Fundamental Analysis of Woolworths and Wesfarmers in the Retail Industry of Australia

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Principles of Financial Management

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Executive Summary
The major objective behind the development of this report is to carry out a fundamental
analysis for the two publicly listed ASX companies. The companies selected for the evaluation
purpose are Woolworths and Wesfarmers operating within the retail industry of Australia. It has
been identified from the top-down analysis that Australia is presently having a favorable
environment to support the growth of retail companies. As such, they are expected to have a
positive state of growth and development supported by reduced unemployment, open trade
policies, positive GDP growth and lower level of inflation. In addition to this, the bottom-up
analysis has depicted that Woolworths and Wesfarmers are both having a strong financial
performance in the current that is expected to continue in the future.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Top-down Approach to evaluate the performance of retail sector of Australia..............................4
Application of Bottom Up Approach to evaluate the performance of Wesfarmers and Woolworth
Companies.......................................................................................................................................7
Conclusion and Suggestions..........................................................................................................13
References......................................................................................................................................14

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Introduction
The investors are largely adopting the use of technique of fundamental analysis for
business valuation for taking significant investment decisions. This approach of value evaluation
of businesses integrated the use of top-down and bottom-up analysis that guides the investors to
estimate the likely changes that can occur within a company value in the future context. The
analysis will provide assistance to the investors to take accurate decisions regarding investment
within the companies. This report has evaluated the future economic and financial performances
of the two companies with the use of fundamental analysis technique, that are, Wesfarmers and
Woolworth. The selected companies are listed on the ASX and are recognized to be leaders
within the retail industry of Australia and thus face stiff competition from each other.
Top-down Approach to evaluate the performance of retail sector of Australia
This approach in the fundamental analysis consist of primarily examining the macro
economic factors for gaining a review of the market conditions as a whole to identify the
feasibility of macro-economic environment to support the growth of a specific industrial sector.
The macro-economic factors that are evaluated for conducting top-down analysis of selected
companies are stated as follows:
Rate of Interest & Inflation
Reserve Bank of Australia (RBA) determines the interest rate within the country through
the use of its monetary policy. There is a low interest rate of 1.5 per cent maintained at present
within Australia to achieve the economic growth objectives. The reduce growth realized in the
private sector and the inflation pressure within the country can be regarded as the major reason
behind this move of RBA. The inflation rate is maintained at 2.1% with slow growth realized in
the wages sector and higher uncertainty existing in relation to the U.S. international trade policy.
RBA is adopting the use of lowering the interest rate as a medium to restrict the increase in
inflation within the country for promoting the economic growth. This is because a control on the
level of inflation would helps in controlling the economic growth due to low recession, reduces
unemployment and increased spending power of consumers (Interest Rate in Australia, 2018).