ACC8105 Financial Statement Analysis: Wesfarmers and Woolworths Report

This report provides a comprehensive financial analysis of Wesfarmers plc and Woolworth Company, two companies within the retail industry, using financial analysis tools such as ratio analysis and bottom-up analysis to determine the optimal investment of $25,000. The strategic analysis evaluates the competitive positioning of each company using SWOT and Porter’s Five Forces frameworks. The analysis identifies the sources of sustainable competitive advantage for both companies, focusing on Woolworths' value chain activities and quality services, and Wesfarmers' cost leadership. The corporate strategies are examined, highlighting Woolworths' focus on cyber computing and Wesfarmers' vertical integration plans. An accounting analysis, covering liquidity, profitability, and efficiency ratios, assesses the financial performance of both companies, ultimately guiding the decision of which company to invest in based on their financial health and market position.

RUNNING HEAD: Financial Statement Analysis 0
Name of the student
Topic- Financial Statement Analysis
University Name

Financial Statement Analysis 1
Table of Contents
1 Introduction..............................................................................................................................1
2 Strategic analysis.....................................................................................................................1
Porter’s ‘five forces’ framework.....................................................................................................3
3 Source of the sustainable competitive advantage....................................................................5
3.1 Source of the sustainable competitive advantage for Woolworths...................................5
3.2 Source of the sustainable competitive advantage for Wesfarmers...................................5
4 Corporate strategy analysis for the two selected multi-business organisations.......................5
5 Perform an accounting analysis that addresses the six (6) steps in performing accounting
analysis of the five components of the financial statement.............................................................6
6 Evaluation of quality of the finanical statemetn of Wesfarmers and Woolworth.................14
7 Selection of company to invest money for buying shares.....................................................14
8 Conclusion.............................................................................................................................14
9 References..............................................................................................................................15

Financial Statement Analysis 2
1 Introduction
In this report, proper financial analysis has been taken into consideration to evaluate the
financial performance of two companies. In this report two companies are picked from the retail
industry. The names of these Companies are Wesfarmers plc and Woolworth Company. In this
report, financial analysis tools such as ratio analysis and bottom up analysis are used to
determine whether investment of $25,000 should be made in Wesfarmers plc or Woolworth
Company (Wesfarmers plc, 2017)
2 Strategic analysis
This analysis is used to evaluate the competitive position of companies in market. It helps in
assessing the strength, weakness of company’s possible threats, available opportunity and value
of the company in market (Woolworth plc, 2017).
SWOT analysis of Wesfarmers and Woolworth plc
Type Woolworths Wesfarmers plc
Strength It is having long term business
sustainability and managed to
provide quality services to its
clients.
The profitability of company
has also increased by 20%
(due to its increased operating
expenses it is shown negative)
since last five year which
reflects the positive indicator
for the future value of
investor’s capital.
Company has been indulged in
offering good amount of offers
and discount to its clients. It
has large number of stores and
workforce over more than 2,
00,000.
It has maintained effective
financial leverage and
increased profitability by 22%
since last five years.

Financial Statement Analysis 3
Nonetheless, the online cyber
computing system adopted by
Woolworth will also increase
the overall sales and capital
employed.
Weakness It has faced several issues of
corporate governance program
and high penalties. It has
increased its overall cost of
production. In addition to this,
it has low geographic
presence.
It has planned to expand its
business out of Australia
which may result to complex
business structure. Company
invested more than AUD $ 20
million capital to establish
cyber communication channel
to communicate with its
several departments. It will
increase the overall cost of its
sales.
Opportunity It has opportunity to expand
its busienss outside Australia.
Strong brand image will ease
its entry into new diversified
sectors.
Increased return on capital
employed could be used to
diversify its busienss.
It has employees and
customers loyalty across
busienss.
It could be used to expand its
business.
By focusing on Enhance
quality, service and experience
benchmarks across stores, it
could grab potential market
share on international level.
Threats The retail business sector has
high amount of threats from
the new rivals in market.
The major competitors such as
Tesco, Morrison plc,
.
The major competitors such as
Tesco, Morrison plc,
Woolworths and Aldi are
focusing on attracting offers

Financial Statement Analysis 4
Wesfarmers and Aldi are
coming up with the strong
marketing strategy to beat its
business.
which may reduce its market
share.
Porter’s ‘five forces’ framework
The industry analysis have been made in context with the both companies.
Five forces model As per the point of view of
Woolworths
As per the point of view of
Wesfarmers
Bargaining power of buyers The clients in Australia are
more inclined towards the
quality of services and
customized products.
However, with the excess
number of competitors such as
Tesco, Morrison plc,
Wesfarmers and Aldi, the
bargaining power of buyers is
high.
Wesfarmers plc has strong
brand image in the market and
has grabbed more than 12%
market share in retail
Australian sectors.
Nonetheless, Tesco, Morrison
plc, Aldi and Woolworths are
offering best quality which
may be additional advantage
for the buyers to switch to
them. Therefore, bargaining
power is high.
Bargaining power of
Suppliers-
Woolworth has established
supply chain management and
buys direct finished goods for
the certain suppliers. It has
low bargaining power of
Suppliers due to availability of
high suppliers in market.
Wesfarmers has focused on
setting effective vertical
integration to start up
manufacturing activities. It
has low bargaining power of
Suppliers due to availability of
high suppliers in market and
its vertical integration to start

Financial Statement Analysis 5
up manufacturing activities
The threat of substitute’s
product
New entrants are coming up
with the new designs of outlet
and retails stores by using
advance technologies. It may
be the big threat for the
Company.
The main threat of substitute
product is quite high due to
the use the obsolete
technologies in the process of
Wesfarmers. It has to adopt
advance technologies to
maintain its busienss.
The rivalry among
competitors
The rivalry among the existing
competitor is intense then it
will drive price of its service
down and force company to
increase the overall quality.
Tesco, Morrison plc,
Wesfarmers and Aldi are
using advance system and
quality services to attract
potential clients
It has strong rivalry with its
competitors. However, clients
are attracted towards the
quality services. Wesfarmers
needs to advance its
technologies to give the strong
competition to its rivals in the
market.
Threat of new entrants It has Low threat of entrants
due to the high fixed cost
investment of its busienss.
However, with the increasing
profitability, big organization
may diversify their busienss in
this sector.
The threat of new entrants is
low.

Financial Statement Analysis 6
3 Source of the sustainable competitive advantage
3.1 Source of the sustainable competitive advantage for Woolworths
It is considered that Woolworth Company has strong brand image and increased its overall
turnover by more than 20% since last five year. In this fierce competition, it has managed to
attract potential clients through its advance value chain activities and quality services. The main
competitive advantage for Woolworths is based on advance value chain activities and quality
services (Palepu, Healy, and Peek, 201).
3.2 Source of the sustainable competitive advantage for Wesfarmers
It is evaluated that Wesfarmers is lacking with the advanced and sophisticated technologies in its
business. However, it has developed competitive advantage by offering its services to clients at
the least price in this retail stores busienss. Nonetheless, it has become hard for other competitors
such as Tesco, Morrison and Aldi to beat the cost leadership competitive style of Wesfarmers
plc.
4 Corporate strategy analysis for the two selected multi-business
organisations
The corporate strategies of these two companies are based on the managerial decisions which are
given as below.
Woolworths- It has focused on using cyber computing system in its business to promote its
online business functioning. It has focused on strengthen its search engine to grab potential
clients through its dashboard mechanism around the globe.
Wesfarmers- It has planned to expand its busienss by undertaking the vertical integration to
eliminate the bargain supplier’s power. It has planned to invest capital to establish its individual
manufacturing plant under its separate brand.

Financial Statement Analysis 7
5 Perform an accounting analysis that addresses the six (6) steps in
performing accounting analysis of the five components of the
financial statement
This analysis helps in assessment of these two companies and their financial performance in the
retail busienss industry.
Accounting analysis of the five components of the financial statement of Wesfarmers
This analysis helps in assessment of two factors of busienss.
Liquidity ratio
It shows companies’ ability to pay off its short term and long term debt with the help of
its current assets.
Woolworths Company
The Woolworth Company has decreased its current ratio to .79 in 2017 which is .12
points lower as compared to last five year data. It shows that company reduced its capital
blockage in its operating activities. In addition to this, The Woolworth Company has increased
its quick ratio to .33 in 2017. It shows that company has blocked more funds in its inventories
(Wesfarmers plc, 2017)
Description Formula Woolworths Plc
2013 2014 2015 2016 2017
cash ratio
cash equivalents +
cash / current
liabilities
0.123652
8
0.122122
3
0.145381
2
0.105415
3
0.1030
1
Current ratio
Current
assets/current
liabilities
0.9
1
0.9
5
0.8
4
0.8
3
0.7
9
Quick Ratio
Current assets-
Inventory/current
liabilities
0.2
9
0.3
3
0.3
0
0.3
2
0.3
3

Financial Statement Analysis 8
Wesfarmers Plc
The Wesfarmers Company has decreased its current ratio by .10 points in 2017 which
reflects the reduction of its investment in its current assets. It has decreased its quick ratio to .30
in 2017 due to the decrease in its sales (Weil, Schipper, and Francis, J., 2013).

Financial Statement Analysis 9
Descript
ion Formula Wesfarmer Plc
2013 2014 2015 2016 2017
cash
ratio
cash equivalents + cash /
current liabilities
0.13926
03
0.25118
48
0.07310
3
0.05861
47
0.097244
888
Current
ratio
Current assets/current
liabilities
1
.11
1
.13
0
.93
0
.93 0.93
Quick
Ratio
Current
assets-Inventory/current
liabilities
0
.58
0
.48
0
.37
0
.33 0.30

Financial Statement Analysis 10
Woolworths plc
It is observed that return on sales of company has gone down due to the sluggish market
condition. It has decreased its return on sales to 2.8% from 3.9% as compared to last five years.
In addition to this, return on assets of company has also decreased to 16% in 2017 which is 9%
lower as compared to last five year data. The earning per share of company has decreased to .27
in 2017 which is not good indicator.
Description Formula Woolworths Plc
2013 2014 2015 2016 2017
Return on
sales Net profit/revenues 3.9% 4.0% 3.5% -2.1% 2.8%
Return on
assets Net profit/Equity 25.0% 23.9% 19.8% -14.6%
16.1
%
Financial
leverage EBIT / EBIT - Interest
0.9396
526
0.9599
077
0.9673
496
0.9744
919
0.978
65
Asset
turnover total assets / total sales *365
138.41
31
144.94
725
151.93
542
147.20
005
150.2
51
Earnings per
share
Net income - pref div / shares
outstanding
0.5202
672
0.5294
753
0.4371
562
-
0.2351
49
0.273
2
Wesfarmers plc
The return on sales of Wesfarmers plc has increased to 4.2% in 2017 which is .4% higher
as compared to last five year data. The return on assets of company has increased to 12% in 2017
which is 3.3% higher compared to last five year data. The earning per share of company has also
increased. It has strong profitability as compared to Woolworths.

Financial Statement Analysis 11
Description Formula Wesfarmers Plc
2013 2014 2015 2016 2017
Return on
equity Net profit/revenues
3.8% 4.5% 3.9% 0.6% 4.2%
Return on
assets Net profit/Equity
8.7% 10.3% 9.8% 1.8% 12.0%
Financial
leverage EBIT / EBIT - Interest
1.1196
345
1.0926
62
1.0818
82
1.0887
608
1.059742
023
Asset
turnover total assets / total sales *365
265.07
985
242.10
434
237.45
982
227.22
242
215.2756
745
Earnings per
share
Net income - pref div / shares
outstanding
0.0971
888
0.1185
731
0.1117
012
0.0185
768
0.129170
039
Efficiency ratio
This ratio divulges the ability of company to manage its blocked funds in busienss.
Woolworths Company
The Asset turnove rof company has increased to 150 points in 2017 which is 12 points higher
since last five year depicated data. The receivbale turnover has went down which is good
indicator for the business. The inventory turnove of company has increased to 37 points in 2017
which shows that company has managed its inventory in effeicient manner (Morningstar, 2017).
Description Formula Woolworths plc
2013 2014 2015 2016 2017
Asset turnover
total assets / total sales
*365
138.413
1
144.947
25
151.935
42
147.200
05
150.2
51
Receivable
turnover
Receivables/ Total
sales*365
11
.45
9
.30
8
.41
6
.74
6.
53
Inventory
turnover
Inventory / cost of goods
sold *365
35
.77
38
.51
40
.10
38
.98
37.
47