Wesfarmers Financial Analysis and Improvement

This assignment delves into the financial health of Wesfarmers, highlighting its liquidity challenges indicated by a current ratio below the recommended benchmark. The analysis explores strategies to enhance liquidity, such as reducing operating costs and selling unnecessary assets. Furthermore, it examines underperforming divisions like Cole, proposing solutions such as targeted marketing and experienced management recruitment. The document also discusses linking executive remuneration to company profitability for improved financial performance.

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Executive summary
This report seeks to analyze an Australian company that is publicly trading in the ASX and to
know its financial position in the last two years. Wesfarmers in the company in profile, it has
done well in terms of profitability and liquidity and the management team has led it to become
the biggest company in terms of revenue collection. The report is intended to advise a potential
investor on the best strategy of investing in the company. Wesfarmers is a good bargain for
investing as it is a highly profitable conglomerate(Elliott and Elliott, n.d.).

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Table of Contents
Introduction......................................................................................................................................3
Divisional performances..................................................................................................................5
Current business strategies and point of difference in target market...............................................6
Skills required..................................................................................................................................6
Strengths of management team........................................................................................................7
Profitability ratio..............................................................................................................................7
Liquidity ratio..................................................................................................................................8
Current management structure.........................................................................................................9
Remuneration trends......................................................................................................................11
Non wage related benefits for employees......................................................................................12
Conclusion and Recommendation.................................................................................................13
References......................................................................................................................................14

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Introduction
Wesfarmers is an Australian Company and a conglomeration of other companies with vast
interest in coal mining, fertilizer manufacturing, chemical, industrial and safety products
manufacturing. Wesfarmers is the largest company in Australia by revenue collection. In the year
2016, it received revenue of AU$ 65.98 billion overtaking rival company’s such as Woolworths
and BHP Billiton. It is also listed at no. 171 in the fortune 500 companies in the world making it
one of the biggest company in Australia and globally(Insights into IFRS, 2016).
Wesfarmers was founded in the year 1914 to help west Australian farmers in services and
merchandise. It was listed in 1984 in the Australian Securities Exchange. The company is
headquartered in Perth, West Australia and also has interest in New Zealand, United Kingdom,
Bangladesh and Ireland. In 2001, Wesfarmers became a freely traded company with open
ownership; it diversified its interest by acquiring other activities and businesses (Improving

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business processes, 2011). The divisions in which Wesfarmers invested in included; Cole, after
purchasing the Cole Group in a takeover move worth, A$ 22 billion, the largest in Australian
history. Others included in business were; home improvement and office supplies, department
stores, Kmart and Target departmental stores, chemicals, energy and fertilizers and resources
such as Cole and allied. Former interests were in Insurance(Van Greuning, Scott and Terblanche,
2011).
Wesfarmers Company is the largest employer in Australia. The company employs more than
220000 people in Australia and around the world.
Key personalities in Wesfarmers Company Limited are
 Michael Chaney- Chairman
 Richard Goyder- CEO
Divisional performances
The financial results have improved drastically over the years to strategically put Wesfarmers as
a leading company in terms of profitability. It has become the largest company in Australia in
terms of revenue collection beating large companies such as BHP Billiton.
Coles
Coles revenue dropped in 2017 from 216 albeit marginally while the return on capital employed
also dropped.
Home Improvement

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For home improvement the revenue increases from $ 11.57 billion in 2016 to $13.56 billion in
2017. This is a significant yet promising revenue increase for the division(Alexander, n.d.).
Department Stores
Revenues for the department stores reduced in the year 2017 albeit marginally from 8.62 billion
in 2016 to $8.57 billion in 2017. The drop is attributable to hard economic position in the
financial year.
Office Works
The revenues in this department increased in 2017 from $1.85 billion in 2016 to $ 1.96 billion in
2017. Earnings before interest and tax also increased in 2017 as compared to 2016.
Industrials
The revenue for this division increased from $4.67 billion in 2016 to $5.16 billion in 2017. The
overall financial performance for the company is better in 2017 than the previous year.
Industry trends
As a leading multinational company in Australia, its competitors are also doing quite well. The
profit for the year ending 2016 was $ 2.35 billion which makes it among the most profitable
companies in Australia. This is a good company for the Australian investor or any other potential
investor willing to invest in a company that leads in the industry. As a company with interests
predominantly in Australia and New Zealand an investor will be willing to invest in this
company(Insights into IFRS, 2016).

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Current business strategies and point of difference in target market
For Wesfarmers, the business strategies are usually expansion coupled by efficient products and
service deliveries. Due to a very competitive market, it is important to differentiate the services
provided to the customers and giving better services to the customers. Expanding means that the
company will start a lot of stores strategically in areas where there are people interested in their
products and services like where there are a lot of farmers (Heesen, n.d.).
Skills required
Wesfarmers has employed 220000 people with different skills set worldwide. It is also the
biggest employer in Australia. As a leading conglomerate company, the company employees all
set skill to help it in various divisions (Lusthaus et al., 2014). These include engineers, industrial
chemists, accountants and even doctors. This are the skilled employees, however, it has
employed many more semi-skilled employees especially in its department stores, Cole and
industrials(Roode and Leith, 2009).
Strengths of management team
Key personalities in Wesfarmers Company Limited are
 Michael Chaney- Chairman
 Richard Goyder- CEO
For Michael Chaney, the chairman of the board of Wes farmers, he has brought stability in
growth and decision strategy of the company (Bradley, n.d.). As an executive with years of
experience in company’s management, Michael, is credited for making the company what it is

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today and the leading Australian company in terms of revenue collection. In 2017, the company
under the able leadership of Michael has reported an increase of 22.1% in profits to $2.83 billion.
Richard Goyder has been instrumental in running the day to day activities of the company. With
a strong management team working directly under him, he has been instrumental in expanding
the company and therefore a corresponding increase in profits (Reading, 2002). The management
strength is manifested in its diversity and experience of the management team(Roode and Leith,
2009).
Profitability ratio
Ratio Formula 2017 2016
Net profit ratio Net Income *
Net Sales
2873/68015
=4.22%
407/65850
=.06%
Return on assets ROA = Net Profit ÷
Average Total Assets
2873/40837=
7.00%
407/41394=
9.8%
Return on Equity ROE=Net profit/
shareholders’ equity
4.33% 4.17%
This shows that the company is fairing on well in terms of profitability index in 2017 and in
2016.

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Liquidity ratio
Ratio Formula 2017 2016
QUICK Ratio Current assets-inventory/current liabilities 0.93 0.93
Current Ratio Current Assets/ Current Liabilities 0.3 0.3
Wesfarmers may be facing liquidity problems as the above liquidity ratio shows because the
yard stich for a safe company should be 2:1 for current ratio and 1:1 for quick ratio. The ratios
for this company show a struggling company in terms of liquidity.
Image 1: Liquidity Ratios of Wesfarmers

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Source: http://quotes.wsj.com/AU/XASX/WES/financials/annual/balance-sheet
Current management structure
The company uses functional organizational structure. This is the management structure that the
company employs.. Although this type of structure was very useful in terms of efficiency in the
processes related to the production of mass production goods, it is now considered as a model for
efficient project management(Van Greuning, Scott and Terblanche, 2011)..
When anWesFarmers employs a functional structure, the functions to be performed are grouped
together. For Example, Wesfarmers has the following departments, such as sales, marketing,
human resources, accounting, etc.
It is a vertical structure as each functional department within Wesfarmers is integrated vertically
from the bottom to the top of the organization. Thus, the company’s head of finance is in charge
of the work of all the team grouped in the department of his specialty. Within the functional
divisions of an organization, employees tend to develop a specialized set of tasks and usually
their members share the same profession. This is why Wesfarmers has adopted this type of
management structure. This facilitates the operational efficiency of each group; it can also lead
to lack of communication among the various functional groups within the organization, making it
slow, inflexible and bureaucratic(Van Greuning, Scott and Terblanche, 2011)..

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A functional management structure is more suited to the production of standardized goods and
services in large volume and at low cost. On the other hand, functional organizations are likely to
develop efficiency improvements for the vertical integration of their activities, so that products
can be distributed and sold quickly and at low cost.
Ownership structure
Being a listed company, Wesfarmers has so many shareholders. According to the 2016 balance
sheet the company had a shareholder base of approximately 530,000. The total shareholders’
equity in 2016 stood at 55.5% while debt stood at 44.5%. This shows that the debt in the capital
structure is still manageable(Van Greuning, Scott and Terblanche, 2011)..
Remuneration trends
Most companies that have been listed in the ASX have linked remuneration to profits. The
changes in both long term and short term remuneration should be aligned with profit changes. As
any other company in the ASX, West farmers has been facing challenges from shareholders on
the need to effectively structure executive remuneration, which is a call for the company to be
open on how much executive and management are being remunerated. This is why as a listed
company, it is a requirement for this company to make a remuneration report available to its
shareholders.
Some of the trends that have affected Wesfarmers are the two strikes rule and shareholders
activism which has increased the proportion of LTI executive remuneration. Second, one of the
primary LTI instrument issued is the LTI instrument when it comes to performance rights.

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Shareholders of Wesfarmers are concerned when non financial non market hurdles drive
bonuses, and particularly when the those factors are not related to shareholders wealth creation.
High earners from last year are Michael Chaney who chairs the group and Richard Goyder who
is the Managing Director and CEO of the group. The two took home millions of Dollars worth of
salaries and bonuses.(Van Greuning, Scott and Terblanche, 2011).
Non wage related benefits for employees
Some of the benefits that employees of Wesfarmers get are :Free days for employees on the day
of their birthdays or family birthdays, or accompany them in difficult times of loss of a loved
one.
Social benefits: insurance, retirement plans, aid to the education of children, payment of
transportation costs and food.
Assistance in training and training that is not directly related to our daily work as languages,
literary or other workshops and that the worker considers necessary for personal development.
Volunteer activities promoted by the organization and with free time for employees to carry out
such activities.
Emotional salary is a key factor in retaining talent. More and more people choose a company to
work for factors that go well beyond the salary issue.
Flexible schedule, ie, meet the eight hours but without strict opening or closing time, what is
really important is to do our work without having to be eight hours in an office. Except for the

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most closed minds, the world understands that meeting a schedule is not synonymous with
productivity. Wesfarmers has already started rolling out such programs.
Teleworking; highly valued by the new generations of workers, accustomed to the use of
computer tools, but it is also an important benefit for parents who have sick children or relatives
and find it difficult to reconcile work and family life. This is still in the pipeline for the company.
Aid in the development of the professional career; the most advanced talent management
organizations train their employees to develop it. They help them financially in the payment of
some training or make it easier for them to attend these training courses(Van Greuning, Scott and
Terblanche, 2011).
Conclusion and Recommendation
As we have seen above , Wesfarmers has been having liquidity problems for the last two years.
In 2016 and 2017, the company registered current ratios of 0.93 in the two years. This is way
much below the recommended ratio of 2. Thus Wesfarmers can improve its liquidity by reducing
overheads costs and other operating costs (Rothwell, n.d.). For example, the company can
negotiate better terms for financing funds, long term insurance e.t.c. Second, another way of
improving liquidity is by selling unnecessary assets, for example, Wesfarmer can sell off old
equipment (Padgett, 2012).
The company has some divisions that are not performing well such as Cole division, the profit
for this division decreased in the 2017 financial year. The company should therefore do more
marketing for this division and also hire more experienced management team to steer this
division back to profitability. Another way of improving the company’s profitability is by

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pegging remuneration of executives to the company’s profitability (Sherman and Zhu, 2006).
Executives have been getting a lot of money from their salaries and bonuses, with the current
economic factors not withstanding. Therefore, any increase in salaries and bonuses paid out to
the board and senior management should reflect the improvement of profits for the company
(Heesen, n.d.).

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References
Alexander, D. (n.d.). International financial reporting and analysis.
Bradley, J. (n.d.). Improving business performance with Lean.
Elliott, B. and Elliott, J. (n.d.).Financial accounting and reporting.
Financial reporting. (2003). London: BPP Pub.
Heesen, B. (n.d.). Effective strategy execution.
Holtzman, M. (2008).What's new in financial reporting. Florham Park, N.J.: Financial
Executives Research Foundation.

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Improving business processes. (2011). Boston, Mass.: Harvard Business.
Insights into IFRS. (2016). London: Sweet & Maxwell.
Lusthaus, C., Adrien, M., Anderson, G., Plinio, G., Carden, M. and De Marulanda, N.
(2014). Organizational Assessment. Ottawa: International Development Research Centre.
Padgett, C. (2012). Corporate governance. Houndmills, Basingstoke, Hampshire: Palgrave
Macmillan.
Roode, M. and Leith, K. (2009).Financial reporting. [Pretoria]: [Salt and Pepper].
Reading, C. (2002). Strategic business planning. London: Kogan Page.
Rothwell, W. (n.d.). Performance consulting.
Sherman, H. and Zhu, J. (2006). Service Productivity Management. Boston, MA: Springer
Science+Business Media, LLC.
Van Greuning, H., Scott, D. and Terblanche, S. (2011). International financial reporting
standards. Washington D.C.: World Bank.
WAHLEN, J. (2017). FINANCIAL REPORTING, FINANCIAL STATEMENT ANALYSIS AND
VALUATION. [S.l.]: CENGAGE LEARNING.