Fundamental Analysis of Woolworths and Wesfarmers Pty Ltd

This report has conducted top-down and bottom-up analysis of selected two ASX listed entities, that are, Woolworths and Wesfarmers Pty Ltd. The top-down analyses has led to the conclusion that overall economic environment of Australia is presently in a state of expansion supporting the growth of the retail companies. On the basis of bottom-up analysis it is ascertained that Wesfarmers financial condition is better than Woolworths. However, Woolworth’s financial condition is also likely to improve in the future supported by the growth in the retail industry in the coming period of time.

Market Principal
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Executive Summary
This report has conducted top-down and bottom-up analysis of selected two ASX listed
entities, that are, Woolworths and Wesfarmers Pty Ltd. The top-down analyses has led to the
conclusion that overall economic environment of Australia is presently in a state of expansion
supporting the growth of the retail companies. On the basis of bottom-up analysis it is
ascertained that Wesfarmers financial condition is better than Woolworths. However,
Woolworth’s financial condition is also likely to improve in the future supported by the growth
in the retail industry in the coming period of time.
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Introduction
The present report is undertaken for carrying out fundamental analysis of the two ASX
listed companies operating in the same industry. The fundamental analysis consists of both top-
down and bottom-up analysis for identifying the macro and micro factors that can impact the
value of selected companies in the future context. The top-down analysis seeks to examine the
overall economic environment and bottom-up analysis evaluates the current financial situation of
the selected companies. The companies selected in this context are Woolworths and Wesfarmers
limited operating in the retail sector of Australia.
Top down Analysis
Overall Economic Environment Forecasted Changes in Economic Fundamentals
Top-down analysis refers to gaining an examination of the overall economic environment
in which an industry operates and then analyzing the impact of the economic trends on the
industry growth prospects. The overall analysis is meant for identifying the macro trends that are
in favor of the industry development (Samonas, 2015). The selected ASX listed companies of
Wesfarmers and Woolworths operates in the retail sector of Australia and as such this top-down
analysis has specifically examined the overall economic environment in Australia that can have
an impact on the performances of companies. The assessment of the overall economic
environment in Australia in order to evaluate the impact of the forecasted changes in economic
fundamentals on the company’s performance as follows:
Economic Analysis
Australia is recognized to be a wealthy nation and is presently in a state of major
economic expansion after recovering from the period of year 2009 of global recession. This is
largely on account of the stable political environment present within Australia that is driving the
industrial growth and development. The Reserve Bank of Australia has maintained the interest
rates at 1.5% and has decided to hold on this interest rate for a long-period of time. The interest
rate of Australia is recorded to be lowest at present as compared to the past 18 months. The
strategy is adopted by RBA for reducing uncertainty that is present in relation to the household
consumption. The decrease in the income level of consumers and rising debt levels are posing
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uncertainty in the household consumption. As such, the RBA has decided to maintain the interest
rates and inflation rates to be lower at 2% for supporting the growth and development of the
country’s economy. The low level of interest and inflation rate will help in increasing the
spending power of consumers and thus promoting the industrial growth and development. This
will help in mitigating the high levels of household debt that is presenting a major risk against
the financial stability of the country (Australian Economy, 2018).
The Australian dollar is expected to trade at 0.76 by end of the end of this quarter as
predicted by the Trading Economics. Also, the current value of Australian dollar is expected to
suffer a declining trend after the weaker performance of its retail and international trade sector.
Also, the declining value of the country dollar is further expected to decline due to lower interest
rates and declining economic growth (Chau, 2018). However, there are also some positive
predictions regarding the growth in the Australian dollar on account of depreciation in the US.
The speculations regarding the increase in the interest rates in the US will make it a more
attractive place for investment to the foreign investors. This can reduce the money invested in
Australia and therefore causing a decrease in the demand of its local currency causing a
weakening in the value of Australian dollar (Australian Dollar Showing Long-Term Negative
Signs, 2018).
The Gross Domestic Product (GDP) is regarded as one of the major indicator for
depicting the well-being of the economy of a country. It depicts the overall market value of final
goods and service produced by a country in a given period of time. The GDP growth rate of
Australia has depicted an increase of about 2.27 per cent in comparison to the previous year in
the year 2017. Also, it has been predicted by the data provided by statistic that the GDP growth
rate of Australia is expected to increase to large amount by the end of the year 2022. The growth
rate in GDP of Australia on an average is 0.85 per cent from the year 1985-2017. The rising
demand of raw commodities from the developing countries since the year 2000 has played a vital
role in the growth of the Australian economy. The country has nearly maintained a positive
growth in the past years and has only experienced a decelerated economic growth in the year of
global financial crisis in 2009. As such, it can be said that Australia is presently in a state of
positive expansion phase as it is economy is growing on a steady growth rate of 2-3 per cent
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every year (GDP in Australia, 2018). The growth rate maintained by Australia in GDP and the
forecasted growth can be depicted as follows:
(Source: https://tradingeconomics.com/australia/gdp-growth)
Impact on the Performances of Selected Companies
The growth in the retail sector on the basis of the economic fundamental of Australia is
predicted to be positive in the coming period of time. The lower interest and inflation rates will
helps in increasing the spending power of consumers and thus supporting the growth of the retail
companies. The trend is expected to continue in the next few years and it is also possible that
RBA cam further reduce its cash rate if household debt increases (Madaan, 2009). Thus, stronger
economic growth, reducing unemployment and low interest rates all provides a solid base for the
growth in Australian retail sector. As such, on the basis of the forecasted economic fundamentals
it can be said that the companies selected are likely to experience a positive economic growth in
the coming period of time (Australia Retail Investment Outlook, 2016).
Bottom up Analysis
Bottom up approach refers to the investment strategy that helps to evaluate the individual
stocks in order to prepare the report on the performance of the company. The main purpose of
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the bottom up analysis is to conduct the fundamental analysis of the selected companies so that
economic performance of whole industry can be predicted. The performance of selected
companies is compared with the industry average so that position of company in the market can
be evaluated. Ratio analysis has been used as an important tool to conduct the fundamental
analysis of Wesfarmers and Woolworth.
Ratio Analysis of Wesfarmers and Woolworth
Ratio analysis is used to perform the quantitative analysis of financial information
presented in the financial reports of the companies. It provides fundamental analysis of operating
and financial performance of selected companies (Carbaugh, R. 2017).
Ratio analysis of both companies has been provided in the below table:
Ratio Calculations
Particulars 2016 2017
Profitability Analysis
Return on
assets Net Profit / Average Total Assets
Wesfarmers 1.00% 7.16%
Woolworth -5.25% 6.69%
Net Profit
Margin Net Profit / Net Revenue
Wesfarmers 0.62% 4.20%
Woolworth -2.12% 2.76%
Liquidity Analysis
Current Ratio Current Assets /Current Liabilities
Wesfarmers 0.93 0.93
Woolworth 0.83 0.79
Quick Ratio Quick Assets / Current Liabilities
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Wesfarmers 0.25 0.30
Woolworth 0.28 0.29
Capital Structure
Analysis
Debt Equity
Ratio Total Debt / Shareholder’s Equity
Wesfarmers 0.39 0.30
Woolworth 0.77 0.51
Debt Ratio Total Debt / Total Assets
Wesfarmers 0.22 0.18
Woolworth 0.28 0.21
Market Performance
Earnings per
Share
Profit attributable for shareholders / Number of
common Stock (Shares)
Wesfarmers
$
0.36 $ 2.55
Woolworth
$
(0.98) $ 1.19
Dividend per
Share
Total Dividend Distributed / Number of Common
Stock (Shares)
Wesfarmers
$
1.02 $ 1.00
Woolworth
$
1.66 $ 0.96
(Wesfarmers: Annual Report, 2017) & (Woolworths: Annual Report, 2017)
(Note: Financial Data has been included in the appendix section of the report)
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Industry Average of retail industry of Australia
Industry Average (Retail industry)
Particulars 2016 2017
Profitability Analysis
Return on assets -2.13% 6.93%
Net Profit Margin -0.75% 3.48%
Liquidity Analysis
Current Ratio 0.88 0.86
Quick Ratio 0.27 0.30
Capital Structure Analysis
Debt Equity Ratio 0.58 0.40
Debt Ratio 0.25 0.19
Market Performance
Earnings per Share -0.31 1.87
Dividend per Share 1.34 0.98
Profitability Analysis
Profitability analysis measures the company’s ability to earn the revenue through use of
available resources. There are multiple ratios that are used assess the profitability position of the
company. The main motive of the company is to reduce the expenses and increase the revenue so
that overall net income can be increased.
Net profit margin shows the percentage of profit earned on net revenue. It is highly
important profitability ratio as it reflects the company ability to earn profit through earning
maximum revenue and control the overall expenses. The net profit margin of the Wesfarmers has
been increased from 0.62% to 4.20%. On the other hand net profit ratio of Woolworth has been
negative 2.12% in year 2016 and it was increased to 2.76% in year 2017. That shows net profit
ratio of Wesfarmers was much better than Woolworth in both the years. As compared with the
industry average it was found that net profit position of Woolworth was worth in both the years
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as compared to Wesfarmers. Although Wesfarmers has better net profit ratio than Woolworth but
it has also faced downgraded net profit as it was expected in both the years (Tracy, 2012).
Return on assets reflects the percentage of profit earned using the assets of the company.
Assets refer to resources used to earn the revenue and return on assets reflects the management
responsibility to make use of assets in maximum possible way so that overall profit can be
increased. Wesfarmers has return on assets of 1 % in year 2016 and it has increased to 7.16% in
year 2017. On the other hand, return on assets of Woolworth was negative 5.25% in year 2016
and 6.69% in year 2017. So it can be said that Woolworth has failed to make use of its assets in
much better way as compared to Wesfarmers. Industry average shows Wesfarmers has been
successful to meet the industry average while Woolworth failed to meet benchmark set by
industry average.
Overall profitability position of Wesfarmers was much better than the Woolworth during
the last two years. It shows that Wesfarmers has been able to utilize its resources in much better
way as compared to Woolworth (Samonas, 2015).
Liquidity Analysis
Liquidity refers to the company’s ability to meet the short term liabilities through use of
it liquid asset resources. The liquidity performance of both the companies is evaluated with the
use of current and quick ratio. The current ratio provides an assessment of the current asset base
maintained by the companies for meeting its financial obligations that are due within the short-
term. The current ratio of Woolworths has declined in the year 2017 as compared to the year
2016 while Wesfarmer’s have maintained a steady current ratio over both the years. The quick
ratio predicts the most liquid asset resources held by the company such as cash resources for
meeting its short-term financial liabilities. The quick ratio of both the companies have increased
in the year 2017 as compared to the previous year and Wesfarmer’s quick ratio is better than
Woolworths predicting its string cash position.
The liquidity performance of both the companies has predicted that Wesfarmers is able to
meet the industry average for current ratio while both the companies have met the industry
average for quick ratio (Taparia, 2004).
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Capital Structure Analysis
The capital structure analysis has been carried out with the use debt-equity and debt ratio
for depicting the efficiency of both the companies in maintaining an optimal capital structure that
will prove it the maximum returns (Robinson, 2015). The debt-equity ratio of Wesfarmer’s and
Woolworths have reduced in the year 2017 as compared to 2016 depicting that they have
reduced its financial leverage in comparison to equity in its capital structure. Also, the debt ratio
of both the companies is declining which means that they are incorporating less use of debt in
financing their assets.
However, on comparison to industry average it can be said that Woolworths is meeting
the industry average in marinating an efficient capital structure by the use of a balanced
proportion of debt and equity to gain larger returns in the future period of time (Robinson, 2015).
Market Performance
The earning per share of Wesfarmer’s has declined in the year 2017 and that of
Woolworths have increased in the respective year. However, Wesfarmers earning per share is
relatively good as compared to Woolworths as depicted from their EPS ratios calculated. Also,
both the companies have reduced the dividend paid to the shareholder sin the year 2017 but
Woolworths has maintained an aggressive dividend policy as it is paying well dividend in
comparison to its EPS. However, Wesfarmer’s is following a conservative divided policy as it
has reduced its dividend in comparison to the earnings in the year 2017.
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Summary & Recommendations
The top-down analysis has predicted a positive growth for Wesfarmers and Woolworths
on the basis of expansion phase of Australian economy supporting a favorable economic
environment for retail sector of Australia. It can be said from bottom-up analysis that financial
performance of Wesfarmer’s is better than Woolworths as analyzed from their financial
outcomes. However, Woolworth’s financial performance is improving in the current phase and it
is expected that the company will perform good in the future period of time as predicted from its
capital structure and market analysis. It is recommended to both the companies to implement
strong financial measures for improving their performances as economic outlook of Australia is
supportive for the growth of the retail sector.
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References
Australia Retail Investment Outlook. 2016. [Online]. Available at:
file:///C:/Users/user/Desktop/Cushman_Wakefield_Australia_Retail_Investment_Outlook_Repor
t_2016.pdf [Accessed on: 29 May 2018].
Australian Dollar Showing Long-Term Negative Signs. 2018. [Online]. Available at:
https://www.poundsterlinglive.com/aud/8755-the-australian-dollar-is-showing-long-term-
negative-signals [Accessed on: 29 May 2018].
Australian Economy. 2018. Reserve Bank of Australia leaves interest rates unchanged amid
market turmoil. [Online]. Available at:
https://www.theguardian.com/australia-news/2018/feb/06/reserve-bank-of-australia-leaves-
interest-rates-unchanged-amid-market-turmoil [Accessed on: 29 May 2018].
Carbaugh, R. 2017. Contemporary Economics. M.E. Sharpe.
Chau, D. 2018. Australian dollar in 2018-19: Experts clash on whether it will crash or surge.
[Online]. Available at: http://www.abc.net.au/news/2018-01-05/australian-dollar-forecast-
2018/9292304 [Accessed on: 29 May 2018].
GDP in Australia. 2018. [Online]. Available at: https://www.focus-economics.com/country-
indicator/australia/gdp [Accessed on: 29 May 2018].
Madaan, K.V. 2009. Fundamentals of Retailing. Tata McGraw-Hill Education.
Robinson, T. 2015. International Financial Statement Analysis. CFA Institute Investment Series.
Samonas, M. 2015. Financial Forecasting, Analysis, and Modelling: A Framework for Long-
Term Forecasting. John Wiley & Sons.
Taparia, J. 2004. Understanding Financial Statements: A Journalist's Guide. Marion Street
Press, Inc.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to
Analyse Any Business on the Planet. RatioAnalysis.net.
Wesfarmers. 2017. Annual Report. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed on: 29 May 2018].
Woolworths Group. 2017. Annual Report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed on:
29 May 2018].
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Appendix
Financial Data of Wesfarmers (Amount in Million Dollar)
Particulars 2016
Net Profit $ 407.00
Total Assets $ 40,783.00
Net Revenue $ 65,981.00
Current Assets $ 9,684.00
Current Liabilities $ 10,424.00
Inventory $ 6,260.00
Prepaid Expenses $ 835.00
Quick Assets $ 2,589.00
Total Debts $ 9,042.00
Financial Data of Wesfarmers (Amount in Million Dolla
Particulars
Net Profit
Total Assets
Net Revenue
Current Assets
Current Liabilities
Inventory
Prepaid Expenses
Quick Assets
Total Debts
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