
40,449.00
$
38,524.00
Cash flow from
operations
$
4,226.00
$
4,080.00
Annual Dividend per
share
$
2.23
$
2.23
Market Price per share
$
25.29
$
33.04
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