Financial Statement Analysis of Wesfarmers Ltd

The article provides a detailed analysis of the financial statements of Wesfarmers Ltd. It covers the profitability, efficiency, liquidity, and investment valuation of the company. The article also provides insights into the cash position of Wesfarmers in 2017 and 2018.

Running Head: Financial Statement Analysis
Financial Analysis
Wesfarmers Ltd

Financial Statement Analysis
Part 1
Profitability position:
Return on assets is a used to assess the profitability position of a company. Over the period of
last 5 years under consideration i.e. from 2014 to 2018, the ROA ratio has shown an inclining
trend except for the 2016 where there was a sudden decline in the profits of the company
because of incurrence of heavy impairment losses. Though, the sales of Wesfarmers Ltd has
increase in 2016 as compared to the last 2 financial years i.e. 2014 and 2015 but the earnings
before tax and interest had reduced significantly. After 2015 there was a significant increase
in the profits of the company on account of reduced impairment losses and other expenses
which strengthened its profitability position. This ratio shows that company had utilised its
overall assets in generating better returns for its shareholders with each passing year except in
2016. Further, Return on equity ratio of Wesfarmers shows that even the profits that were
attributable to the shareholders of the company have reduced since 2014 to 2016 and this
shows that the company could not generate sufficient returns for its shareholders in 2015 and
2016 as it generated in 2014 by making efficient utilisation of the funds of its shareholders. In
2016, the company generate minimum returns for its shareholders and in 2017 highest returns
were offered to its shareholders at the rate of 12.25%. Year 2017 has been a golden years for
the shareholders as there was a steep increase in their returns because of increased
profitability of the company in that particular year. After 2017, there was a considerable
decline in company’s profits that were to be allocated to the shareholders, was reported which
reduced back their returns. Operating profit margin is used to calculate profits of the
company that are remained after meeting the operating expenses of the business. From the
ratio analysis, it can be said that company had generated maximum profits out of the sales of
its products in 2017 as highest percentage of sales was made in this year. However in 2016,
there was a significant reduction in company’s operating profits on account of recording of

Financial Statement Analysis
impairment losses on its assets. After 2017, the operating profits of the company again
reduced slightly even though the sales were increased because of incurrence of more
operating expenses. The gross profit margin ratio shows the quantum of earnings that were
available with the company after meeting its cost of goods sold (Tracy, 2012). After
analysing the gross profits of Wesfarmers Ltd, it has been identified that the company was
successful in maintain a consistency in maintaining its gross profit margins in accordance
with its sales pattern. Highest percentage of gross margins was achieved in 2018.
From the above analysis, it can be said that the profitability position of the company was
strongest in 2017 and thereafter it had again declined to some extent even with the increase in
sales revenue. It was reported as weakest in 2016 after the periods of growth of 2014 and
2015. This was not due to the sales factor but on due to the heavy impairment losses which
occurred in 2016. Thus the investors of the company must have obtained highest returns in
2017 despite of the fact that there was a decline in level of sales made by the company as
compared to 2016.
Efficiency position
Efficiency position of Wesfarmers Ltd over the period of last five financial years is assessed
using various ratios such as asset turnover ratio, inventory turnover ratio and accounts
receivables settlement period ratio. These ratios help in determining the level of efficiency
with which company’s assets are managed during the course of its business. An increasing
asset turnover ratio reflects the improving efficiency of the company in managing its total
assets to generate higher sales (Forster, 2004). In 2018, the asset turnover ratio was highest
which shows that company has most efficient utilised its assets to generate sales. This might
be due to reduced level of total asset investment which made it possible for the company to
manage and utilise its assets in the more efficient way. Except 2017, there has been reported

Financial Statement Analysis
an incline in the asset efficiency of Wesfarmers. Further, inventory turnover ratio is assessed
to evaluate the company’s operating cycle. It has been found that the number of days taken to
convert the inventory into sales have increased over the past four years since 2014 to 2017
after which there has been a reduction in number of days taken to turn down inventories of
business into sales. Therefore, it can be said that company could not efficiently manage its
inventory since 2014 to 2017 but there after the inventory management practices of the
company had improved slightly which is a positive indicator for its efficiency position
(Annual Report, 2014). Also, the settlement period of debtors has been calculated to
determine the average number of days taken by company to convert its accounts receivables
into cash. Since 2014, there had been a reduction in the average duration to collect the monies
due from the trade receivables of the company. This shows that Wesfarmers Ltd had
efficiently managing its cash collection practices till 2016 after which the average duration to
collect money from its accounts receivables increased. However, in 2018 it seems that
company has improved its cash collection practices which have resulted in reduction of
average collection days. This is a positive indicator towards the improved that the cash
conversion cycle of company (Papadopoulos, 2011). From the above analysis it can be said
that the company’s efficiency position was weakest in 2017 and it improved in 2018.
Liquidity position
The liquidity position of Wesfarmers could be analysed using the current ratios and quick
ratios. It had been found that liquidity position of the company was not sound in all the
periods reported hereunder in this report because the company did not have sufficient current
asset balances to meet its short term liabilities. The current liabilities were higher in amount
than the current assets which must have made the company face tight liquidity position in
market. As the inventories of the business are not among those assets that could be readily
converted into cash as and when required hence they are excluded to calculate the quick ratio.

Financial Statement Analysis
It has been found that Wesfarmers did not have adequate level of quick assets which
worsened its liquidity position. The liquidity position of business had been worsening further
since 2016 and 2018 was the year where the company had to face highest level of liquidity
crunch. Year 2016 was relatively better for the company than other years in terms of its
liquidity state.
Financial Gearing
The financial gearing of Wesfarmers is determined using interest coverage ratio and debt to
assets ratio. Since 2016, the debt to asset ratio has declined which is a good indicator of its
solvency position. This ratio shows the percentage of total assets financed through the funds
of creditors. In 2016, the company had to face highest level of financial leverage because of
highest debt to asset ratio (Annual Report, 2016). Thereafter, Wesfarmers had managed to
reduce its risk of insolvency. Further, the interest coverage ratio of the company shows that it
had made sufficient earnings to meet its interest obligations on the funds borrowed from the
market. Highest level of interest coverage ratio in 2018 shows that the solvency position of
the company is strong and it has improved since last 3 years (Annual Report, 2018).
Investment Valuation
As the company could not generate sufficient profits in 2016, the EPS of its shareholders was
lowest in 2016. However, as it has been identified that 2017 was the golden year for the
Wesfarmers’s shareholders so they had received highest earnings per share in 2017. The
market price of the company had been kept on fluctuating over the period of last 5 years. As
in 2018, the market price of Wesfarmers’s stock has increased from $ 40.12 to $ 49.36, the
PE ratio has also increased which is a positive indicator of company strong growth
perspectives. In 2017, the company had paid highest dividend yield to its shareholders
(Higgins, 2012).

Financial Statement Analysis
Part 2
The cash position of Wesfarmers had kept on fluctuating over the period of last 5 years on
account of changes in the level of operating activities, investing activities and the financing
activities. This part of the report deals with the changes that occurred in the cash flows in the
last two financial years i.e. 2017 and 2018 and the prime reasons for such changes.
Activities 2017 2018
Chan
ge %
Operating activities 4226 4080 -3%
Investing activities -53 -658 1142%
Financing activities -3771 -3752 -1%
While examining the cash flows statement for the year end 2017 and 2018 it has been found
that there has been a net decline of 3% in the cash inflows of Wesfarmers in 2018 as
compared to 2017. This is majorly on account of higher amount of incomes taxes that were
paid in 2018. Also, the interest income in 2018 was relatively lower than that of 2017 which
had caused reduced operating cash flows in 2018 (Annual Report, 2018).
In the areas of investing activities, Wesfarmers had to experience huge difference in its net
cash outflows in 2018 as compared to 2017 because in 2018 the company had invested more
of its funds in purchasing property, plant and equipment which led to higher amount of
outflow of cash from its business. Also, it had disposed-off lesser business assets and units
which have resulted in reduced cash inflows (Annual Report, 2018).
The net cash outflow in case of financing activities of Wesfarmers has reduced slightly in
2018 as compared to 2017 because company had generated more amounts of funds by way of
borrowings in 2018 which had resulted in higher cash inflows in 2018. This was the major

Financial Statement Analysis
factor which had caused reduction in the net flow of cash out of the business (Annual Report,
2018).
References:
Foster, G., 2004. Financial Statement Analysis, 2/e. Pearson Education India.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Papadopoulos, P. 2011. Investment Report - Fundamental Analysis/ Ratio Analysis. GRIN
Verlag.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to
Analyse Any Business on the Planet. RatioAnalysis.net.
Wesfarmers Ltd, 2014. Annual Report, 2014. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2014-annual-
report.pdf?sfvrsn=0 Accessed on: 01.12.2018.
Wesfarmers Ltd, 2016. Annual Report, 2016. Available at:
https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?
sfvrsn=8 Accessed on: 01.12.2018.
Wesfarmers Ltd, 2018. Annual Report, 2018. Available at:
https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-
report.pdf?sfvrsn=4 Accessed on: 01.12.2018.
Appendix

Financial Statement Analysis
2013 2014 2015
201
6
201
7 2018

Financial Statement Analysis
Return on total
assets
EBIT/ Average total
assets 2890 3759
134
6
417
7 4061
4144
1
4006
4.5
405
92.5
404
49
3852
4
6.97
%
9.38
%
3.32
%
10.3
3%
10.5
4%
Rate of return on
ordinary equity
PAT/Average
Shareholder's equity 2689 2440 407
287
3 1197
2600
4.5
2538
4
238
65
234
45
2325
7.5
10.3
4%
9.61
%
1.71
%
12.2
5%
5.15
%
Operating profit
margin
Operating Profit/Net
Sales 2890 3759
134
6
417
7 4061
6018
1
6244
7
659
81
649
13
6688
3
4.80
%
6.02
%
2.04
%
6.43
%
6.07
%
Gross profit
Margin Gross Profit/ Net Sales
1875
7
1942
2
204
56
202
80
2116
5
6018
1
6244
7
659
81
649
13
6688
3
31.1
7%
31.1
0%
31.0
0%
31.2
4%
31.6
4%
Inventories
turnover period
Average
Inventory*365/Cost of
Sales
1894
897.
5
1977
022.
5
214
565
3
233
417
5
2288
732.
5
4142
4
4302
5
455
25
446
33
4571
8
days
45.7
4
45.9
5
47.1
3
52.3
0
50.0
6
Settlement
period for
debtors
Average Accounts
Receivalbes*365/Credit
Sales
7163
12.5
5560
77.5
564
107.
5
595
132.
5
6022
50

Financial Statement Analysis
6018
1
6244
7
659
81
649
13
6688
3
days
11.9
0 8.90 8.55 9.17 9.00
Current ratio
Current Assets/ Current
Liabilities 9311 9093
968
4
966
7 8706
1374
0
1042
4
972
6
104
17
1002
5
0.68 0.87 1.00 0.93 0.87
Quick ratio
Current Assets-
Inventories-
Prepayments/ Current
Liabilties 3975 3596
340
4
313
7 2695
1374
0
1042
4
972
6
104
17
1002
5
0.29 0.34 0.35 0.30 0.27
Debt to assets
ratio
Total Liabilities / Total
Assets
1374
0
1562
1
178
34
161
74
1417
9
3972
7
4040
2
407
83
401
15
3693
3
34.6
%
38.7
%
43.7
%
40.3
%
38.4
%
Interest cover
ratio EBIT/ Interest Expense 2890 3759
134
6
417
7 4061
346 315 308 248 211
times 8.35
11.9
3 4.37
16.8
4
19.2
5
Assets turnover
Net Sales/ Average
total assets
6018
1
6244
7
659
81
649
13
6688
3
4144
1
4006
4.5
405
92.5
404
49
3852
4
times 1.45 1.56 1.63 1.60 1.74

Financial Statement Analysis
Earnings per
share
Profit after tax/
Weighted average
number of shares 2689 2440 407
287
3 1197
1146 1129
112
3
112
8 1131
2.3 2.2 0.4 2.5 1.1
Price-earnings
ratio MPS/EPS
41.8
4
39.0
3 40.1
40.1
2
49.3
6
2.3 2.2 0.4 2.5 1.1
17.8
3
18.0
6
110.
64
15.7
5
46.6
4
Dividend yield
Annual
Dividend/Current Stock
Price 2 2 1.86 2.23 2.23
41.8
4
39.0
3 40.1
40.1
2
49.3
6
4.78
%
5.12
%
4.64
%
5.56
%
4.52
%