Financial Analysis of Wesfarmers: Profitability, Liquidity, Efficiency, Market and Gearing Ratios

The aim of the assessment is to understanding the current financial position of Wesfarmers by calculating the profitability, liquidity, efficiency, market and gearing ratios from 2016 to 2017. The financial performance of the organization has improved exponentially from 2016 to 2017, as detected from the financial ratios.

Wesfarmers
FIN600 TX 2017
NAME: STUDENT ID:

Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
Executive Summary
The aim of the assessment is to understanding the current financial position of Wesfarmers by
calculating the profitability, liquidity, efficiency, market and gearing ratios from 2016 to 2017. In
addition, the financial performance of the organization has improved exponentially from 2016 to
2017, as detected from the financial ratios. The company has improved its operations and net
income by reducing the impairment cost during 2017, as compared to 2016. Moreover, the net debt
of the company has declined by 31%, which has improved its current financial condition. Hence,
investment in Wesfarmers could allow the investor to raise its investment capital and enjoy the
rising dividends, which is being provided by the company.
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
Contents
1 Introduction...................................................................................................................................3
2 Company Analysis........................................................................................................................3
3 Ratio Analysis...............................................................................................................................3
4 Recommendations and overall assessment...................................................................................6
5 References/Bibliography...............................................................................................................8
Appendices – attached Excel Spreadsheet.........................................................................................10
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
1 Introduction
1.1 Background and Business
The assessment aims in evaluating the financial performance of Wesfarmers for the two
fiscal years. Moreover, adequate ratios are used in detecting the current financial performance of the
organization and how it could be an adequate business investment. Wesfarmers is considered to be
one of the highest levels of income generating organization, which operates in retail sector of
Australia. The organization has been operating since 1914, where it started its operation in Australia
and now is operating in different countries. The organization has grown immensely, where it has
become an Australian conglomerate. The company has been operating in retail, fertilizers, safety
products, chemicals, coal mining, and industrial products. The wide variety of industry that has
been maintained by the organization has provided them the name of conglomerate, the ones who
operation in different sector or industries from the parent company. However, the main operation of
Wesfarmers is in retail sector, which has provided the organization with higher revenue and profit.
Moreover, Wesfarmers is also considered to be one of the biggest employers, where it currently
employees 220,000 persons within its vicinity (Wesfarmers.com.au, 2018).
2 Company Analysis
2.1 Financial statements, Current Financial performance, economic outlook
The financial performance of Wesfarmers is relatively increased in 2017 as compared to
2016, as your organization has generated higher revenues and profit during the fiscal year. The
increment in financial performance was relatively detected from the growth of net profits, which
increased from 407 million in 2016 to 2,873 million in 2017. This drastic growth in net profit was
mainly achieved by the reduction in administrative expenses of the organization. The overall
revenues of the organization increased nominally, while the profit was raised by exponential
numbers. This was only achieved with the production in impairment expenses, which declined from
the levels of 2,172 million in 2016 to 49 million in 2017 (Wesfarmers.com.au, 2018).This
improvement in the financial performance of Wesfarmers indicate a positive attribute for the
organization. The current financial performance of Wesfarmers has relatively improved, as the
organization has generated higher returns during the fiscal year. the current economic outlook of
Australia is a relatively positive, as maximum of the Australian industries are generating profits.
The GDP of Australia is relatively increasing due to the presence of low unemployment and higher
income generated by its citizens. The economic growth in Australia has allowed multinational
companies to increase their revenues and generate higher profits.
3 Ratio Analysis
3.1 Profitability and Market ratios
(see appendix for
calculations)
2017 2016 Industry average
Return on assets 7.10% 1.00% 3.77%
Return on equity 12.25% 1.77% 9.14%
Net profit margin 4.20% 0.62% 1.97%
Gross profit margin 32.27% 31.00% 31.90%
Expense ratio/Cost to
Income ratio
82% 95% 60%
Cash return on sales 6.17% 5.10% 5%
Earnings per share $2.547 per share $0.362 per share $1.34
Price earnings ratio 16 times 111 times 67.38 times
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
Earnings yield 6.35% 0.90% 1.2%
Dividends per share $2.23 $1.86 $1.07
The profitability and market ratio of Wesfarmers can be identified from the above table,
which indicates the positive attributes of the organization that has been achieved during the fiscal
year of 2017. From the evaluation of the profitability ratios the organization has obtained higher
revenue during the fiscal year of 2017 as compared to 2016. the return on Assets of the
organization has improved from the levels of 1% in 2016 to 7.10% in 2017. This was mainly
achieved due to the exponential increment in net income of Wesfarmers during the financial year of
2017. Moreover, the return on Assets of the organization is higher than the industry average, which
depict the financial progress that has been obtained by Wesfarmers (Kanapickiene & Grundiene,
2015). The return on equity of Wesfarmers has also increased from the levels of 1.77% to 12.25%,
which was only possible due to the high net income generated by the organization. The industry
average for return on equity is at the levels of 9.14%, which is relatively lower than the actual
values of the organization.
In the similar instance, net profit margin ratio and gross profit margin ratio of Wesfarmers
has adequately increased during the fiscal year of 2017. However, the growth in gross profit margin
is seen at the levels of 1.27%, as the ratio increased from the levels of 31% to 32.27% in 2017. This
mainly indicated that the growth in revenues and reduction in cost of sales was not high during the
fiscal year. Moreover, the industry average for gross profit margin is mainly at the levels of 31.90%,
which is slightly higher than the values that is generated by Wesfarmers. On the other hand, the net
profit margin of Wesfarmers has increased exponentially from the levels of 0.62% in 2016 to 4.20%
in 2017, which was achieved due to the reduction in operating expenses such as impairment cost.
The industry average for net profit margin is at the levels of 1.97%, while the values of Wesfarmers
is at the levels of 4.2%, which indicates the positive attributes of the organization in generating
higher net income from its operations.
Expense ratio and cash return on sales ratio of Wesfarmers is adequately depicted in the
above table, where both the ratios are higher than the industry average. The expense ratio has
declined from the levels of 95% to 82% in 2017, which portrays a positive attribute of the
organization for reducing is expenses during the fiscal year. Moreover, the increment in cash returns
on sales from the levels of 5.10% to 6.17% in 2017 depicts the incremental condition of Wesfarmers
operations. The relative improvement in the expense ratio needs to be conducted by Wesfarmers for
reducing its expenses and maximizing the level of profits, which could be generated from
operations. Furthermore, continuous increment in cash return on sales needs to be conducted by the
organization for increasing its cash position during the fiscal year (Atoom, Malkawi & Al Share,
2017).
The evaluation of earnings per share and price on in ratio relatively supports the market
ratios of Wesfarmers during the fiscal year of 2017. The increment in earnings per share from the
levels of 0.362 to 2.547 indicates the high revenues that has been generated by the company during
the financial year. The current earnings per share of Wesfarmers is relatively higher than the
industry average which depicts its positive financial condition. The price earnings ratio of
Wesfarmers has declined exponentially during the fiscal year of 2017 from the levels of 111 times
to mere 16 times. This indicates an investment opportunity for the investors, as the industry average
is relatively higher than the actual valuation of Wesfarmers.
In the same instance, both the earnings yield and dividend per share of Wesfarmers has
relatively improved during the fiscal year of 2017, due to the high income that has been generated
by the company. The increment in earnings yield is due to the high EPS, which was obtained by the
rising net income of the organization, while its share price remained more or less same. The
combination of the market ratio directly portrays the rising financial health of Wesfarmers, where
the organization can generate higher revenues from investment in form of dividends (Rey &
Santelli, 2017).
3.3 Efficiency ratios
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
(see appendix for
calculations)
2017 2016 Industry average
Asset turnover 1.69 Times 1.62 times 1.29 times
Cash return on assets 0.10 Times 0.08 times 0.12 times
Fixed Asset turnover 2.25 Times 2.12 times 3.1 times
The efficiency ratio of Wesfarmers is detected in the above table, where the performance of
the organization has improved in some areas. The high growth achieved by Wesfarmers during the
fiscal year of 2017 led to the increment in asset turnover from the levels of 1.62 to 1.69, which was
a relatively higher than the industry average. This directly indicated the overall efficiency of the
management to generate higher returns from investment while reducing any kind of excessive
expenditure from the operations. However, the evaluation of cash return on assets indicates an
increment in its values from the levels of 0.08 times to 0.10 times, which is lower than the industry
average. On the other hand, fixed asset turnover ratio of the company has improved nominally from
the levels of 2.12 times in 2016 to 2.25 times in 2017.This was only achieved due to the rising
revenues obtained by the organization, while the industry average is higher than the actual values of
Wesfarmers. This relatively indicates that the efficiency of the management has improved during
2017, as asset turnover ratio of the organization has increased adequately (Giordani et al., 2014).
3.3 Liquidity ratios
(see appendix for
calculations)
2017 2016 Industry average
Current ratio 0.93:1 0.93:1 1.43:1
Quick ratio 0.30:1 0.33:1 1.05:1
Receivables turnover 122 Days 98 Days 14 Days
Average collection period 9 Days 14 Days 11 Days
The liquidity ratio of Wesfarmers is a relatively depicted from the above calculation which
indicates its low financial position. The low financial condition of Wesfarmers the relatively
detected from the low values of current ratio and quick ratio. The current ratio of the organization
has remained same, which is at the levels of 0.93, while the quick ratio has declined from 0.33 to
0.30 in 2017. This decline in quick ratio is due to the high inventories that has been accumulated by
the organization during the fiscal year. The decline in both total current assets and current liabilities
of the organization is relatively nominal, which did not reflect major changes in the current ratio.
On the other hand, the excessive increment in inventory has reduced the current ratio of
Wesfarmers. both the current ratio and quick ratio of the organization is not up to the industry
average, which depicts the low financial condition of the organization to support its short-term
obligations. The company is considered to be highly risky, as adequate current ratio and quick ratio
levels are not being maintained for supporting its future obligations.
Moreover, the accounts receivable turnover of the organization has increased exponentially
from 98 days to 122 days in 2017, while the industry average is at the levels of 14 days. This
indicates that the company is providing higher no credit x to the customers which is blocking
essential resources of the organization. On the other hand, the average collection period of the
organization has declined from the levels of 14 days to 9 days, while the industry average is 11
days. This mainly indicates that the collection period of Wesfarmers has improved, which improves
the cash position of the organization (Le & Viviani, 2018).
3.4 Gearing ratios
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
(see appendix for
calculations)
2017 2016 Industry average
Debt to equity ratio 20.09% 30.95% 64.46%
Debt ratio 12% 17% 45%
Equity ratio 60% 56% 55%
Cash debt coverage 25% 19% 21%
Interest cover ratio 16.67times 4.37times 17.22 Times
The gearing ratio of Wesfarmers indicate the positive attributes of the organization, as both
its income and debt has declined over the period of 2 years. The debt to equity ratio of the company
has declined from the levels of 30.95% in 2016 to 20.09 % in 2017. This decline was mainly
possible due to the increment in equity and decline in net debt accumulated by Wesfarmers in 2017.
The substantial decline in debt of the company from the levels of 7,103 million in 2016 to 4,809
million in 2017 led to the improvement in its gearing ratio. Moreover, the debt to equity ratio is a
relatively lower than the industry average, which is a positive indication for the organization, as low
debt reduces its finance cost. Furthermore, the debt ratio has declined from the levels of 17% to
12% due to the production in the net debt accumulation of the organization. The industry average is
relatively at the levels of 45%, which is higher than the actual values of Wesfarmers. Likewise, the
equity ratio of the company has improved nominally from the levels of 56% in 2016 to 60% in
2017. This increment is relatively higher than the values of industry average, which indicates the
positive attributes of the organization and depicts positive financial position (Phung, Nguyen &
Nguyen, 2017).
The cash debt coverage of the company has increased from the levels of 19% to 25% in
2017, due to the rising values of operating cash and declining values of total liabilities. The changes
in value of operating cash and total liabilities has allowed the organization to improve its current
cash to debt coverage ratio, which depicts the positive financial position of Wesfarmers. In the same
scenario, the interest coverage ratio of Wesfarmers has increased exponentially from the levels of
4.37 times in 2016 to 16.67 times in 2017, which indicates the additional loan that could be taken
by the organization. The increment in interest coverage ratio is due to the rising EBIT of
Wesfarmers, which was achieved by reducing the impairment caused during the fiscal year of 2017.
However, the interest coverage ratio of Wesfarmers is not up to the industry standards, which
indicates that the company needs to increase their current EBIT or reduce the finance cost.
4 Recommendations and overall assessment
From the valuation of the above ratios the current financial projection of Wesfarmers is
considered to be positive, as the organization is reducing its operating expenses and maximizing the
level of income that could be generated from its operations. Seeing the current progress that has
been achieved by Wesfarmers there is a future possibility for the company to achieve success and
generate higher revenues. However, the evaluation did not indicate the likelihood of a merger or
acquisition that will be conducted by Wesfarmers during the next fiscal year. There are many ways
in which the company needs to improve its current operation to succeed and continue the profit
generating streak. The accumulation of current assets would be effective for the organization to
improve its capability for supporting the financial obligations in near future.
Furthermore, organization needs to have ethical consideration, when they become insolvent,
as they are not able to support their financial obligations without selling the assets that was being
used by and its operations. The current financial performance of West farmers is adequate, where
the debt condition is nominal and does not lead to any kind of insolvency in near future, unless the
organization increases the exposure in debt. The current political competitive environment of
Australia is a relatively high, as the Retail Industry is going through volatility after the introduction
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
of online shopping in the country. The Retail Industry that has changed there is scope and
operations from hard core sales to online sale has a relatively survived the changing market.
The changes in employee pay, preference of customers and political decisions can be
considered as one of the external factors that means to be considered by investors while evaluating
the performance of the organization. From the evaluation of the financial ratios, investment in
Wesfarmers can be considered viable. The company has generated higher revenue in 2017, which
indicates its positive attributes to provide a higher return from investment. Wesfarmers has provided
higher dividends, while the price earnings ratio is low, which indicates that the share value will
increase eventually. Hence, investment can be conducted in Wesfarmers, as it will increase returns
in future.
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
5 References/Bibliography
Abdul-Baki, Z., Uthman, A. B., & Sannia, M. (2014). Financial ratios as performance measure: A
comparison of IFRS and Nigerian GAAP. Accounting and Management Information
Systems, 13(1), 82.
Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A case study in
emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia, 79, 13-26.
Atoom, R., Malkawi, E., & Al Share, B. (2017). Utilizing Australian Shareholders' Association
(ASA): Fifteen Top Financial Ratios to Evaluate Jordanian Banks' Performance. Journal of
Applied Finance and Banking, 7(1), 119.
Eckerd, A. (2015). Two approaches to nonprofit financial ratios and the implications for managerial
incentives. Nonprofit and Voluntary Sector Quarterly, 44(3), 437-456.
Elhaj, M. A. A., Muhamed, N. A., & Ramli, N. M. (2015). The influence of corporate governance,
financial ratios, and Sukuk structure on Sukuk rating. Procedia Economics and Finance, 31,
62-74.
Giordani, P., Jacobson, T., Von Schedvin, E., & Villani, M. (2014). Taking the twists into account:
Predicting firm bankruptcy risk with splines of financial ratios. Journal of Financial and
Quantitative Analysis, 49(4), 1071-1099.
Goyal, S., & Bhatia, A. (2016). Analysis of Financial Ratios for Measuring Performance of Indian
Public Sector Banks. International Journal of Engineering and Management Research
(IJEMR), 6(2), 152-162.
Gunawardena, M. M. D., Peiris, H. R. I., Wijesundera, A. A. V. I., Weerasinghe, D. A. S., &
Krishna, T. P. C. R. (2015). Predictability of Stock Returns Using Financial Ratios Empirical
Evidence from Colombo Stock Exchange.
Johri, S., & Maheshwari, T. (2015). An empirical study on the practical efficacy of ideal financial
ratios. Pranjana, 18(1), 41.
Kanapickienė, R., & Grundienė, Ž. (2015). The model of fraud detection in financial statements by
means of financial ratios. Procedia-Social and Behavioral Sciences, 213, 321-327.
Laitinen, E. K., Lukason, O., & Suvas, A. (2014). Behaviour of financial ratios in firm failure
process: an international comparison. International journal of finance and accounting, 3(2),
122-131.
Le, H. H., & Viviani, J. L. (2018). Predicting bank failure: An improvement by implementing a
machine-learning approach to classical financial ratios. Research in International Business
and Finance, 44, 16-25.
Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance
indicators in bankruptcy prediction: A comprehensive study. European Journal of
Operational Research, 252(2), 561-572.
Misund, B. (2017). Financial ratios and prediction on corporate bankruptcy in the Atlantic salmon
industry. Aquaculture Economics & Management, 21(2), 241-260.
Mousa, G. A. (2015). Financial Ratios versus Data Envelopment Analysis: The Efficiency
Assessment of Banking Sector in Bahrain Bourse. International Journal of Business and
Statistical Analysis, 2(2), 75-84.
Nuryani, N., Heng, T. T., & Juliesta, N. (2015). Capitalization of Operating Lease and Its Impact on
Firm's Financial Ratios. Procedia-Social and Behavioral Sciences, 211, 268-276.
Phung, T. T. M., Nguyen, M. T., & Nguyen, T. H. (2017). The Role of Financial Ratios in the
Variance of Stock Trading Volume in Emerging Stock Markets.
Rey, A., & Santelli, F. (2017). The Relationship between Financial Ratios and Sporting Performance
in Italy’s Serie A. International Journal of Business and Management, 12(12), 53.
Schmidgall, R. S., & DeFranco, A. (2016). How to best use financial ratios in benchmarking and
decision making in clubs: Review of the decade 2003–2012. International Journal of
Hospitality & Tourism Administration, 17(2), 179-197.
Wesfarmers.com.au. (2018). Wesfarmers.com.au. Retrieved 16 August 2018, from
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
Appendices – attached Excel Spreadsheet
Profitability and Market Ratios - 2017
2017 2016
Average
for
Industry
Return on
Assets (Profit / Average total assets)
Profit / ((Year 1 Total
A + Year 2 Total A)/2) Profit /Year 2 Total A
0.070992612 0.009979648
7.10% 1.00% result %
Return on
Equity (Profit / Average equity)
Profit / ((Year 1 OE +
Year 2 OE)/2) Profit /Year 2 OE
0.12254212 0.017734978
12.25% 1.77%
Net Profit
Margin Net profit / Sales or revenue NP/ Revenue NP/ Revenue
0.041975922 0.006168442
4.20% 0.62% result %
Gross Profit
Margin Gross profit / Sales or revenue GP/ Sales GP/ Sales
0.32267255 0.310028645
32.27% 31.00% result %
Net Interest
Income
Net Interest Income / Average
Earning Assets
NII / ((Year 1 earning
A + Year 2 earning
A)/2) NII / Year 2 earning A
for banks only 0 0
0.00% 0.00% result %
Expense
ratio
Expenses (excluding tax) / Net
sales Exp / Revenue Exp / Revenue
(using operating expenses/operating income) 0.820375821 0.951261244
82% 95% result %
Cash return
on sales
Net cash flow from operating
activity / Sales or Revenue $ op activities / REV
$ op activities /
REV
0.061743907 0.05099953
6.17% 5.10% result %
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
Earnings per
share
Profit for shareholders / Number
of ordinary shares $2.547 per share $0.362 per share
EPS taken from annual report 2.547 0.362
Price
earnings
ratio
Current market price / Earnings
per share $XX / EPS $XX / EPS
share price taken from annual report 16 111
16 times 111 times
result
times
Earnings
yield EPS / Share price EPS / $XX EPS / $XX
share price taken from annual report 0.063484546 0.009027431
6.35% 0.90% result %
Dividends
per share
Dividends - Special dividends/ No
of shares $2.23 per share $1.86 per share
$xx per
share
(determined
) DPS taken from annual report 2.23 1.86
Efficiency Ratios – 2017
2017 2016
Average
for
Industry
Asset
turnove
r Sales / Average total assets
revenue /
((Year 1 Total A
+ Year 2 Total
A)/2)
revenue / Year
2 Total A
1.69 1.62
1.69 times 1.62 times
result
times
Cashflo
w
return
on
assets
Net cash from op activities / Average total
assets
$ op activities/
A
$ op activities/
A
0.10 0.08
0.10 result
times
0.08 result
times
result
times
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
Fixed-
Asset
Turnove
r Ratio Sales / Total non current assets
revenue / Total
NCA
revenue / Total
NCA
2.25 2.12
2.25 times 2.12 times
result
times
Liquidity Ratios – 2017
2017 2016
Average
for
Industry
Current
Ratio
Total
current
assets /
Total
current
liabilities CA / CL CA / CL
0.9
3
0.9
3
0.93:1 0.93:1 XX:1
Quick Ratio
(Total
current
assets -
Inventory) /
Total
current
liabilities (CA - INV) / CL (CA - INV) / CL
0.3
0
0.3
3
0.30:1 0.33:1 XX:1
Receiveable
s turnover
Credit sales
rev / Avg
receivables
(Credit sales rev/ ((Year 1 Acc rec
+ Year 2 Acc rec)/2)/100) *365
(Credit sales rev/Acc
rec)/100*366
122 98
122 result days 98 result days
result
days
Average Average (Acc rec *365) / Rev (Acc rec *365) / Rev
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
collection
period
receiveable
s x 365 /
Net credit
sales rev
9
1
4
9 days 14 days
result
days
Gearing Ratios -2017
2017 2016
Averag
e for
Industr
y
Debt to
Equity
Total debt/Total equity or Total
liabilities/Total equity Debt / Equity Debt / Equity
(use debt figures only) - DEBT or
BORROWINGS 0.200868802 0.309512397
20.09 30.95
result
%
Debt ratio Total debt / Total assets Debt / Total Assets Debt / Total Assets
0.119880344 0.174165706
12% 17%
result
%
Equity Ratio Total equity / Total assets OE / A OE / A
0.596809174 0.562709953
60% 56%
result
%
Cash debt
coverage
$$ from op activities / Avg total
liabilities
$ operating activities /
((Year 1 Total L + Year
2 Total L)/2)
$ operating activities /
Year 2 Total L
0.248529758 0.188684535
25% 19%
result
%
Interest
coverage
ratio EBIT / Interest expense EBIT / Interest Exp EBIT / Interest Exp
16.67 4.37
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Student name – ID FIN600 TX 2017
Assignment – Wesfarmers
16.67 times 4.37 times
result
times
14