Short-Term Credit Risk Analysis: Wesfarmers vs. Woolworths

This assignment analyzes the short-term credit risk of Australian companies Wesfarmers and Woolworths. It compares their liquidity, solvency, and cash flow performance using key financial ratios. The analysis concludes that Wesfarmers is in a stronger position than Woolworths regarding short-term credit risk based on its better liquidity and debt coverage ratios. Recommendations are provided for Woolworths to improve its financial health.

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of the university
Author note

1MANAGEMENT ACCOUNTING
Table of Contents
1. Methods used for presentation of cash flow statement.......................................................2
1. Cash flows from different activities....................................................................................3
2. Analysis of cash flow..........................................................................................................4
3. Conclusion and recommendation........................................................................................5
Reference....................................................................................................................................6

2MANAGEMENT ACCOUNTING
Wesfarmers Limited is the Australian conglomerate that has it’s headquarter in Perth
and they carry on their business mainly in Australia and New Zealand. Their main products
and services are coal mining, fertilizers, chemicals, retails and safety products. It is grown
into the biggest listed companies of Australia. Each of their diverse businesses is responsible
for daily operations and each business has their own team for human resource
(Wesfarmers.com.au, 2018). On the other hand, Woolworth supermarket is the Australian
grocery or supermarket store chain that is owned by the Woolworths Limited. After
Wesfarmers they are the 2nd biggest company in terms of revenue (Woolworths.com.au,
2018).
1. Methods used for presentation of cash flow statement
Under financial accounting, the cash flow statement is the financial statement that
states the changes in the cash balance and generation of cash from various activities like
operating activities, financing activities and investing activities. Cash flow statement can be
prepared using direct method or indirect method (Bhandari & Iyer, 2013). The cash flow has
three sections for three activities that are the operating activities, investing activities and
financing activities. Under the direct method, cash flows are listed under the operating
activities. The cash flows from the operating activities are generated from collection from
customers and payment made to employees, suppliers and others. This section also includes
the payment made towards interest and income tax. On the other hand, under the indirect
method, net incomes are adjusted to convert it to the cash basis from the accrual basis
(Pavlović & Bogdanović, 2013). It requires adding back the non-cash expenses like
amortization, depreciation, provision of loss for accounts receivables and the losses selling of
fixed assets. The net income is also adjusted for the changes in the account balances in the
current assts where the cash and current liabilities are excluded for that period between the
starting account balance and ending account balance.
Looking into the cash flow statement of Wesfarmers it has been identified that the
company uses direct method for preparing their cash flow statement. The company reported
appropriate reconciliation under the Note 4 – Cash and cash equivalents. Further, under the
reconciliation the company stated the reconciliation of the net profit after tax with the net
cash flows from the operations (Wesfarmers.com.au, 2018). As per the reconciliation, non-
cash items like impairment, depreciation, gain on disposal has been adjusted to the amount of
the net profit and thereafter the increase or decrease in assets and liabilities has been adjusted

3MANAGEMENT ACCOUNTING
to arrive at the amount of net cash flows from the operating activities (Farshadfar & Monem,
2013). Further, it stated the details regarding the net cash flow from capital expenditure.
Wesfarmers classifies the short-term deposits and cash under the balance sheet that includes
the cash on hand and at bank that has the maturity of 3 months or less than that as financial
assets that is held at the amortised cost.
Looking into the cash flow statement of Woolworths Limited it has been identified
that the company uses direct method for preparing their cash flow statement
(Woolworths.com.au, 2018). The company reported appropriate reconciliation under the Note
4.5 – Net cash provided by operating activities. Further, under the reconciliation the
company stated the reconciliation of the net profit after tax with the net cash flows from the
operations (Brooks, 2015). As per the reconciliation, non-cash items like impairment,
depreciation, gain or loss on disposal, interest capitalised and dividend received has been
adjusted to the amount of profit or loss after the expenses of income tax and thereafter the
increase or decrease in assets and liabilities has been adjusted to arrive at the amount of net
cash flows provided by the operating activities. Further, it stated the details regarding the net
cash flow from capital expenditure (Collins, Hribar & Tian, 2014).
1. Cash flows from different activities
 Operating activities – for Wesfarmers the net cash flow from the operating activities
for the year ended 30th June 2017 amounted to $ 4,226 million as compared to $ 3,365
million for the previous year (Deegan, 2012). The company spend large amount that
is $ 68,713 million towards payment to the employees and suppliers. Further, its total
receipt from the customers amounted to $ 74,042 million. On the other hand, for
Woolworths, net cash flow provided by the operating activities for the year ended 30th
June 2017 amounted to $ 3,122 million as compared to $ 2,357.5 million for the
previous year. The company spend large amount that is $ 61,474.8 million towards
payment to the employees and suppliers. Further, its total receipt from the customers
amounted to $ 65,498 million.
 Investing activities – Wesfarmers total cash flows that are used for the investing
activities for the year ended 30th June 2017 amounted to $ 53 million as compared to $
2,132 for the previous year. Large amount that is $ 1,681 million was used by the
company towards the payment of intangibles and plant, property and equipment. On
the contrary, Woolworths total cash flows that are used in the investing activities for

4MANAGEMENT ACCOUNTING
the year ended 30th June 2017 amounted to $ 1,431.4 million as compared to $ 1,266.7
for the previous year. Large amount that is $ 1,633.6 million was used by the
company towards the payment of intangibles and plant, property and equipment.
 Financing activities – net cash used by Wesfarmers towards financing activities for
the year ended 30th June 2017 amounted to $ 3,771 million as compared to $ 1,333
million for the previous year. Bigger amount spend by the company towards the
payment of equity dividend and it was amounted to $ 1,999 million and repayment of
the borrowings amounted to $ 1,994 million. On the other hand, net cash used by
Woolworths towards financing activities for the year ended 30th June 2017 amounted
to $ 1,729.3 million as compared to $ 1,474.9 million for the previous year. Bigger
amount spend by the company towards the payment of equity dividend and it was
amounted to $ 540.9 million and repayment of the borrowings amounted to $ 1,406.5
million.
2. Analysis of cash flow
Ratio Formula Wesfarmers Woolworths
Cash adequacy ratio
Cash flow from operations /
(Long term debt payment +
purchase of fixed asset + payment
of cash dividend)
0.745 0.872
Cash flow liquidity
ratio
Operating cash flow / Current
liabilities 0.406 0.354
Debt coverage ratio Net operating income / Debt
service 16.674 12.014
Cash flow to sales ratio Operating cash flow / Net
sales*100 6.174% 5.628%
Cash flow adequacy ratio – it is used for determining the cash flow generated from
operations are sufficient for paying other expenses or not (Hoskin, Fizzell & Cherry, 2014).
Generally, the cash adequacy ratio of more than 1 is considered as sufficient for maintaining
the business without additional requirement of equity or debt funding. From the above table it
can be seen that cash adequacy ratio of both the firms are less than 1. However, the ratio of
Woolworths at 0.872 is better as compared to 0.745 of Wesfarmers.

5MANAGEMENT ACCOUNTING
Cash flow liquidity ratio – cash flow liquidity term refers to the ability of the company for
repaying the debts from the operating cash funds (Call, Chen & Tong, 2013). From the above
calculation it is identified that with regard to cash flow liquidity Wesfarmers is in better
position as compared to Woolworths as the ratio of Wesfarmers is 0.406 as compared to
0.354 of Woolworths.
Debt coverage ratio – this ratio is used for determining the ability of the company to generate
sufficient operating income for covering the debt expenses. It is recognized from the above
table that the debt coverage ratio of Wesfarmers is 16.674 as compared to 12.014 of
Woolworths. Therefore, Wesfarmers is in better position to cover up its debt expenses with
the available income from operation as compared to that of Woolworths.
Cash flow to sales ratio – this is calculated in percentage form and compares the operating
cash flow of the company to the net revenue from sales (Brown, 2012). It also gives an idea
to the investor regarding the ability of the company to turn their sales into cash. It can be
identified from the above table that Wesfarmers ability to turn their sales into cash is better as
compared to that of Woolworths.
3. Conclusion and recommendation
It can be concluded from the above analysis that Wesfarmers is in better position and
will be considered better with regard to the short-term credit risk as compared to Woolworths
as the cash flow liquidity ratio of Wesfarmers is better as compared to Woolworths.
However, if the cash resources are considered, it can be identified that both the companies do
not have adequate cash resources to cover up their ongoing expenses but Woolworths is in
better position as compared to Wesfarmers. Among the two, Wesfarmers can be expected to
survive for long term if compared with Woolworths as the debt coverage ratio of Wesfarmers
is better than Woolworths. Finally, Wesfarmers ability to generate cash from sales and turn
their sales into cash is better as compared to that of Woolworths. Therefore, it is suggested
that Woolworth shall minimise their operating expenses and other expenses to have more
cash from operation which in turn, increase the ability of the company to sustain over long
term and increase their solvency.

6MANAGEMENT ACCOUNTING
Reference
Bhandari, S. B., & Iyer, R. (2013). Predicting business failure using cash flow statement
based measures. Managerial Finance, 39(7), 667-676.
Brooks, R. (2015). Financial management: core concepts. Pearson.
Brown, R. (2012). Analysis of investments & management of portfolios.
Call, A.C., Chen, S. & Tong, Y.H. (2013). Are analysts' cash flow forecasts naïve extensions
of their own earnings forecasts?. Contemporary Accounting Research, 30(2), pp.438-
465.
Collins, D. W., Hribar, P., & Tian, X. S. (2014). Cash flow asymmetry: Causes and
implications for conditional conservatism research. Journal of Accounting and
Economics, 58(2), 173-200.
Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.
Farshadfar, S., & Monem, R. (2013). Further evidence on the usefulness of direct method
cash flow components for forecasting future cash flows. The international journal of
accounting, 48(1), 111-133.
Hoskin, R.E., Fizzell, M.R. & Cherry, D.C. (2014). Financial Accounting: a user perspective.
Wiley Global Education.
Kirkham, R. (2012). Liquidity analysis using cash flow ratios & traditional ratios: The
telecommunications sector in Australia. The Journal of New Business Ideas &
Trends, 10(1), p.1.
Pavlović, M. & Bogdanović, J. (2013). Cash flow statement. Škola biznisa, (3-4), pp.129-147.
Wesfarmers.com.au. (2018). Wesfarmers.com.au. Retrieved 8 January 2018, from
http://www.wesfarmers.com.au/
Woolworths.com.au. (2018). Woolworths.com.au. Retrieved 8 January 2018, from
https://www.woolworths.com.au/