Australian Economy Analysis 2017

This assignment requires students to analyze the Australian economy in 2017. Tasks include calculating financial ratios for companies like Wesfarmers and Woolworths, examining GDP growth figures, and discussing the impact of global economic trends. Students must utilize resources such as annual reports and news articles to support their analysis.

Principals of Financial Markets
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Executive Summary
Analysis of industry performance is always the major concern as there is no particular
information available at one place. Industry analysis can be better conducted through top down
and bottom up analysis. In this report top down and bottom up analysis has been conducted of
retail industry of Australia.
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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Top-Down Analysis.........................................................................................................................4
Australian Macro-Economic Environment..................................................................................4
Bottom up Analysis of the Retail Industry (Wesfarmers and Woolworth).....................................8
Detail Analysis of ratio calculation of both the companies...........................................................14
Liquidity or Solvency Analysis..................................................................................................14
Capital Structure Analysis.........................................................................................................15
Profitability analysis..................................................................................................................16
Market Performance analysis.....................................................................................................17
Conclusion and Recommendation.................................................................................................17
References......................................................................................................................................19
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Introduction
The technique of fundamental analysis proves to be highly essential for investors in
determining the intrinsic stock value of different business entities. This helps them to make
accurate decisions regarding their investment in particular stocks of companies. This report has
been developed for carrying out fundamental analysis of an Australian industry with the
selection of two ASX listed companies operating within the same industry. The fundamental
analysis is carried out through conducting top-down and bottom-up analysis of the selected
industry. The industry selected for the purpose is retail industry of Australia with the selection of
Wesfarmers and Woolworths as the major companies operating within the sector. The
fundamental analysis is conducted for evaluating the factors that influences the share price of the
companies operating within the retail industry of Australia. The factors analysis consists of
evaluating the micro and macroeconomic characteristics impacting the performance of the
industry and the selected ASX listed firms within the sector.
Top-Down Analysis
The top-down approach under fundamental analysis consists of analyzing primarily the
macro-economic trends in a selected market. This involves a general evaluation of the macro-
economic factors such as Gross Domestic Product (GDP), interest rate, rate of inflation, foreign
exchange rate and trade movements of a selected economy. This is followed by predicting the
performance of an industry on the basis of macro-economic evaluation. The industry that will
provide larger returns in the existing macro-economic environment is selected through the use of
top-down analysis. At last, the top-down investors analyses the company’s performance within
selected industry for adding their stock to their portfolios. The companies are selected ion the
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basis of the evaluation of the macro-economic factors by predicting which companies will
perform best under the present economic environment (Krantz, 2016). As such, the top-down
analysis primarily will analyse the Austrian economic environment for assessing the future if
retail companies through analyzing its macro-economic policies.
Australian Macro-Economic Environment
The economy of Australia is presently regarded to be in developing phase owing to its
strong macro-economic policies. The standard of living is higher in the country with its strong
economic policies adopted by the Reserve Bank of Australia (RBA). The economy if Australia
has recovered almost completely from the crisis of global financial with major of the developed
economies is still not able to recover from its after-effects. This suggests that strong economic
reforms adopted by the country’s government have helped in its recovery from the global
financial crisis. The country is regarded to be one of the wealthiest nations with total worth of
about AUD $ 8.9 trillion and having a GDP of AUD $ 1.69 trillion as of the end of the year 2017
(Bagshaw, 2017). The GDP rate of the country has increased by about 0.3 per cent in the last
three months supported by an increase in household spending. The GDP rate of the country is
expected to increase in future with positive business environment and increased foreign
investment. The strong GDP of the country further supports its plan of business expansion with
realization of 0.8 per cent increase in its overall economy as indicated by the Bureau of Statistics.
This is largely attributed to the large-scale expenditure of the consumers on food, clothing and
household items (Janda and Letss, 2017).
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Source: http://www.smh.com.au/business/the-economy/gdp-australia-grabs-record-for-longest-
time-without-a-recession-20170606-gwm0o2.html
The RBA has currently maintained a low interest rate of about 1.5 per cent as compared
to its past years. This has been done to support the economic growth of the country through
attracting foreign students by providing them cheap loan facilities and increasing the export
demand of products. However, the RBA is currently emphasizing on increasing the interest rates
as it is leading to rise in the price of houses and contributing to mortgage lending (Chau, 2017).
The RBA will maintain cash rates to be lower till the economic growth will remain the transition
phase until the US rates matches the Australian level. The narrowing difference between the
interest rates of Australia and US will cause the RBA to increase its interest rate in the coming
period for preventing the occurrence of housing bubble. The value of Australian dollar (AUD) is
rising and falling every day in relation to the value of other currencies. The current value of
AUD is reported to be 80.28 US cents recording an increase of about 4.15% in its value for the
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first time in last two years. The AUD has maintained an average value of US$0.75 indicating that
$1AUD is worth of US$0.75 (What makes the Australian dollar move, 2017).
Source: https://www.cromwell.com.au/insights/news/the-2017-australian-economic-outlook
The RBA has also reported a decrease in its inflation rate worth reaching to its expected
value of 2-3 per cent. The consumer price index in the country as of year 2017 is recorded to be
about 109.4 as per the Bureau of Statistics. The RBA has achieved its annual rate below its
determined target of maintaining it between 2-3 per cent. The increase in the consumer prices by
about 0.2 per cent has resulted in reducing its inflation rate to 1.9 per cent (The 2017 Australian
Economic Outlook, 2017).
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Source: http://www.in2013dollars.com/Australia-inflation-rate-in-2017
As such, the strong economic growth of the country largely supports its industry
expansion. The increase in consumer spending a supported by increase in the GDP rate of the
country provides positive sign for retail expansion. The expenditure of consumers on items such
as food, clothing and other household product has shown an upward trend with their good
standard of living. This provides a positive sign for retail growth in the country and the industry
has recorded an increase in 3% in its present value as of the year 2016. The advent of internet
retailing is also contributing largely to the large-scale development of the retail sector that
provides convenient channels for consumers to purchase the products online in relatively short
span of time from anywhere. The grocery retailers have also expenses a positive growth in the
recent years with the increase in per capita income of the country’s population group
(Hajkowicz, 2015).
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Source: https://tradingeconomics.com/australia/retail-sales-annual
The retail sector of Australia is expected to record an increase of its CAGR value by
about 3% in the future period. The growth will largely be driven by the increase in consumer
spending, internet retailing and the development of innovative technologies. The Wesfarmers is
regarded to be largest retailer in the country followed by Woolworths. The strong performance of
Wesfarmers in the retail sector of the country is mainly due to its production of home and garden
specialist products and providing online service to the customers. However, Woolworths have
diversified itself in number of business segments apart from food retailing such as liquor, petrol
stations and having gaming machines at pubs and restaurants. However, the company has
maintained its strong position in providing fresh food to people and ahs thus developed a strong
brand image in the retail market of Australia (Pink, 2008).
Bottom up Analysis of the Retail Industry (Wesfarmers and Woolworth)
Bottom up analysis is carried from the investor’s point of view and in this analysis the
focus is on the individual stocks rather than whole industry. Through analyzing the performance
of the individual companies, an attempt is made to make opinion on the industry as a whole. The
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two companies selected from the retail sector of Australia are Wesfarmers and Woolworth. Ratio
analysis has been conducted for years 2016 and 2017 to evaluate the financial performance of the
selected companies and conclusion with recommendation is drawn to interpret the performance
of the retail industry in Australia (Bull, 2007).
Financial data extracted from the annual reports of both the companies are given below. Only
that financial data is shown that is important for calculation of ratios.
Financial Data of Wesfarmers (Amount in Million Dollar)
Particulars 2016 2017
Net Profit
$
407.00
$
2,873.00
Total Assets
$
40,783.00
$
40,115.00
Net Revenue
$
65,512.00
$
68,015.00
Current Assets
$
9,684.00
$
9,667.00
Current Liabilities
$
10,424.00
$
10,417.00
Inventory
$
6,260.00
$
6,530.00
Prepaid Expenses
$
835.00
$
-
Quick Assets $ $
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2,589.00 3,137.00
Total Debts
$
7,410.00
$
5,757.00
Shareholder's Equity
$
22,949.00
$
23,941.00
Profit attributable for
shareholders
$
407.00
$
2,873.00
Earnings Per Share
$
0.18
$
1.27
Number of Equity Shares in
million 2246.00 2260.00
Payout Ratio in % 80.30% 368.90%
(Annual Report 2017 and 2016, Wesfarmers and Woolworth)
Financial Data of Woolworth (Amount in Million Dollar)
Particulars 2016 2017
Net Profit
$
(1,235.00)
$
1,534.00
Total Assets
$
23,502.00
$
22,916.00
Net Revenue
$
58,276.00
$
55,669.00
Current Assets
$
7,427.00
$
6,994.00
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Current Liabilities
$
8,993.00
$
8,824.00
Inventory
$
4,559.00
$
4,080.00
Prepaid Expenses
$
330.00
$
334.00
Quick Assets
$
2,538.00
$
2,580.00
Total Debts
$
6,039.00
$
4,566.00
Shareholder's Equity
$
8,471.00
$
9,526.00
Profit attributable for
shareholders
$
(1,235.00)
$
1,534.00
Earnings Per Share (in dollar)
$
(0.98)
$
1.19
Number of Equity Shares in
million 1264.00 1288.00
Payout Ratio in % 0.00% 53.30%
(Annual Report 2017 and 2016, Wesfarmers and Woolworth)
Ratio Calculations
Particulars 2016 2017
Profitability Analysis
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Return on assets Net Profit / Average Total Assets
Wesfarmers Limited 1.00% 7.16%
Woolworth Limited -5.25% 6.69%
Net Profit Margin Net Profit / Net Revenue
Wesfarmers Limited 0.62% 4.22%
Woolworth Limited -2.12% 2.76%
Liquidity Analysis
Current Ratio Current Assets /Current Liabilities
Wesfarmers Limited 0.93 0.93
Woolworth Limited 0.83 0.79
Quick Ratio Quick Assets / Current Liabilities
Wesfarmers Limited 0.25 0.30
Woolworth Limited 0.28 0.29
Capital Structure
Analysis
Debt to Equity Ratio Total Debt / Shareholder’s Equity
Wesfarmers Limited 0.32 0.24
Woolworth Limited 0.71 0.48
Equity Ratio Total Equity / Total Assets
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Wesfarmers Limited 56.27% 59.68%
Woolworth Limited 36.04% 41.57%
Market Performance
Earnings per Share
Profit attributable for shareholders / Number of
common Stock (Shares)
Wesfarmers Limited
$
0.18
$
1.27
Woolworth Limited
$
(0.98)
$
1.19
Dividend per Share
Total Dividend Distributed / Number of Common
Stock (Shares)
Wesfarmers Limited
$
1.02
$
1.00
Woolworth Limited
$
1.66
$
0.96
(Annual Report 2017 and 2016, Wesfarmers and Woolworth)
Detail Analysis of ratio calculation of both the companies
Liquidity or Solvency Analysis
Liquidity is defined as availability of cash and cash equivalent to discharge the current
liabilities of the company. Current assets are regarded equivalent to cash and cash equivalent and
it is used to pay the liabilities that are due in one year time period. In order to evaluate the
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liquidity or solvency position of the selected companies in the retail industry, the ratio such as
current ratio and quick ratio are calculated (Drake and Fabozzi, 2012).
Current ratio: Current ratio is most used liquidity ratio and it is calculated as current assets
divided current liabilities. Current assets are defined as assets that can be converted into cash and
cash equivalent in 1 year time period. Current liabilities are defined as expenses that need to be
paid in next one year. So it can be said that difference of current assets and current liabilities is
regarded as working capital and it is used to run the business successfully. Companies should
maintain the current assets greater than current liabilities, to have adequate amount of working
capital.
Current ratio of the Wesfarmers was 0.93 times in both the years that show poor liquidity
performance of the company. It was the same case with the Woolworth. The current ratio of
Woolworth was 0.83 times in year 2016 and it was further decline in year 2017 to 0.79 times.
Quick Ratio: Quick ratio is almost similar to current ratio and it is consider as important where
inventory is the significant part of the company revenue. As chosen industry belongs to retail
industry and the whole revenue of the company comes from inventory. In the quick ratio,
inventory and prepaid expenses are not considered while calculating the quick assets. The main
reason behind this is that it is not possible to convert the inventory into cash and cash equivalents
in one year period.
The quick ratios of both the companies are below the expected ratio and it shows the negative or
highly poor solvency position in both the years.
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Capital Structure Analysis
Capital means the financial resources employed in the business to purchase various
resources such as fixed and current assets. There are two category of capital, one is referred as
owner’s capital (Equity Capital) and other is known as debt capital. Debt capital bears some
fixed charge on the profit of the company, it is therefore known as leverage capital. Debt to
equity ratio and Equity ratio has been calculated to analysis the capital structure of both the
companies (Dyster and Meredith, 2012).
Debt to Equity ratio: This ratio is calculated as debt capital divided by the equity capital. Here
debt capital is calculated as some of liabilities that are due after one year time period and equity
capital is defined as shareholder’s fund.
Debt to equity ratio of Wesfarmers was 0.32 in year 2016 and it was reduced to 0.24 in year
2017 that shows debt amount has been decreased in the current year. It implies that Wesfarmers
has larger proportion of equity capital as compare debt capital and company is trying to reduce
the debt capital even more. On the other hand Woolworth has 0.71 times the debt capital as
compare to equity in year 2016 and it has been reduced to 0.48 times in year 2017. Woolworth
has maintained high proportion of debt capital in year 2016 but certainly reduced much of
amount in year 2017.
Equity Ratio: This ratio is defined as level of equity capital used to finance the total assets of the
company. It is beneficial for the company to finance more and more asset through use of equity
capital. The formula to calculate the equity ratio is shareholder’s fund divided by the total assets.
About 56 % of the total assets of the Wesfarmers are financed through equity capital and it was
increased 59.68 % in year 2017. In case of Woolworth only 36.04 % of total assets have been
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financed through equity capital in year 2016 but in year 2017, company has decreased the debt
capital and introduced some equity capital that has raised the percentage of equity capital. In year
2017 the equity ratio of Woolworth was 41.57%.
Overall capital structure of Wesfarmers was better than Woolworth in the years. When
talking about the performance in year 2017, Woolworth has put extra efforts to make the
significant changes in the capital structure.
Profitability analysis
Profitability analysis means evaluating the income earnings capacity of the companies
after taking into account all the expenses. Return on assets and net profit ratio are calculated to
evaluate the profitability of both companies.
Return on Assets: Return on assets is defined as percentage of income earned on the total assets
employed by the company. This ratio is considered as important company seeks to know the
profit they have earn on the assets used by them.
ROA of Wesfarmers was 1 % in year 2016 and it has increased to 7.16% in year 2017 that
indicates rise in profit capacity of the company in the current year. In case of Woolworth the
ROA was negative 5.25% and company has shown great efforts in year 2017 and has earned
return of 6.69 % in year 2017. It can be said that Woolworth performance has faced drastic
change in year 2017 through earnings good of profits.
Net Profit Ratio: Net profit ratio is the most famous ratio to evaluate the profitability
performance of the entity. It is calculated as net profit divided by the net revenue. In year 2016
the net profit ratio of Wesfarmers was 0.62% and it was increased to 4.22% in year 2017. In case
of Woolworth the net profit ratio was -2.12% and it was increased to 2.76% in year 2017.
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Overall profitability position of the Wesfarmers was much better than the profitability
position of the Woolworth Limited.
Market Performance analysis
Market performance is linked with how the company has performed with the market
conditions and what return they have provided to the shareholders. Companies distribute
dividend to their shareholders and it is why the reason why dividend is considered as most
important to evaluate the market performance of the companies (Krantz, 2016).
Earnings per Share: It is calculated as net profit divided by the number of equity shares. The EPS
of Wesfarmers was $0.18 in year 2016 and $1.27 in year 2017. On the other hand it was negative
$0.98 in year 2016 and $1.19 in year 2017 for Woolworth.
Dividend per Share: It refers to amount of dollar per share distributed to the shareholder’s as the
matter of their investment in the company. Both companies have distributed the dividend despite
of low income or negative income.
Conclusion and Recommendation
On the basis of overall analysis of the retail industry using the top down and bottom up
analysis it can be said that in the recent period the industry has started to grow again despite of
huge downfalls in previous years. It can also be proved through the ratio analysis of the selected
companies. The growth in the industry was due to increase in expenditure ratio of household in
year 2017. It is highly recommended to the investors to sale the shares in next six months as
there is huge possibility of increase in short term period due to increase in per capita income of
the household.
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