Financial Analysis of Woolsworth and Westfarmers

This finance assignment delves into a comparative analysis of the financial performance of two prominent Australian retail companies: Woolworths Limited and Wesfarmers Limited. Utilizing publicly available financial statements, students will calculate and interpret key financial ratios such as profitability (Gross Profit Margin, Net Profit Margin), liquidity (Current Ratio, Quick Ratio), and solvency (Debt Ratio). The analysis aims to assess the financial health, efficiency, and risk profiles of both companies, providing insights into their respective strengths and weaknesses.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Profitability measure along with calculation of Return to assets and Return to equity..........1
2. Liquidity measure along with calculation of current asset and quick or acid test ratio..........2
3. Debt measurement along with its debt and debt to equity ratio..............................................4
4. Comparing various ratios of both organizations along with its specific recommendations. . .5
5. Comparing on basis of industry average.................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
APPENDIX....................................................................................................................................10
Statement of financial position (Woolsworth)..........................................................................10
Statement of Profit and loss......................................................................................................11
Statement of financial position (westfarmers)..........................................................................12
Statement of Profit and Loss.....................................................................................................13

INTRODUCTION
Financial accounting is very important concept for every organization. The present report
is giving brief discussion about Woolsworth SA and Westfarmers Limited along with its
profitability, liquidity and solvency measures by comparing with its industry average. It had also
represented comparison of both companies for the purpose of buying shares. Further it had also
articulated its position for gaining position for investor or to buy shares.
1. Profitability measure along with calculation of Return to assets and Return to equity
Profitability ratio is referred as financial metrics which is used through investors and
analysts for evaluating and measuring capability of organization to generate profit with context
to balance sheet assets, shareholder’s equity and operating margin in specific duration. It
replicates that how organization optimises its assets for generating value and margin with
reference to shareholders. There is presence of various profitability ratios which are applied by
organizations for giving important insights with respect to financial performance and wellbeing
of specific business. The below stated table had measured organizations capability for generating
return with context to its shareholders through return on assets and equity (Shah, Gujar & Sohu,
2018).
Westfarmers Limited 30/06/17 Woolsworth SA
Profit after
tax 2873
Industry
average
Profit after
tax 1777
Shareholders
’ equity 23941
Profit after
tax/
Shareholder
equity Net worth 9526
Return on
Equity 12.00% 8.54%
Return on
Equity 18.00%
Net profit 2873 Net profit 1777
Total Assets 40115
Net Profit /
Total assets Total Assets 22916
Return on 7.16% 10.42% Return on 7.75%
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Assets Assets
Return on Equity: It justifies percentage of net profit which is linked to equity of
stockholders or rates with reference to return on money which had been adjusted in business
equity by investors. The above table is stating return on equity of Westfarmers Limited and
Woolsworth SA as 12% and 18% respectively. It could be stated that high ratio of ROE is
indicated as huge return on equity and has more capability for producing cash through internal
activity. On its contrary, there is less dependency on debt financing. Thus, it could be interpreted
that Woolsworth SA had more capability for generating return on equity with context to
Westfarmers Limited. The industry average is 8.54 which implies that both organization are
capable to exceed its average (Garrido, Verbeke & Bravo, 2018).
Return on Assets: It is replicated by its name that percentage of net earnings related to
total asset of organization. This particular ratio helps in signifying margin of tax which had been
generated by business entity on each dollar of asset which is held. The intensity of asset had been
also measured via business. The company is known as more asset intensive if profit per dollar
asset is low. As there is huge requirement of highly asset intensive for purpose of investments for
purchasing equipment and machinery for producing income. The above table is stating ROE of
Westfarmers Limited and Woolsworth SA as 7.16% and 7.75% respectively. Thus, the industry
average is 10.42 but both organizations are below its standards so there is requirement to operate
in effective aspect.
2. Liquidity measure along with calculation of current asset and quick or acid test ratio
Liquidity ratio helps in measuring organizations capability for paying its obligations of
short term debt. It could be performed through comparing its liquid assets and which can be
converted in cash in easy format along with its liabilities of short term. With reference to
fundamental analysis, these ratios are vital part as they identify capability of business entity to
service its debts. If organizations fail to pay debts then it might face bankruptcy or restructuring
for value of shareholder. The below stated table had used current and quick acid test ratio for
determining its liquidity position (Lestari & Riyadi, 2018).
Westfarmers Limited Woolsworth SA
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2017 30/06/17 2017
Industry
average
Current
Assets 9667
Current
Assets 6994
Current
liabilities 10417
Current
Assets /
Current
Liabilities
Current
liabilities 8824
Current
Ratio 0.92 2 1
Current
Ratio 0.79
Current
Assets 9667
Current
Assets 6994
inventories 6530 inventories 4080
prepaid
expenses 0
prepaid
expenses 334
Current
liabilities 10417
Current
Assets –
Inventories –
Prepaid
expenses /
Current
Liabilities
Current
liabilities 8824
quick ratio 0.25 1.2 : 1 quick ratio 0.29
Current ratio: It helps in measuring capability of organization to repay its liability of
short term debts and payables along with assets like cash, receivables and inventory. It reflects
proportion of current assets to current liabilities. Any organization has this specific ratio of less
than 1 which signifies that some current asset as compared to liabilities are termed as financial
risk for creditor perspective. If situation is vice versa such as more than 1 then it could liquidate
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its current assets in easy way for paying its liabilities of short term. The ideal ratio is 2:1 but both
organization are below so there is requirement for managing its liquidity position (Zhang, 2018).
Quick ratio: It is also referred as acid test ratio which replicates ratio of cash and
resources which are liquid in nature of a particular organization by comparing from its current
liabilities (Quick ratio, 2018). In simple words it could be justified as measuring of
organization's liquidity by reflecting capability to pay its current liabilities along with its quick
assets. It is known as indicator for short term liquidity of a particular business entity. Usually, if
it is greater than 1 then it reflects availability of sufficient quick assets for repayment of its
current liabilities. The current assets which could be transformed in cash in easy format are
referred as quick assets. The business entity which gives good quick ratio are directly favoured
through creditors. The above table is depicting quick ratio of Westfarmers Limited and
Woolsworth SA as 0.25 and 0.29 respectively.
3. Debt measurement along with its debt and debt to equity ratio
It is referred as solvency ratio which helps in measuring ability of business entity for
meeting its debt with its specific obligations (Che & et. al. 2018). It helps in indicating cash flow
of organization which must be sufficient for accomplishing its long and short term liabilities. It is
also known as leverage ratios as it helps in quantifying business entity's income after tax. It does
not consider expenses of non-cash depreciation which helps in contrasting sum of debt
obligations of organization. It plays huge contribution in analysis of financial ratio which helps
specific business owner for identifying survival on long term prospective (Debt Ratio, 2018).
There is presence of various solvency ratio which are generally used by auditors, corporate
analysts, shareholders, professional accountants for identifying solvency of organization. There
is extraction of debt and debt equity ratio of both Woolsworth SA and Westfarmers Limited for
determining solvency.
Westfarmers Limited Woolsworth SA
2017 30/06/17 2017
Total
Liabilities 16174
Total
Liabilities 13390
Total equity 23941 Total
Liabilities /
Total equity 9526
4

Total Equity
Debt to
equity ratio 0.67
Debt to
equity ratio 1.4
Total
Liabilities 16174
Total
Liabilities 13390
Total Assets 40115
Total
Liabilities /
Total assets Total Assets 22916
Debt ratio 0.4 Debt ratio 0.58
Debt Ratio: It is an indicator for solvency which is always represented in decimal format
as it extracts total liabilities as percentage of its total assets. Along with various solvency ratio, if
it is lower, then it becomes favourable as compared to ratio which is higher in this similar aspect.
The financial leverage had been calculated by this ratio and it reflects capability of organization
for repaying its liabilities through its specific assets. In simple words it justifies number of assets
that should be sold for paying it's all liabilities. If debt ratio is lower, then it represents that the
business is operating in a stable way. Its potentiality for longevity due to lower ratio has
decrement in debt. Generally, each industry has its specific benchmark but 0.5 is considered as
ideal ratio. Westfarmers Limited has 0.4 and Woolsworth SA as 0.58 of debt ratio (El-Osta,
2018).
Debt Equity ratio: It signifies specific proportion of asset of organization which are
directly financed via debt. It is referred as solvency ratio for long term perspective which shows
soundness of financial policies of same duration of business entity. The health of organization
had been examined as it is very critical for giving attention to ratio of debt equity. If there is
increment in debt equity ratio, then it is directly financed through creditors instead of owning
financial sources. It might be stated as trend which creates difficulty for business perspective If
debt equity ratio is high, then it signifies a presence of aggressive finance for purpose of growth
along with its debt. It could give outcomes as volatile earnings for expenses of additional
interests. The above scenario is depicting ratio of debt equity of Westfarmers Limited and
Woolsworth SA as 0.67 and 1.4 respectively (Rajpoot, 2018).
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4. Comparing various ratios of both organizations along with its specific recommendations
Westfarmers Limited Woolsworth SA
2017 2017
Current Ratio 0.92 0.79
Quick ratio 0.25 0.29
Return on Equity 12.00% 18.00%
Return on Assets 10.42% 7.75%
Debt to equity ratio 0.67 1.41
Debt ratio 0.40 0.58
Interpretation: The above table is giving brief comparison of various ratios of
Woolsworth SA and Westfarmers Limited. The above ratios are measuring liquidity, solvency
and profitability with its essential indicators. The liquidity of organization had been measured
through current and quick ratio. The ideal ratio is 2: 1 for current ratio as Westfarmers Limited
and Woolsworth SA both are not capable to achieve its standard so it could give special focus on
its current assets for repaying its current liabilities and to maintain its liquidity. In the same
series, it had justified quick ratio of both organization as 0.25 and 0.29 as its ideal ratio is 1:1
which signifies that there is requirement for maintaining its quick assets for short term liabilities
(Iqbal & Usman, 2018).
The profitability of both Westfarmers Limited and Woolsworth SA had been measured
through return on equity and asset. Woolsworth SA is giving huge return with reference to equity
as 18% which is higher than West farmers as 12%. In the same series, its return on asset had
been given through Westfarmers Limited as 10.42% which is higher than 7.75% as Woolsworth
SA. The organization should keep proper watch on its assets for getting good return on assets
with context to its profitability.
The solvency of both organizations had been indicated through debt and debt to equity
ratio. While comparing debt to equity ratio, Westfarmers Limited is performing in appropriate
aspect as it has 0.67 and on its contrary, Woolworth is highly reliable on debt with 1.41. It should
6

balance its debt and equity because it refers to huge threat to its organization. In the same series,
its debt ratio Westfarmers Limited is not performing very well as compared to Woolsworth SA.
Thus, Woolsworth gives huge return on equity so it is referred as good for buying shares (Blitz &
et. al., 2018).
5. Comparing on basis of industry average
Westfarmers Limited Woolsworth SA Industry average
Current Ratio 0.92 0.79 2
quick ratio 0.25 0.29 1.21
Return on Equity 12.00% 18.00% 10.42
Return on Assets 10.42% 7.75% 8.54
Debt to equity ratio 0.67 1.41 3.5
Debt ratio 0.40 0.58 4.2
Interpretation
Current Ratio
Both organization are not performing in
efficient aspect with context of industry
average.
Quick ratio
Both organization are not performing in
efficient aspect with context of industry
average.
Return on Equity
Both organization are performing in efficient
aspects with context of industry average.
Return on Assets Westfarmers Limited is performing efficiently
as compared to its industry average but there is
requirement for improvement for Woolsworth
7

SA.
Debt ratio and Debt to equity ratio
As compared to industry average, both
organization has low gearing ratio via debt and
debt to equity ratio.
CONCLUSION
From the above report it had been concluded that financial accounting plays very
important role for knowing its position along with its performance and stability. It had been
articulated that Woolsworth SA is performing well in context of return on equity which is highly
preferable for buying of shares.
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REFERENCES
Books and Journals
Blitz, D. & et.Al., (2018). Equity Solvency Capital Requirements: What Institutional Regulation
Can Learn from Private Investor Regulation.
Che, X. & et. al. (2018). The effect of growth opportunities on the market reaction to dividend
cuts: evidence from the 2008 financial crisis. Review of Quantitative Finance and
Accounting. 51(1). 1-17.
El-Osta, H. S. (2018). Strategies to Manage Risk and their Role in Impacting Economic
Performance among Farm Households. Applied Economics and Finance. 5(2). 49-64.
Garrido, F., Verbeke, W., & Bravo, C. (2018). A Robust profit measure for binary classification
model evaluation. Expert Systems with Applications. 92. 154-160.
Iqbal, U., & Usman, M. (2018). Impact of Financial Leverage on Firm Performance. SEISENSE
Journal of Management. 1(2). 70-78.
Lestari, S. D., & Riyadi, S. (2018). The Effect of Firm Size, Financial Leverage, and Profitability
on Investment Opportunities Set Policy and Its Implications on Accounting
Policy. Advanced Science Letters. 24(4). 2342-2346.
Rajpoot, S. (2018). To Analyze the Long Term Position of Selective Ssis in Vidisha District to
Assess the Importance of Finance Management Techniques as Tools That Help Us to
Know If the Small Scale Industry Is Really Winning. Management and Economic
Journal, 84-92.
Shah, B., Gujar, M. A., & Sohu, N. U. (2018). The Impact of Working Capital Management On
Profitability: Case Study of Pharmaceutical and Chemical Firms Listed On Karachi Stock
Exchange. International Journal of Economics, Commerce and Management, 200-220.
Zhang, J. (2018). An Investigation of the Return Risk and Liquidity Measure for Chinese Open-
Ended Funds. International Journal of Organizational and Collective Intelligence
(IJOCI). 8(3). 13-30.
Online
Debt Ratio. 2018. [Online] Available through:<https://www.myaccountingcourse.com/financial-
ratios/debt-ratio>
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Quick ratio. 2018. [Online] Available
through:<http://www.ccdconsultants.com/calculators/financial-ratios/quick-ratio-
calculator-and-interpretation?tab=interpretation>
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APPENDIX
Statement of financial position (Woolsworth)
11

Statement of Profit and loss
12

Statement of financial position (Westfarmers)
13