Financial and Economic Analysis of Wesfarmers Limited

This report provides an analysis of the financial and non-financial performance of Wesfarmers Limited, an ASX listed entity involved in diverse businesses such as retail, chemicals, fertilizers, coal, industrial and safety products. It includes key financial ratios, interpretation of financial analysis, and future market potential.

Financial and Economic Interpretation and Communication
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Resource A
Executive Summary
The present report is developed for the purpose of providing an analysis into the
financial and non-financial performance of an ASX listed entity. The analysis is undertaken
with the help of information extracted form the annual report and other recent publications
containing the information in relation to the selected company. The analysis is carried out to
provide recommendations to the potential investor for taking the investment decision. The
company selected is Wesfarmers limited, an ASX listed entity involved in diverse businesses
such as retail, chemicals, fertilizers, coal, industrial and safety products. It is recognized as a
leading retia company of Australia having about 220,000 employees base.
Analysis
Key Measures that shows the financial performance of Wesfarmers
Particulars FY17 FY16
$M $M
Total Revenue $ 68,015.00 $65,512.00
Operating Expenses $ 16,973.00 $16,209.00
EBIT $ 4,683.00 $ 3,778.00
$ 2,873.00 $ 407.00
Earnings Per share $ 2.55 $ 0.36
Current Assets $ 9,667.00 $ 9,684.00
Current Liabilities $ 10,417.00 $10,424.00
Non Current Assets $ 30,448.00 $31,099.00
Long term debts $ 5,757.00 $ 7,410.00
Shareholder's equity $ 23,941.00 $22,949.00
Cash Flow from operating activity $ 4,226.00 $ 3,365.00
Profit for the period from continuing
and discontinued operations
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Earnings Per share $ 2.55 $ 0.36
Current Assets $ 9,667.00 $ 9,684.00
Current Liabilities $ 10,417.00 $10,424.00
Non Current Assets $ 30,448.00 $31,099.00
Long term debts $ 5,757.00 $ 7,410.00
Shareholder's equity $ 23,941.00 $22,949.00
Cash Flow from operating activity $ 4,226.00 $ 3,365.00
$ 402.00 $ (100.00)
Key Financial Ratios of Wesfarmers
Net increase/(decrease) in cash and
cash equivalents
There has been changes in the financial results of Wesfarmers over the last tow years.
The company has significantly improved its financial outcomes in the year 2017 as compared
to the year 2016. This is largely on account of increasing ability of the company to manage its
cash resources adequately.
Interpretation
Financial Analysis
It can be stated from the analysis of the financial performance of the company over
the last two years that its profitability position has improved in the year 2017 as compared to
the previous year. The net profit ratio of the company has also improved in the year 2017
depicting that its realizing larger revenue growth and have improved its operational
efficiency. The return on assets ratio has also strengthened depicting the increasing ability of
the company to realize sales from asset utilization. The company is also able to achieve high
return on equity employed and also have reduced financial leverage as depicted from reduced
debt-equity ratio in the year 2017 as compared to the year 2016. Also, there is increase in its
liquid asset resources for meeting the financial liabilities in the respective year. Therefore, it
can be stated from the overall financial analysis of Wesfarmers that it is performing
financially sound (Wesfarmers Limited: Annual Report, 2017).
Resource B
Non-Financial Information
The core business areas of Wesfarmers Pty Ltd are supermarkets, liquor, hotels,
convenience stores, home improvement, office supplies and department stores. It is also
having industrial divisions in business areas of chemicals, energy, fertilizers, safety products
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and coal. The company carries out its operations mainly across Australia and New Zealand.
There is a slight reduction in the segment revenue of its major supermarket unit of Coles from
39,242($m) to 39,217 ($m). The investor section in the online website of the company
contains information for verifying the industry trends (Wesfarmers Limited, 2018).
The current business strategy of the entity is to create long-term returns for the
shareholders through adequate financial management of its diversified portfolio of business.
It aims to achieve its corporate strategy by strengthening existing business through achieving
operational excellence and meeting the customer expectations. The key customers of the
company are differentiated on the basis of nature of its different operational sections. The
target customers differ on the basis of age and other demographic characteristics. Wesfarmers
intend to develop a diverse employee base having varying competencies and backgrounds’ in
order to meet appropriately the varying job requirements. The company specifically aims to
recruit talent having creative and innovative skills to meet the changing needs of its different
target market (Mitchell, 2015).
As analyzed from the financial results of its operating segments, the company present
market potential is supermarket as it is realizing larger segment revenue from its supermarket
sections of Coles, KMART and Target. The future market potential is its growing
performance in the industrial businesses that is expected to deliver strong returns in the future
period of time. Also, its resources business has recorded a significant increase in the earnings
and is likely to depict a good performance in the future context (Sharp, 2018). The strong
macro-economic conditions in Australia supported by low inflation and interest rates will
have a positive impact on the spending power of consumers. As such, the retail business
portfolio of the company is expected to deliver strong performance in the future context (The
Future of Retail, 2017).
The Board of the company has elected key management personnel on the basis of
diverse skills and competencies. The management personnel are having different
backgrounds and higher educational qualifications with strong industrial experience that will
support the financial growth and development of the company in the future context. The
remuneration for the highest earners, that is, Chief Executive Officer, has increased to
$2,000,000 per annum due to the greater workload and also his transition to the Group
Managing Director at the end of the year 2017. Wesfarmers is paying highest revenue to its
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management team in comparison to its competitor’s business such as JB Hi-Fi or
Woolworth’s (Wesfarmers Limited: Annual Report, 2017).
The owners are the shareholders of the company who appoints the Board and
management team for managing the daily operational activities of Wesfarmers. It is freely
traded public company with open ownership while the management structure comprises of
diver team of management personnel appointed by the Board team. Wesfarmer’s
remuneration committee also included a non-wage benefit apart from the wages in the
remuneration structure of its employees. The Board provides annual incentives to the
management personnel on the basis of the performance targets achieved that are determined
in advance (Wesfarmers Limited: Annual Report, 2017).
Conclusion
The report concludes that a potential shareholder needs to undertake an in-
depthanalysis of the profit and market situation of the company. Australia economy
isrecognized as booming economy as it is in a state of positive economic growth with
increasing GDP after the financialcrisis of year 2007. The low inflation and interest rest are
likely to support the economic growth of the country in future. The Australian dollar has also
maintained its strong position since the past years and will stand strong in the future
prediction strong economic growth and activities within the country. As such, the strong
financial performance of the company with good economic prospects in future is likely to
cause improvement in the company performance and therefore investors are recommended to
invest in the company.
However, the financial analysis has somelimitations as there may be some
fluctuations in the results obtained with the use of ratio analyses due to mis-interpretation of
financial items presented in the annual report during the analysis.
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References
Mitchell, S. 2015. Wesfarmers sacrifices short-term profit for long-term growth. [Online].
Available at: https://www.smh.com.au/business/wesfarmers-sacrifices-shortterm-profit-for-
longterm-growth-20150218-13ii3h.html [Accessed on: 11 June 2018].
Sharp, B. 2018. Wesfarmers Limited (ASX:WES): What Can We Expect From Future Profit
Margins? [Online]. Available at: https://simplywall.st/stocks/au/consumer-retailing/asx-
wes/wesfarmers-shares/news/wesfarmers-limited-asxwes-what-can-we-expect-from-future-
profit-margins/ [Accessed on: 11 June 2018].
The Future Of Retail. 2017. [Online]. Available at:
https://business.nab.com.au/wp-content/uploads/2017/09/The-future-of-retail-September-
2017.pdf [Accessed on: 11 June 2018].
Wesfarmers Limited. 2018. [Online]. Available at: http://www.wesfarmers.com.au/who-we-
are/our-history/approval-of-wesfarmers-ownership-simplification-plan [Accessed on: 11 June
2018].
Wesfarmers Limited: Annual Report. 2017. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed on: 11 June 2018].
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