Financial Analysis of Wesfarmers and Woolworths Ltd

The report analyses the financial statements of Wesfarmers and Woolworths Ltd for the years 2016 and 2017. It includes an introduction to both companies, their positioning in the industry, and a detailed analysis of their income statement, balance sheet, and cash flow statement. The report also provides insights into their profitability, efficiency, liquidity, gearing, and investment ratios.

Acco ntin oru g f
Mana ementg
eci ionD s s

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
In the given assignment, a report has been prepared on the 2 companies namely Wesfarmers
Limited and Woolworths Ltd, both of which are listed on Australian Stock Exchange. The annual
report of both the companies have been analysed for two years, 2016 and 2017. The report gives
the brief introduction of the two companies, how they are positioned in the industry and how the
financial information in profit and loss account, balance sheet and the cash flow statement looks
like. The report also highlights the progress and performance of the company over the two years
based on various ratio analysis including profitability, efficiency, liquidity, gearing and
investment ratios. A brief discussion has been done on each of the ratios for the 2 companies as
to how they have performed over the years.
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Contents
ntrod ctionI u .................................................................................................................................................4
inancial Anal i in inancial tatementF ys s us g f s s..............................................................................................5
Anal i o e armer tdys s f W sf s L .....................................................................................................................5
Anal i o ool ort tdys s f W w hs L .....................................................................................................................8
atio comp tationR u .....................................................................................................................................13
atio Anal iR ys s............................................................................................................................................14
e erenceR f s.................................................................................................................................................16
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Introduction
The research and study of the two companies namely Wesfarmers Ltd and Woolworths Ltd has
been done primarily with the motive of financial statement analysis. Both the companies are the
pioneer companies of Australia, which have been existent for a long time and are listed on the
Australian Stock exchange. Woolworths Ltd is an extensive retail super market and deals in
products like merchandise, liquor, petrol, hotel industry, etc. It is the second largest revenue
generating company in Australia and largest in New Zealand (Belton, 2017). It employs more
than 202000 people. On the other hand, Wesfarmers is another Australian giant and
conglomerate, which is dealing in Australia, New Zealand, Ireland, Bangladesh and United
Kingdom. It is dealing in products like fertilizers, chemicals, retail, coal mining, safety and other
industrial products. In 2016, it became the largest revenue generating company in Australia
overtaking other major giants like Woolworths and BHP Billiton. It also employs more than
220000 employees in Australia and is the largest private employer.
Woolworths is a market leader in the product market in which its deals, it has major focus and
objective to ensure customers put them first. Its five major priorities include building a store and
customer led culture in the team, empowering the business to deliver value to the shareholders,
becoming a lean retailer by the way of doing end to end processes and ensuring system
excellence, creating sustainable sales and providing more value and convenience to customers in
the Drinks business. On top of all this, the company has a fierce marketing strategy and has a
dominant position in the liquor, grocery and general merchandise market (Bizfluent, 2017).
Thus, it is being seen as one of the most trusted and reliable brand in Australia.
Wesfarmers in another pioneer company in Australia which is again a leader in its products like
fertilizers, chemicals and has the primary objective of delivering satisfactory value to its
shareholders through ensuring financial discipline and excellent management of the diverse
portfolio of the products in which the company deals in (Chron, 2017). It is also committed in
engaging with the local communities and minimising the environmental impact at the same time
as one of its long-term goals. It is one such company in Australia, which has presence in the lives
of almost all the Australians, which shows the dominant positioning of the group in the
marketplace.
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Financial Analysis using financial statements
Analysis of Wesfarmers Ltd.
Below shown is the income statement of the company Wesfarmers Ltd that shows the
performance over both the years 2016 as well as 2017. As per this, we can see that the company
was able to increase the revenue by more than 3.5% from $ 65981 MN to $ 68444 Mn due to
diversified portfolio of the products. On the other hand, the increase in cost of goods sold
particularly the raw materials was to the tune of 1.5% from $ 45525 Mn to $ 46359 Mn. Other
expenses including the employee benefit expenses, freight and other related expenses, occupancy
related expenses, depreciation and amortization expenses and other indirect expenses increased
marginally which which had a direct impact in terms of EBIT which rose from 1346 Mn in 2016
to 4402 Mn in 2017 (Vieira, O’Dwyer, & Schneider, 2017). This shows tremendous growth in
terms of profitability for the company which is under heavy competition from the small
companies and new entrants in the marketplace. The impairment in 2016 ($ 2172 Mn) was
comparatively much more than in 2017 ($ 49 Mn). All this has together led to an increase in the
profit attributable to the shareholders from $ 407 Mn to $ 2873 Mn in 2017.
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Above shown is the balance sheet of the company, which reflects that there has been a
considerable increase in the cash balance of the company whereas the company no longer holds
any finance advances and loans. All this reflects that the collection policy of the company has
been strong and therefore it has been able to reduce the risk of collection from debtors. The other
current assets including trade receivables, inventories and others have been more or less constant
over the 2 years (Choy, 2018). About property, plant and equipment the company has made an
addition of $ 1559 Mn in 2017 as against $ 1738 Mn in 2016. Similarly, the company made
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disposals and write-off amounting to $ 615 Mn in 2017 as against $ 1446 Mn in 2016. This
shows that the efficiency with which the company has started to use fixed assets has increased
and the depreciation costs over 2 years have almost been constant. In terms of intangibles assets,
the company is carrying goodwill, brand, contractual and non-contractual relationships, liquor
licenses and software as assets in the books and they have had no significant addition or deletion
to the intangibles in 2017, however, in 2016, the company made an addition to the goodwill
balances amounting to $ 1018 Mn (Werner, 2017).
In terms of the current liabilities of the company, all of them including trade payables, interest
bearing borrowings, provisions, derivatives and others, all have remained more or less constant
except income tax payable, which has increased from $ 29 Mn to $ 292 Mn. Amongst, the non-
current liabilities, the interest bearing loans and borrowings have come down from $ 5671 MN to
$ 4066 Mn and the other provision and derivative liabilities have remained the same.
In terms of equity, the company has issued the equity shares under the dividend reinvestment
plan and employee share acquisition plan as per which a net addition of over $ 320 Mn has been
done to the equity balance of the company (Alexander, 2016).
Below shown is the cash flow statement of Wesfarmers for the year 2016 and 2017. As per this,
a proper reconciliation of the cash flow from operating activities has been shown in the notes to
accounts both as per the direct as well as indirect method. IN the cash flow statement, the major
contributor to the inflows was operating activities, whereas to the outflow were investing and
financing activities. In the operating activities, we can see that the receipts from customers has
improved over the last year by nearly $ 2900 Mn whereas the payment to the creditors was
increased by only $ 1900 Mn (Dichev, 2017). Rest of the heads almost remained constant which
includes borrowing costs, income tax paid, dividend received from associates and interest
received. Amongst investing activity, the payment because of property plant and equipment was
$ 1899 Mn in 2016 and $ 1681 Mn in 2016. The proceeds from the sales of property plant and
equipment amounted to $ 563 Mn in 2016 and $ 653 Mn in 2017. The company also made a
major receipt from sale of business and associate amounting to $ 947 Mn in 2017 (mere $ 1 Mn
in 2016). However, in the year 2016, the company had acquired subsidiaries amounting to $ 748
Mn, which was a major outflow. In investing activity, the company had major borrowings in
2016 amounting to 2360 Mn ($ 220 Mn in 2017) whereas the repayment amounted to $ 1994 Mn
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in 2017 ($ 1424 Mn in 2016), other heads almost remaining constant. The net increase in cash
flow for the year was $ 402 Mn in 2017 as against $ 100 Mn outflow in 2016 (Goldmann, 2016).
Analysis of Woolworths Ltd.
Below shown is the profit and loss account of the company as per which the company was able
to increase the revenue by 4% from $ 53473 Mn in 2016 to $ 55475 Mn in 2017. On account of
this, the cost of sales increased only by 2.5% from $ 38538 Mn tin 2016 to $ 39739 Mn in 2017.
The other revenue, the branch expenses and other administration expenses remained more or less
constant during 2016 as well as 2017 (Heminway, 2017). The earnings before interest and tax
amounted to 1495 Mn in 2016 and $ 2326 Mn in 2017, which is nearly an increase of 70% in
profits. In addition, the earning per share of the company increased from -97.7 to 119.4 cents per
share, which shows that the company has been grown not only in terms of profits and business
but also in terms of shareholder returns.
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From the above shown consolidated balance sheet, we can see that in current assets, apart from
the inventories, rest of the assets like the cash and cash equivalents, the receivables and other
financial assets all have remained constant. The overall inventories level has come down from $
4558 MN to $ 4080 Mn, which shows the effective management of inventory levels. Amongst,
the non-current assets, there was substantial change in the balance of the property, plant and
equipment where the company made the addition of $ 1862 Mn in 2017 and $ 1842 Mn in 2016
and also made the disposals amounting to $ 111 Mn in 2017 and $ 132 Mn in 2016 (Gooley,
2016). The other non current assets like trade and other receivables, the financial assets, the
intangible assets and he deferred tax assets remained fairly constant over these 2 years. In terms
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of current liabilities, the balance of trade payables increased whereas the borrowings decreased
in 2017. Amongst the non-current liabilities, the borrowings, provisions and other financial
liabilities, all of them decreased, showing that the company has focused on making repayment of
the borrowings in 2017 and reducing the debt burden. There was issuance of equity shares as per
the dividend reinvestment plan due to which the equity balance has increased both at the end of
2016 and 2017.
Above shown is the cash flow statement of the entity, it can be seen that there has been no
substantial increase in the receipt from customers or payment to creditors, both the balances have
remained fairly constant over the 2 years. In terms of investing activity, the payments for
property, plant and equipment has increased by nearly $ 170 Mn and the proceeds from the sale
of subsidiaries and investments was $ 200 Mn in 2017 ($15 Mn in 2016). Altogether, the cash
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outflow from the investing activity has increased from $ 1266 Mn in 2016 to $ 1431 Mn in 2017
(Jefferson, 2017). Amongst the financing activity, the proceeds from borrowings decreased in
2017 and the repayments increased as compared to 2016 showing a double impact in reducing
the debt balance in the capital. The dividends on the other side almost halved in 2017 as
compared to 2016. Considering all these effects, it can be seen that the net decrease in cash and
cash equivalents was $ 384 Mn in 2016 and $ 38 Mn in 2017 (Trieu, 2017).
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Ratio computation
Based on the chapter on different ratios, the ratio computation has been shown below for both
the companies for the years 2016 and 2017.
Wesfarmers Limited and Woolworths Ltd > Ratios Analysis
Ratios Wesfarmers Ltd. Woolworths Ltd.
For the Fiscal Period Ending
Formulas
12 months
Jun-30-
2016
12 months
Jun-30-
2017
12 months
Jun-30-
2016
12 months
Jun-30-
2017
Profitability Ratios
Return on Assets % Net Profit/ Total Assets 4.9% 6.2% 3.8% 6.4%
Return on Capital % Net profit to shareholders/Equity
Shareholders' funds
6.4% 8.4% 6.4% 11.3%
Net Income Margin % Net Profit/ total sales 0.6% 4.2% (2.3%) 2.8%
Efficiency Ratios
Total Asset Turnover Sales / Total Assets 1.6x 1.7x 2.2x 2.4x
Fixed Assets Turnover Sales / Fixed Assets 6.7x 7.2x 5.9x 6.7x
Accounts Receivable
Turnover
Sales / Accounts Receivables 57.2x 55.6x 255.9x NM
Inventory Turnover Sales / Inventory 7.8x 7.3x 8.2x 9.2x
Liquidity Ratios
Current Ratio Current Assets/ current Liabilities 0.9x 0.9x 0.8x 0.8x
Quick Ratio Current Assets - Inventory -
Prepaid Expenses/ current
Liabilities
0.2x 0.3x 0.2x 0.1x
Working capital Ratio Working capital / Current Liabilities 0.3x 0.4x 0.3x 0.4x
Gearing Ratios
Total Debt/Equity Total Debt/Equity 31.8% 22.6% 49.7% 30.7%
Total Debt/Capital Total Debt/Capital 24.1% 18.4% 33.2% 23.5%
EBIT / Interest Exp. EBIT / Interest Exp. 11.9x 18.3x 5.8x 11.7x
Investment Ratios
Price Earning Ratio Market price per share/ EPS 122.
06
16.
20
23.
32
22.
74
Earning per share Distributable earnings/No. of equity
shares
0.
36
2.
54
(0.98
)
1.
19
Price/Book Value Market price per share/ Book value
per share
2.2x 2.1x 4.1x 3.7x
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Ratio Analysis
Based on the above computation, when the ratio analysis is done, we can see that in terms of
profitability ratios, Wesfarmers and Woolworths both the companies have improved the net
margin over the last year, but Wesfarmers (4.2%) is much ahead than Woolworths (2.8%).
However, n terms of returns on assets and the return on capital, Woolworths has progressed
better over the last year showing a considerable improvement and therefore the shareholders
would be happy with the increase in return (Linden & Freeman, 2017). Wesfarmers on the other
hand, need to improve on the return on capital as it is far behind the market expectations.
In terms of Efficiency ratios, we can see that, Woolworths in doing far better than Wesfarmers as
it indicated by total assets turnover ratio, fixed assets turnover ratio, accounts receivables
turnover ratio and inventory turnover ratio, etc. For Woolworths, the receivables is getting
churned at the level of 261 times in the year whereas for Wesfarmers, it is getting churned only
55.6 times, which shows that Woolworths have great control over collection and are able to
manage the receivables well (Saeidi, 2012).
In terms of the liquidity ratios, both the companies are performing almost on the same lines as all
the ratios including current ratio, quick ratio and Working capital ratio are almost the same for
both the companies. However, they are much below the industry ideal trend (current ratio: two
and quick ratio: 1) and hence the companies need to work on the same. In addition, the working
capital ratio seems to be too low for both the companies, which indicates that they are not having
sufficient liquidity (Raiborn, Butler, & Martin, 2016).
The gearing ratio of the company measures the debt capital being used in the company.
Woolworths has been able to bring the debt equity ratio down to 30.7% in 2017 as compared to
49.7% in 2016, which shows that the company has enough cushion to use low cost debt capital in
future. On the other hand, Wesfarmers has even better debt equity ratio of 22%. Since both the
companies are enjoying lesser debt capital ratio, it shows that the company is trading with the
help of equity capital and can raise additional capital at lower costs in future. In addition, the
interest service coverage ratio for Wesfarmers is 18 times as against Woolworths 11.7 times,
which shows that both the companies are having sufficient EBIT to cover the interest expenses
on the loan capital taken.
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Finally, in terms of the investment ratios, we can see that the price earnings ratio which shows
that how many times the earning of the company the investors are willing to pay for the shares of
the company has dropped considerably for Wesfarmers from 122 times in 2016 to 16.2 times in
2017. For Woolworths, it has almost remained constant showing similar growth of the company.
The earning per share has grown almost equally for both the companies. The Price/ book value
ratio is an indicator of what number of times prices is in comparison to the book values of the
company (Visinescu, Jones, & Sidorova, 2017). The P/B ratio for Wesfarners is 2.1 times
whereas for Woolworths is 3.7 times, which shows that both the companies are trading at
premium.
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