Financial Analysis

This report analyzes the financial statements of Woolworths and Wesfarmers using ratio analysis. It examines profitability, liquidity, solvency, efficiency, CAPM, and earnings multiplier. The report concludes that Wesfarmers is performing better than Woolworths.

Running Head: FINANCIAL ANALYSIS 0
Financial Analysis

FINANCIAL ANALYSIS 1
Abstract
The below report is prepared with the aim to understand the analysis of the financial
statements of the Woolworths and Wesfarmers limited. In order to analyse the position of
each company along with the inter comparison the ratio analysis technique was used to arrive
at the conclusion. The most dominant company is the Wesfarmers in comparison to the
Woolworths after analysing the ratio as well as the cost of capital that have been calculated
using the capital asset pricing model and price earnings ratio.

FINANCIAL ANALYSIS 2
Table of Contents
Abstract.................................................................................................................................................2
Overview and the primary lines of business..........................................................................................4
Ratio Analysis.......................................................................................................................................4
Profitability............................................................................................................................................5
Gross profit....................................................................................................................................5
Net profit.......................................................................................................................................6
Return on total assets.....................................................................................................................6
Return on Equity............................................................................................................................6
Liquidity & Solvency............................................................................................................................7
Current Ratio.....................................................................................................................................7
Quick Ratio.......................................................................................................................................8
Debt to assets ratio.............................................................................................................................8
Interest coverage Ratio......................................................................................................................8
Efficiency..........................................................................................................................................9
CAPM...................................................................................................................................................9
Earnings multiplier..............................................................................................................................10
Conclusion...........................................................................................................................................11
References...........................................................................................................................................12
Appendix.............................................................................................................................................14

FINANCIAL ANALYSIS 3
Overview and the primary lines of business
Woolworths is the biggest Australian based company which came into existence on
1924 in the month of September having its headquarters at Bella Vista, New South Wales
Australia. The commonly known as Woollies is an Australian supermarket chain owned by
Woolworths Limited Group. The friendship with the Coles determines the duopoly of
Australian supermarkets and grabs almost 80% of the share. Woolworths mostly specialises
in selling the groceries however they also sell magazines, health and beauty care products.
The current revenue of the company is A$56.726 billion and the company is progressing with
a team of 115000 members (Woolworths, 2018).
In competition to the Woolworths is the Wesfarmers, an Australian Conglomerate
dealing in chemicals fertilisers, coal mining and the industrial as well as the safety products.
Michael Chaney and Rob Scott are the key people who are involved in making the
Wesfarmers a top notch company. The company is operating with a team of 223000
employees and placed revenue of A$68.44 billion for the financial year 2018. Currently the
Wesfarmers are ahead of the Woolworths on the basis of thee revenue but the information
alone will not be helpful in determining which company is best (Wesfarmers, 2018).
Ratio Analysis
Ratio analysis is the technique which is adopted by the management as a tool to make
sure that company is performing in alignment with the gaols set by the company. The
financial performance for the company can be assessed by this tool in terms of different
categories. May it be the profitability, efficiency, solvency or the liquidity of the company,
the performance is measured in all the areas. This tool is not only sued by the management
but also used by the investors and the shareholders to assess the capacity of the firm on the

FINANCIAL ANALYSIS 4
basis of these criteria. Below is the ratio analysis technique used for the two companies
namely the Woolworths and Wesfarmers (Uechi, et al 2015).
Profitability
The profitability ratios are the class of the metrics used by the management to
measure the financial performance of the business. These ratios are the critically successful in
determining the data and the ability of the company whether the company is profitable or not.
Generally the gross profit, net profit, return on total assets and return on equity is calculated
under this category (Williams & Dobelman, 2017).
Gross profit
Gross profit is the major ratio that determines the gross margin which does not
involve any type of the costs. In accounting period, the gross profit is the ratio that
determines the difference between the revenue and the cost of goods sold. The major reason
is to determine the incremental sales and to guide the promotion and the pricing strategy. The
ratio of the Woolworths and the Wesfarmers is 27% and 31% respectively. The competition
is high and the Wesfarmers are performing well and it can be said as the cost of goods sold
ratio is 69% whereas that of Woolworths is crossing 73% which is a signal to the company
that the immediate actions are required to curb it (Robinson, Henry, Pirie & Broihahn, 2015).
Profitability
Ratios
Return on total assets
EBIT 2% 2%
Sales
Rate of return on ordinary equity
Net income - preferred dividends -7% 1%
Average ordinary shareholders equity
Operating profit Margin
EBIT * 100 2% 2%
Sales
Gross profit

FINANCIAL ANALYSIS 5
margin
Gross profit 27% 31%
Sales
Net profit
The net profit margin of the both the companies are low and the heavy impact is
because of the heavy interest cost specially the minority interest cost. The expenses of the
Woolworths are crossing their limit and this is the peak time where the company must pay
attention to the unnecessary costs. The other operating expenses costs $12033100 which are
almost 20% of the sales and thereafter the selling expenses are also around 22% acting as a
red flag for the company. The management must focus on having a proper net margin to
stabilize the operations. Overall Wesfarmers are in lead than the Woolworths and an investor
must invest in Wesfarmers by figures and the relative operations as well (Boyas & Teeter,
2017).
Return on total assets
Return on total assets of the company is almost same and this can be of core
importance for the both the companies as both needs to improve the ratio. The return on total
assets of Woolworths as well as the Wesfarmers is considered a critical one at 2%. To
improve the ratio the company must reduce the costs of assets, reducing expenses. Though
the Wesfarmers is the first choice yet the company must secure the ratio (Grant, 2016).
Return on Equity
The return on equity is the ratio which showcases the relationship between the
profitability and the equity of the business. ROE is a measure of the how well the earnings of
the company use the investment to generate the earnings of the growth. The return on equity
of the Woolworths and Wesfarmers are -7% and 1%. The negative position of the
Woolworths reflects a critical position because this increases as the financial leverage. To

FINANCIAL ANALYSIS 6
improve the return of the equity increase profit margins, improve the asset turnover ratio the
idle cash shall be distributed and this shall lower down the taxes (Khan & Ali, 2016).
Liquidity & Solvency
Solvency ratio is the key metric used to measure an enterprise ability to meet its debt
obligations and the same is used by the prospective business lenders. The solvency of the
company is necessary to measure and gets an overall understanding of whether the cash flows
are enough to meet the obligations pending on the side of the company. On the hand the
liquidity of the company shall also be scrutinised so that the investors can get an insight of
how liquid is the firm (Chan-Lau, et al 2017).
Liquidity and Solvency
Ratios
Woolwort
hs
Wesfarme
rs
Current Ratio
Current assets 0.83 0.93
Current Liabilities
Quick Ratio
Quick assets 0.15 0.21
Current Liabilities
Debt to assets ratio
Debt 0.26 0.18
Total assets
Interest coverage ratio
EBIT 5.54 3.37
Interest Expense
Current Ratio
Current Ratio is the ratio that defines the relationship between the current assets and
the current liabilities. The ideal current ratio of the company is 2:1 and when compared with
each other the current ratio of the Woolworths and the Wesfarmers is 0.83 and 0.93
respectively. The current ratio of both the organisations needs to be in alignment with the
ideal ratio. To improve the current ratio, the focus of the company shall be on reducing the

FINANCIAL ANALYSIS 7
obsolete assets and the current liabilities shall be replaced with the long term liabilities. In
order to be sufficient and stable the current ratio of the company must be stable (Boyas &
Teeter, 2017).
Quick Ratio
The Quick ratio also known as the acid test ratio is a metric used to reflect how well
the companies are able to generate the cash as fast as possible so that the contractual
obligations can be paid on time. The Quick ratio of the Woolworths and Wesfarmers are 0.15
and 0.21. Usually the quick ratio is 1:1 and as can be seen the companies have not performed
well and the major reasons are the poor inventory ratio that needs immediate action
(Wesfarmers, 2018).
Debt to assets ratio
The Company’s financial leverage can be indicated with the use of the debt to asset
ratio. The percentage of the financial assets that are covered through the creditors and the
other short terms as well as long term liabilities can be easily found out. The debt to total
assets of the Woolworths and Wesfarmers are 0.26 and 0.18, where the lower the better is the
golden rule. Hence an investor must invest in the Wesfarmers (Wesfarmers, 2018).
Interest coverage Ratio
Interest coverage ratio also known as time coverage ratio is able to reflect the ability
of the company to pay back the costs of interest with the help of the earnings earned by the
company. Currently the interest coverage ratio of the company is 5.54 and 3.37 for the
Woolworths and Wesfarmers respectively. Though the Woolworth has the ability to settle
first yet the Wesfarmers can still improve by financing more with the help of the equity
(Woolworths, 2018).

FINANCIAL ANALYSIS 8
Efficiency
Efficiency ratios of the company are calculated to determine how well the company is
able to realise the cash through efficient means while selling the inventory how well the
creditors are paid. This basically relates to the optimum utilisation of cash (Olesen, Petersen,
& Podinovski, 2015.
Operating Efficiency
Woolwort
hs
Wesfarme
rs
Inventories turnover
period
Inventory * 365 38.99 50.19
Cost of goods sold
Fixed Assets Turnover
Ratio
Fixed Assets 0.30 0.24
Sales
Total Assets Turnover
Ratio
Total assets 1.07 2.04
Revenue
The inventory turnover ratio of the Woolworths is 38.99 days whereas that of the
Wesfarmers is 50.19. The fixed assets turnover ratio of the Woolworths is 0.30 and
Wesfarmers is 0.24. These two ratios scans how well the assets are used to generate the
revenue and the how early the inventories could be sold to realize cash and pay the current
liabilities immediately. The efficiency is necessary to ensure that the company maintains a
good conversion cycle and the company may not face cash crunch or negative working
capital ever (Woolworths, 2018).

FINANCIAL ANALYSIS 9
CAPM
In order to find out whether the stock is overvalued or undervalued the two models
are used to clarify which company is better.
Capital Asset pricing model is a tool that helps the investors in forming a classified as
well as the diversified portfolio. The required returns at which the assets shall be added are
assessed using this model. The relationship between the systematic risks as well as the
expected risk is determined clearly. The cost of capital of the Woolworths and the
Wesfarmers are defined below (Fabrizio, 2017).
CAPM MODEL
WOOLSWORTH
CAPM MODEL
WESFARMERS
Risk free rate of Return
2.27
% Risk free rate of Return
2.27
%
Beta 0.72 Beta 1.02
Expected return on Market
6.20
% Expected return on Market
6.20
%
Expected Return
5.10
% Expected Return
6.28
%
Since the return exceeds the CAPM in case of the Woolworths, the stock is
undervalued. The stock price of the Wesfarmers on the other hand is overvalued as the
CAPM is more. The investors’ shall invest in Woolworths as the stock price is undervalued
however, keeping in mind the other factors as well the company any opt Wesfarmers if the
expected return in lower (Furman & Zitikis, 2017).
Earnings multiplier
The earnings multiplier is also known as the price to earnings ratio is a valuation
method that determines the relationship between the current price and it’s per share earnings.

FINANCIAL ANALYSIS 10
The earnings multiplier is a crucial and the powerful tool as it helps the investors to get a
quick insight of the finances of the company without being digging into the entire accounting
period. The PE Ratio of Woolworths and Wesfarmers are calculated below (Serrato &
Wingender, 2016).
Market
Performance
Woolworth
s
Wesfarmer
s
Earnings per share
Net profit
after tax -14.58 1.77
No of shares outstanding
Price earnings ratio
Price per share 24.1 32.7
Price per
share -14.58 1.77
EPS
-1.65 18.44
This tool determines whether the stock in undervalued or overvalued with respect to
each other and also with regard to S&P 500 at times. The higher the earnings multiplier the
higher returns are expected from the investors and vice versa. The P/E Ratio clearly is
positive in case of the Wesfarmers and the negative in case of the Woolworths. The stock in
over valued in case of the Wesfarmers yet the returns will be progressive (Gregory, Whittaker
& Yan, 2016).
Conclusion
From the above analysis it can be stated that the Wesfarmers is performing
consistently well in all the areas, on the other hand the Woolworths is lower at various levels
and moreover the company needs support and needs to improve otherwise they will fall into
the sick units. Further from the perspective of the investors the Wesfarmers will be an
appropriate choice.

FINANCIAL ANALYSIS 11

FINANCIAL ANALYSIS 12
References
Boyas, E., & Teeter, R. (2017). Teaching Financial Ratio Analysis using XBRL.
In Developments in Business Simulation and Experiential Learning: Proceedings of
the Annual ABSEL conference (Vol. 44, No. 1).
Chan-Lau, M. J. A., Lim, C. H., Rodríguez-Delgado, J. D., Sutton, M. B. W., & Tashu, M.
(2017). Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to
Latin America. International Monetary Fund.
Fabrizio, D. S. (2017). Is the CAPM valid? An Empirical Analysis in USA Stock Exchange.
Furman, E., & Zitikis, R. (2017). An adaptation of the classical CAPM to insurance: the
weighted insurance pricing model. In Casualty Actuarial Society E-Forum, Spring
2017.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley &
Sons.
Gregory, A., Whittaker, J., & Yan, X. (2016). Corporate social performance, competitive
advantage, earnings persistence and firm value. Journal of Business Finance &
Accounting, 43(1-2), 3-30.
Khan, R. A., & Ali, M. (2016). Impact of Liquidity on Profitability of Commercial Banks in
Pakistan: An Analysis on Banking Sector in Pakistan. Global Journal of Management
And Business Research.
Olesen, O. B., Petersen, N. C., & Podinovski, V. V. (2015). Efficiency analysis with ratio
measures. European Journal of Operational Research, 245(2), 446-462.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Serrato, J. C. S., & Wingender, P. (2016). Estimating local fiscal multipliers. National Bureau
of Economic Research.
Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector
dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and
its Applications, 421, 488-509.
Wesfarmers, (2018). Annual Report. Retrieved from
https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-
annual-report.pdf?sfvrsn=0
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific
Book Chapters, 109-169.

FINANCIAL ANALYSIS 13
Woolworths, (2018). Annual Report. Retrieved from
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf

FINANCIAL ANALYSIS 14
Appendix
Fiscal year ends in June. AUD in thousands except per share data.
Woolworth
s
Wesfarmer
s
Revenue 58275500 65512000
Cost of revenue 42676700 45525000
Gross profit 15598800 19987000
Operating expenses
Sales, General and administrative 12964000 12850000
Other operating expenses 12033100 3359000
Total operating expenses 24997100 16209000
Operating income -9398300 3778000
Interest Expense 245600 308000
Other income (expense) 11003500 -2432000
Income before income taxes 1359600 1038000
Provision for income taxes 519500 631000
Minority interest -1113100
Other income -1113100
Net income from continuing operations 840100 407000
Net income from discontinuing ops -3188000
Other 1113100
Net income -1234800 407000
Net income available to common shareholders -1234800 407000
Fiscal year ends in June. AUD in
thousands except per share data. Woolworths
Wesfarmer
s
Assets
Current assets
Cash
Cash and cash equivalents 948100 611000
Total cash 948100 611000
Receivables 433500 1628000
Inventories 4558500 6260000
Prepaid expenses 330400 835000
Other current assets 1156500 350000
Total current assets 7427000 9684000
Non-current assets
Property, plant and equipment
Land 1435500 2552000
Fixtures and equipment 13937000 12860000
Other properties 3627900 2678000
Property and equipment, at cost 17564900 15538000
Accumulated Depreciation -10737600 -8478000
Equity and other investments 108500 605000
Goodwill 3637300 14448000

FINANCIAL ANALYSIS 15
Intangible assets 2341000 4625000
Deferred income taxes 1110000 1042000
Other long-term assets 615600 767000
Total non-current assets 7812400 31099000
Total assets 16674900 40783000
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 490300 1632000
Capital leases 400 6491000
Accounts payable 4809100 29000
Deferred income taxes 39500 2272000
Other current liabilities 3653400
Total current liabilities 8992700 10424000
Non-current liabilities
Long-term debt 3868000 5671000
Capital leases 2900 180000
Pensions and other benefits 165400 1559000
Minority interest 311300
Other long-term liabilities 1691300
Total non-current liabilities 6038900 7410000
Total liabilities 15031600 17834000
Stockholders' equity 874000
Common stock 5252200 21909000
Other Equity -68800 166000
Retained earnings 3124500 874000
Accumulated other comprehensive
income 162700
Total stockholders' equity 8470600 22949000
Total liabilities and stockholders' equity 23502200 40783000