Financial Analysis of Wesfarmers: Profitability and Operating Efficiency

HI5002: Group Assignment
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Abstract
This report has been developed for the purpose of providing an insight into the financial
performance of an ASX listed entity, that is, Wesfarmers Ltd. The financial evaluation conducted
with the use of ratio analysis, systematic and unsystematic risks, dividend policy, cash
management and sensitivity analysis has revealed that Wesfarmers is having good future growth
prospects owing to its higher profitability position. It is also effectively managing its systematic
and unsystematic risks in an effective manner and providing good dividend to shareholders and
thus selected for an investment purpose by an institutional investor.
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Contents
Abstract............................................................................................................................................2
Section I: Introduction to the report.................................................................................................4
Section II: Financial Analysis of Wesfarmers for last three years (2016, 2017 and 2018).............4
Section 2.1: Overview of the selected company..........................................................................4
Section 2.2: Ratio Analysis of Wesfarmers.................................................................................5
Profitability Analysis of Wesfarmers...........................................................................................5
Operating Efficiency Analysis of Wesfarmers............................................................................7
Section 2.3: Use of marketable securities by Wesfarmers for cash management purpose..........9
Section 2.4: Application of sensitivity analysis through using the capital budgeting scenario...9
Section 2.5: Information on systematic risks and unsystematic risks that impacts the
performance of Wesfarmers.......................................................................................................16
Systematic Risks........................................................................................................................16
Unsystematic Risks....................................................................................................................16
Section 2.6: Estimation of dividend payout ratio and identification of dividend policy used by
the management at Wesfarmers.................................................................................................17
Section III: Recommendation Letter.............................................................................................18
Section IV: Conclusion..................................................................................................................19
References......................................................................................................................................20
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Section I: Introduction to the report
The business entities tend to disclose the information relating to their financial
performance through the help of developing the financial statements. The financial statements
are analyzed by the end-users such as investors for gaining an insight into the present and future
growth of a company. This is largely required to take correct investment decisions and ensuring
that the wealth of the investors’ remains protected. This report has been developed for providing
support to an institutional investor aiming to invest within the Australian market. In this context,
an ASX listed entity having a promising future for investment in Australia has been selected for
the purpose of financial evaluation. The financial evaluation has been done by the use of
examination of the financial statements of the selected company with the use of technique such
as ratio analysis, cash management, and sensitivity analysis, discussion of systematic and
unsystematic risks, analysis of dividend payout ratio and providing recommendation to the
investors on the basis of financial evaluation carried out. The ASX listed entity that has been
selected for the purpose of financial evaluation is Wesfarmers Limited, a supermarket giant in
Australia.
Section II: Financial Analysis of Wesfarmers for last three years (2016, 2017 and 2018)
Section 2.1: Overview of the selected company
Wesfarmers Limited is a supermarket giant of Australia whose headquarter is located
Perth. The company is regarded to be in a conglomerate business as it is involved in different
businesses such as retail, chemicals, fertilizers, home improvement, outdoor living, apparel,
general merchandise and industrial safety products. As such, the major business segments have
been divided into following categories:
 Home Improvements
 Department Stores
 Industrial Safety Products
 Office Works
The company since its establishment in the year 1914 has been recognized as one of the
major retailing company within Australia. It is regarded as one of the largest employer within the
country. It conducts its diverse business operations with the help of its many subsidiaries such as
Bunning’s Warehouse, Kmart, Officeworks and others across Australia. The primary objective of
the company is to promote sustainable growth of its business through long-term management.
The company since its establishment has prioritized to become a sustainable company by
conducts its business operations in a responsible and ethical manner. The high emphasis placed
on sustainability has enabled the company to promote its long-term growth and development by
achieving a distinctive position in the retailing sector of Australia. It strong commitment towards
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