Analysis of Financial Statements for Wesfarmers Limited

This report provides a detailed financial analysis of Wesfarmers Limited, an Australian conglomerate company. The report includes the calculation and analysis of performance ratios such as short-term and long-term solvency, asset utilization, profitability ratios, and market value ratios. It also presents a graphical portrayal and comparison of past share prices with the market index along with the assessment of organization's stock value. The report concludes with a recommendation and conclusion based on the analysis performed.

RUNNING HEAD: BUSINESS FINANCE
Analysis of financial statements

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Contents
Introduction.................................................................................................................................................3
Company’s overview...................................................................................................................................3
Calculation and analysis of performance ratios...........................................................................................4
Short term solvency.................................................................................................................................4
Long term solvency.................................................................................................................................6
Asset utilization.......................................................................................................................................8
Profitability ratios....................................................................................................................................9
Market value ratios................................................................................................................................11
Graphs and comparison of share price movements....................................................................................12
Share valuation..........................................................................................................................................13
Recommendation and Conclusion.............................................................................................................14
References.................................................................................................................................................15

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Introduction
The report talks about the overall analysis of Wesfarmers Limited’s financial performance for
the past two years. The financial statements, share price trends and value of stock have been
analyzed in the whole report. Constant Dividend Growth Rate Model is applied to figure out the
value of company’s stock and then the same is compared to its current share price. It gives a
short overview about the organization selected, featuring its core activities, competitive
advantages and depicting the market in which it works. In the later part, performance ratios or
financial metrics are been computed which reflect the overall performance and position of
Wesfarmers in the past two years that are 2016 and 2017.
The report also presents graphical portrayal and comparison of past share prices with the market
index along with the assessment of organization's stock value. The purpose of the report is to
determine that whether the chosen company is monetary sound or not. In the last, a suggestion
and conclusion is given which summarizes the result of the analysis performed. It gives bits of
knowledge about the financial performance and position of Wesfarmers in 2016 and 2017.
Company’s overview
Wesfarmers Limited is an Australia based conglomerate company which deals in several types of
business consists of supermarkets, office supplies, coal products, fertilizers and many others. The
company was founded in 1914 and is listed on ASX with a symbol ASX: WES. It is considered
as the largest private employer across the country. Wesfarmers operates through segments named
as Coles, Home Improvement, Department stores including Kmart and Target, WIS and
WesCEF and others. The division Coles is a supermarket dealer having more than 770

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supermarkets; Home Improvement provided outdoor living products in Australia and New
Zealand. According to the annual report of 2017, the company has made revenue amounted to
$6.44 billion and profit worth $2.87 billion (Bloomberg. 2018).
The competitive advantage of Wesfarmers is its Kmart division which is delivering products at
reasonable prices and has maintained the style and quality of the services. Moreover, the
company is focused on keeping Coles highly competitive despite of the Woolworth’s billion
dollar investment in prices. In addition the sale of coal and competent float of Officeworks can
deliver more earnings to the company (SMH. 2017). According to the last year report of Deloitte,
Wesfarmers and Woolworths are the only two retailers that appeared in the list of top 250
retailers around the globe. Wesfarmers was ahead of Woolworth because of its constant growth
in Bunning brand and exit of WOW’s Home Improvement segment. The company has one a
major contribution to the retail industry of Australia (Deloitte. 2017). However, as per the report
of KPMG the retail sector of Australia is facing disruption due to the changes in customer
preferences and entrance of overseas businesses with a new approach of retailing. The future of
retail industry requires more multiplicity of delivery platforms to ensure that every requirement
is met. All such can easily impact the performance of Wesfarmers (KPMG. 2018).
Calculation and analysis of performance ratios
Short term solvency
 Current ratio: It is one of the liquidity ratios which determine the probability of the
organization in satisfying its present liabilities by utilizing its current resources. The ideal
ratio is 2:1 which implies that the current assets should be twofold of liabilities in order to
meet all the obligations efficiently and effectively (Saleem and Rehman, 2011).

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The CR of Wesfarmers remains the same in both the years. It was 0.93 in 2016 and 2017. This
was due to the proportionate change in the current assets and current liabilities of the company.
Both reduced to the same extent which eventually kept the ratio same. An increase in creditors
and decrease in short term debt bring an overall fall in company’s CLs. On the other side,
slightest change in receivables and inventory reduces the CA as a whole (Wesfarmers. 2017).
Current ratio 2016 2017
Current assets (A) 9684 9667
Current Liabilities (B) 10424 10417
CR (A/B) 0.93 0.93
 Quick ratio: It is another metric which reflects the financial health of the company. It is
also a liquidity ratio which determines the competency of the firm by considering the
most liquid resources such as cash and marketable securities and comparing them against
the firm’s current obligations. The perfect proportion is 1:1 which is to be kept up by
each firm (Bragg, 2012).
The QR of Wesfarmers has increased from 0.25 to 0.30 in 2017. This was due to a significant
rise in company’s quick assets from $2589 million to $3137 million. The cash balance of the
company increased due to the remarkable performance of its segments like Kmart and Target.
The rise in amount from $611 million to $1013 million leads to an upsurge in Wesfarmer’s ratio.
Quick ratio 2016 2017
Quick assets (A) 2589 3137
Current Liabilities (B) 10424 10417
QR (A/B) 0.25 0.30

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Long term solvency
 Debt-Equity ratio: It is a financial metric utilized for estimating the long term solvency
position of the organization. It gauges the part of company's obligation against the value
of its equity. A high D/E proportion shows high financial risk and high dependency of the
firm on outside borrowings (Bragg, 2012).
In case of Wesfarmers Limited, the ratio reduced to a great extent as it was 32% in 2016 which
falls to 23% in 2017. This was due to the huge decrease in company’s debt component from
$7303 million to $5413 million. Out of this, long term obligations $5671 million in 2016 which
declined to $4066 million in 2017. Furthermore, its short term debt also reduces which overall
make the ratio to fall. On the other side, the equity of the company rises leaving a positive impact
on the ratio.
Debt-equity
ratio 2016 2017
Debt (A) 7303 5413
Equity (B) 22949 23941
D/E (A/B) 32% 23%
 Debt ratio: Another metric which decides the financial solvency of the organization for
longer term. It looks at the aggregate liabilities and aggregate resources of the
organization against one another. Overall, it decides the degree of organization's leverage
and demonstrates the value of assets that are financed through obligation (Gibson, 2011).

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Same trend has been observed in the debt ratio of Wesfarmers as it reduced from 44% to 40%.
The annual report of the company suggested that it has paid off many of its liabilities in the last
year with the help of its assets. This reduced its overall obligations and reflected that company
now depends more on equity rather than on debt.
Debt ratio 2016 2017
Total liabilities
(A) 17834 16174
Total assets (B) 40783 40115
DR (A/B) 44% 40%
 Interest coverage ratio: It demonstrates the ability of the firm to meeting its interest cost
with its EBIT much of the time and on time. A high and enhanced ICR is good for the
entity as it reflects that it is sufficiently equipped to meet its finance costs on time with its
income before interest and tax (Higgins, 2012).
The ICR of the company increased from 12.27 times to 17.74 times last year showing a strong
solvency position for the long term. This upsurge was because of the significant reduction in
company’s interest expense as its debt has been reduced. Moreover, the EBIT of Wesframers
increased due to high revenue and earnings generated by its segments like Kmart. All such
events enhance the ratio and make the company financially strong.
Interest coverage ratio 2016 2017
EBIT (A) 3778 4683

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Interest expense (B) 308 264
ICR (A/B) 12.27 17.74
Asset utilization
 Inventory turnover ratio: It is a productivity ratio that shows how productively and
rapidly an organization can change over its inventories into money. It is computed by
isolating company's COGS with the estimation of average stock. A high ratio indicates
that company is efficient enough to convert its inventory into cash with an ease (Jenter
and Lewellen, 2015).
The ITR of Wesfarmers has slightly reduced from 7.74 times to 7.25 times during the last year.
This was because of the increase in company’s inventory as well as in its cost of goods sold. The
value of stock rises from $5878.5 million to $6395 million. Similarly, COGS also increased that
brings an overall reduction in the ratio (Wesfarmers. 2017).
Inventory turnover
ratio 2016 2017
COGS (A) 45525 46359
Average inventory (B) 5878.5 6395
ITR (A/B) 7.74 7.25
 Debtor turnover ratio: This proportion measures the possibility of the firm in dealing with
its receivables. It demonstrates the amount of turnover produced by the organization by
changing over its account holders into money (Kimmel, Weygandt and Kieso, 2010).

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The same trend was there in DTR of WES as it falls from 42.39 times to 41.71 times.
Although the revenue of the firm has increased but the proportionate change or rise in
company’s average receivables has reduced the ratio. This shows that company is not as
much efficient as it has to be in collecting money from its debtors.
Receivable turnover
ratio 2016 2017
Total revenue (A) 65512 68015
Average debtors (B) 1545.5 1630.5
DTR (A/B) 42.39 41.71
 Asset turnover ratio: Another metric which demonstrates value of income produced by
the aggregate resources of the organization. A high proportion is thought to be good for
the firm. It shows how efficiently a firm manages its assets for the purpose of generating
high revenue (Nikolai, Bazley and Jones, 2009).
In case of Wesfarmers, the ATR has shown a reverse trend as it increased from 1.61 times to
1.68 times. This was due to the overall reduction in company’s average total assets and upsurge
in the revenue which boosted up the ratio. The sale of property, plant and equipment also
contributed to the high turnover of the firm (Wesfarmers. 2017).
Asset turnover ratio 2016 2017
Total revenue (A) 65512 68015
Average total assets (B) 40592.5 40449
ATR (A/B) 1.61 1.68

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Profitability ratios
 Net profit ratio: It is a performance metrics which reflects the overall profitability of the
association. It gauges the measure of net benefit against the organization's aggregate
income for the specific timeframe (Lee, Lee and Lee, 2009).
The NPR of Wesframers has increased from 1% to 4% in 2017 due to the high profits reported
by the company last year. The fall in profits in 2016 was offset by the increase in earnings from
Kmart, Industrial businesses and Bunning in Australia and New Zealand. Moreover, reduced
losses in Target also contributed to high profit margin (Wesfarmers. 2017).
Net profit
margin 2016 2017
Net profit (A) 407 2873
Total Revenue (B) 65512 68015
NPR (A/B) 1% 4%
 Return on Assets: It shows the amount of return produced by the company on the
resources employed by it in the business. A high ROA is considered to be more
favorable.
Return on
assets 2016 2017
Net profit (A) 407 2873
Total Assets (B) 40783 40115
ROA (A/B) 1.0% 7.2%

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The ROA also shows the same trend as it increased from 1% to 7.2%. This huge upsurge was
due to high profits and significant reduction in company’s total assets.
 Return on equity: This proportion mirrors the measure of return offered by the
organization to its investors on their capital invested by them into the firm. A high ROE
implies high productivity and returns (Parrino, Kidwell and Bates, 2011).
Wesfarmer’s ROE also reflected high profitability for the company as it increased from 1.8% to
12%. The only reason for such high return was the huge amount of profits made by the company
last year. This allows them to give high returns and dividends to its shareholders, thus increasing
its owners’ equity. Moreover, reduction in financial risk has also attracted a lot of investors
towards Wesframers (Wesfarmers. 2017).
Return on equity 2016 2017
Net income (A) 407 2873
Shareholders' equity (B) 22949 23941
ROE (A/B) 1.8% 12.0%
Market value ratios
 Earnings per share: It is one of the metric which indicates both the market performance
and profitability of the company. It shows the amount of profit attributable to each
outstanding share of the company (Bragg, 2012).
The EPS of Wesfarmers has increased from 0.36 cents to 2.54 cents. Such increase was due to
the rise in company’s net profit as well as upsurge in its number of shares outstanding. The

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growth in EPS reflected that Wesfarmers is performing well and is making more money for its
shareholders.
Earnings per share 2016 2017
Net income (A) 407 2873
Number of shares
(B) 1123 1130
EPS (A/B) 0.36 2.54
 Price earnings ratio: It shows the intention of the investor in paying the amount for each
dollar of earnings. It is also known as price multiple (Higgins, 2012).
The P/E ratio of Wesfarmers was $97.92 in 2016 that increased to $14.62 in 2017. This was due
to the upsurge in its EPS as well as in the market price of company’s share. A high P/E indicates
that investors are expecting growth in future and can have the opportunity to book high profits by
selling their shares at increased price. Overall, it reflected the Wesfarmer’s shares are performing
well in the market.
Price earnings ratio 2016 2017
Market price (A) 35.49 37.18
EPS (B) 0.36 2.54
P/E (A/B) 97.92 14.62

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Graphs and comparison of share price movements
1/05/2015
1/07/2015
1/09/2015
1/11/2015
1/01/2016
1/03/2016
1/05/2016
1/07/2016
1/09/2016
1/11/2016
1/01/2017
1/03/2017
1/05/2017
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Share price movements
Average return (WES) Average return (market)
Months
Returns
(Source: Yahoo Finance. 2018).
The above graph shows the share price movements of Wesfarmer’s stock in the past two years
and compares the same with the fluctuations in market return. It shows huge variances in the
average return of the Wesfarmers while the market remains constant in contrast with it. In
starting of 2015, the returns of the company were negative where as the market was positive.
Additionally, when the company delivered high return of 9.24% at the end of 2015, the market
was at low pace. It tends to be seen that in the beginning of 2016, the organization has high
negative returns as contrast with the market returns. Likewise, when WES reflected positive
returns, the market was going down and getting to be negative. Later in mid of 2017, the shares
of Wesfarmers conveyed high and positive returns though the market was as yet negative.
Therefore, it can be said that the performance of company’s stock is not deeply affected by the
market.

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Share valuation
According to the Constant Dividend Growth rate model, the value of Wesfarmer’s stock is
$44.60 which is less than its current share price of $49.84. This means that the share price of the
company will fall in future and the share is overvalued. The reason for such variance is that
Wesframers has outperformed the market and have enough resources to produce sufficient
returns. It indicates that investors have opportunities to earn high profit by selling out there
shares toady and purchasing the same in future.
Dividend growth rate (A) 4%
Required rate of return (B) 9%
Current share price $ 49.84
Dividend per share (C) 2.23
Value of stock [C/(B-A)] $ 44.60
Recommendation and Conclusion
From the above report, it will be recommended to investors that they should invest in
Wesfarmers as the company has performed well in past year. It has improved its performance
and position in financial terms. High profitability and liquidity position will allow the company
to give high returns to its investors. Moreover, it has low debt portion and low financial risk.
Overall, it can be concluded that the company is doing well and is fundamentally financial
healthy. It is focused on enhancing its segmental performance and looking forward to attract
more investors.

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References
Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New
Jersy: John Wiley & Sons.
Bloomberg (2018).Company Overview of Wesfarmers Limited.[Online]. Available at:
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=875660 [Accessed
24 September 2018].
Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley & Sons.
Deloitte (2017). 2017 set to be ‘fascinating’ year for Australian retail. [Online]. Available at:
Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage
Learning.

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Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
https://www2.deloitte.com/au/en/pages/media-releases/articles/2017-set-to-be-fascinating-year-
for-australian-retail-240117.html [Accessed 24 September 2018].
Jenter, D. and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of
Finance, 70(6), pp.2813-2852.
Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for
business decision making. New Jersy: John Wiley & Sons.
KPMG (2018). Future of retail in Australia. [Online]. Available at:
https://home.kpmg.com/au/en/home/insights/2018/04/bernard-salt-next-5-years-retail-future-
australia.html [Accessed 24 September 2018].
Lee, A. C., Lee, J. C., and Lee, C. F. (2009). Financial analysis, planning and forecasting:
Theory and application. Singapore: World Scientific Publishing Co Inc.
Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage
Learning.
Parrino, R., Kidwell, D. S. and Bates, T. (2011).Fundamentals of corporate finance. USA: John
Wiley & Sons.
Saleem, Q. and Rehman, R.U. (2011). Impacts of liquidity ratios on
profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
SMH (2017). Wesfarmers vows Coles will be competitive forever. [Online]. Available at:
https://www.smh.com.au/business/companies/officeworks-for-sale-as-wesfarmers-looks-to-cash-
in-20170214-gud0f8.html [Accessed 24 September 2018].

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Wesfarmers (2017). Annual Report.[Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed 24 September 2018].
Yahoo Finance (2018).Wesfarmers Limited (WES.AX.). [Online]. Available at:
https://au.finance.yahoo.com/quote/WES.AX?p=WES.AX [Accessed 24 September 2018].