Financial Analysis Report: Wesfarmers and BHP Billiton Performance

This report presents a comprehensive financial analysis of two prominent Australian companies, Wesfarmers and BHP Billiton Limited, focusing on their financial performance over a three-year period. The analysis employs fundamental tools such as ratio analysis, trend analysis, and cash flow analysis to evaluate the companies' financial positions and performance trends. The report delves into various financial ratios, including liquidity, profitability, solvency, and efficiency ratios, to assess the companies' operational effectiveness and financial health. The findings are then used to provide investment recommendations. The report also discusses the strategic positions of the companies within their respective industries, offering insights into their competitive landscapes. Furthermore, the report touches on the ethical considerations relevant to fund managers, ensuring a well-rounded perspective on financial analysis and investment decision-making.

RUNNING HEAD: Financial analysis of Companies 1
Financial analysis of Companies

Financial analysis of Companies 2
Executive summary
This report reflects the adamantine study on two Australian listed companies and their
financial performance. Fundamental analysis has been used to evaluate the core financial factors
and company’s performance throughout the time. Ratio analysis assists in evaluating the clear
nexus between two financial factors of company to evaluate the trend of company for the
determined certain period of time. This report showcases the financial performance of two
companies since last three years. Investment analysis decision of the investors may result to
value creation of their capital only when proper level of financial analysis and interpretation of
same has been done by the financial analysis in effective manner.

Financial analysis of Companies 3
Table of Contents
Executive summary.....................................................................................................................................2
Introduction.............................................................................................................................................3
Present description of organization.........................................................................................................3
Ratio analysis...........................................................................................................................................4
Strategic position of both companies in their particular industry.............................................................13
Large forecast related to equity analysis investment recommendation....................................................14
Elementary discussion on the professional ethical behavior of fund manager.........................................15
Conclusion.................................................................................................................................................16
Refrences...................................................................................................................................................17

Financial analysis of Companies 4
Introduction
This report reflects the key understanding on the financial performance of two
companies. It is evaluated that financial tools such as ratio analysis, trend analysis and cash flow
analysis reflects the true financial position of companies. However, in order to evaluate the trend
of two companies from two companies from two industries have been selected. Wesfarmers and
BHP Billiton Limited are two major companies which have been evaluated in this report to
showcase the financial performance and trend of companies since last three years. In the starting
of this report, the descriptions of these two companies have been given. After that key
understanding on the financial performance of these two companies has been made by using ratio
analysis, cash flow analysis and trend analysis. After that, recommendation has been given on
the basis of financial figures of these two companies to investors so that they could make
effective investment decisions in determined approach. In the end of this report, critical
conclusion has been made to showcase the investment decisions of investors in short run and
long run.
Present description of organization
Wesfarmers plc is an Australian conglomerate company which has been running its
business since very long time on international level having headquartered in Australia. In 2016,
company had total 65.98 billion AUD total investments in value chain activities of organization
which has increased by 20% as compared to the total revenue shown in 2015. Company has total
employees 2, 20,000 in its all value chain activities (Annual report, 2016).

Financial analysis of Companies 5
On the other hand, BHP Billiton Ltd is an Anglo Australian multinational mining, metals
and petroleum dual listed public company having headquarter in Melbourne, Australia.
Currently, 2016 company has total revenue of 30.9 billion from its business functioning.
Ratio analysis
This analysis reflects the relation between two factors of company. There are several ratio
such as liquidity ratio, efficiency ratio, solvency ratio, dividend payout ratio and profitability
ratio which could be used to analysis the financial performance of two companies Wesfarmers
plc and BHP Billiton (Annual report, 2016).
Current ratio analysis
This ratio provide the liquidity position of company and ability to pay off its short term
and long term debts with the help of its current assets (Annual report, 2016).
Wesfarmers plc
After evaluating the annual report of company, it is observed that Wesfarmers Plc has
maintained stable current ratio with slight change of .01%. However, due to the reduction in
quick assets, Wesfarmers has reduced its quick ratio by .06 % and resulted to .30 points in 2016.
Computation of ratio analysis
Liquidity ratio 2014 2015 2016
Current ratio 0.9349167 0.92901 0.928002
Quick ratio 0.3697306 0.3284728 0.301142
BHP Billiton Plc

Financial analysis of Companies 6
It is evaluated that in 2014 BHP Billiton Plc was having 1.09 points current ratio which
has drastically increased to 1.37 points in 2016. This has shown that company has increased its
investment in operating activities. Moreover, Quick ratio of company has also increased to
1.0444 in 2016 as compared to last three year data. It reflects that company has increased its
investment in quick assets to improve its liquidity position and increasing overall productivity in
determined approach (Annual report, 2016).
Computation of ratio analysis
Liquidity ratio 2014 2015 2016
Current ratio 1.0944434 0.906167 1.3782
Quick ratio 0.8086589 0.573295 1.04427
Profitability ratio
This ratio reflects how well company is performing to earn the profit from its overall
business functioning. It showcases company’s ability to earn money from its value chain
activities.
BHP Billiton Plc
Operating profit margin- It provides the relation between BHP Billiton Plc’s operating profit and
overall turnover of organization. In 2014, BHP Billiton Plc had 33% operating profit which went
down to -23% in 2016. This shows that BHP Billiton Plc has faced loss from its business
functioning due to the loss faced in sluggish market in Australia (Annual report, 2016).
Net profit margin- This shows relation between net profit and overall turnover of company. It
provides company’s ability to draw net profit from the overall turnover of company. In 2014,
BHP Billiton Plc had 20% net profit margin which has gone down to negative profit amount to -

Financial analysis of Companies 7
20% in 2016. However, company has faced this loss due to decreased level of total turnover and
increased operating expenses.
Return on capital employed- This ratio reflects the relation between two factors such as net profit
and capital employed in the business functioning of BHP Billiton Plc. It is evaluated that
throughout the three years, BHP Billiton Plc has faced high amount of loss in its business
functioning. In 2014, company had good amount of profit 11% which has decreased and resulted
to -5.7% returns on capital employed to shareholders of organization. The main reason of going
down of return on capital employed is related to the sluggish market conditions, less total
turnover and increased cost of capital of company.
Return on equity- This shows the relation between availability of return to shareholders
and capital investment of company. In 2014, company had return on equity of 19% which has
gone down and resulted to negative 9.85% return on equity to shareholders (Gitman, Juchau, and
Flanagan, 2015).
Profitability ratio 2014 2015 2016
Operating Profit Margin
0.330863
3
0.180482
1
-
0.2348
3
Net Profit Margin 0.205815
0.042790
6
-
0.2065
5
Return on Capital
Employed
0.117482
2
0.014323
3
-
0.0571
5
Return on Equity
0.195743
2
0.027029
3
-
0.0985
8
Wesfarmers Plc

Financial analysis of Companies 8
Profitability ratio
This ratio establishes relation between profit earned by company and its overall total turnover.
Operating profit margin- It reflects the relation between Wesfarmers Plc. ‘s operating profit and
overall turnover of organization. In 2014 Wesfarmers Plc had 4.9% operating profit which
increased to 5.4% in 2016. This reflects that Wesfarmers Plc has been running its business
efficiency and increasing its overall productivity (Ozturk and Acaravci, 2013).
Net profit margin- This establish relation between net profit and overall turnover of
company. After evaluating the annual report of Wesfarmers plc, it is observed that in 2014,
Wesfarmers had 3.9% net profit margin which increased to 4.2% 2016. Nonetheless, company
has increased its overall profit by increasing its overall total turnover of company.
Return on capital employed- This ratio establish the relation between two factors such as
net profit and capital employed in the business functioning of Wesfarmers plc. In 2014, company
had 7.9% returns on capital employed which has increased to 9.6% in 2016. This shows that
company has been creating value on the shareholder’s investment and earning more than its cost
of capital (Gitman, Juchauand Flanagan, 2015).
Return on equity- This reflects the relation between availability of return to shareholders
and capital investment of company. In 2014, company had return on equity of 9.8% which has
increased to12% in 2016. This shows that company has increased its profit and distributing more
profit to shareholders in determined approach.

Financial analysis of Companies 9
Profitability ratio 2014 2015 2016
Operating Profit Margin
0.049660
2
0.009799
7
0.05417
9
Net Profit Margin
0.039290
2
0.006212
6
0.04224
1
Return on Capital
Employed 0.079541
0.013406
2
0.09674
1
Return on Equity
0.098462
5 0.017735
0.12000
3
Solvency ratio
This ratio provides the relation between debt and equity of company. It is accompanied
by two parts such as debt to equity ratio and interest coverage ratio (Hussey and Ong, 2017).
Debt to equity ratio- This ratio is used to measure the company’s financial leverage
throughout the time. In 2014, BHP Billiton has 95 debt to equity ratio in 2014 which decreased
by 3 points and resulted to 92 in 2016 which reflects that company has high financial leverage. It
shows that company could increase more finance by issue of debts as it has low risk of debt in its
value chain activities (Chapple and Humphrey, 2014).
Interest coverage ratio- This ratio reflects BHP Billiton ability to pay off its interest and
other fixed cost amount through earnings before interest and tax. It is observed that in 2014
company had 2.7 interest coverage ratio which have went down to -11% due to its loss showing
business. Company is having negative earning before interest and tax which has resulted to
negative ability to pay off its interest payment to banks and financial institutions. However,
company has high sustainability risk and creditors and lenders may pass resolutions to take the
company into winding up if their dues are not cleared in time (Pettersson and Brolin, 2014).

Financial analysis of Companies 10
Solvency Ratios 2014 2015 2016
Debt-Equity Ratio
0.954446
4
1.022727
3
0.92348
1
Interest coverage
Ratio
0.027747
8
0.051886
8
-
0.11682
Wesfarmers Plc
Debt to equity ratio- This ratio reflects the relation between Debt and equity of company.
In 2014, Wesfarmers Plc has 63 debts to equity ratio in 2014 which increased by 3 points and
resulted to 65 points debt to equity ratio in 2016. This shows that company has maintained stable
debt to equity ratio throughout the time (Fodor and Stowe, 2015).
Interest coverage ratio- This ratio reflects company’s ability to pay off its interest amount
or other fixed cost charges from its earned profit. It is observed that in 2014 company had
interest coverage ratio 10% which has decreased by 3% and resulted to 7.1% interest coverage
ratio in 2016. However, this ratio reflects that company has stable solvency ratio and could easily
pay off its interest and other fixed cost amount from its yearly earning. It shows low level of
sustainability risk in organization (Dlamini and Masuku, 2014).
Solvency Ratios 2014 2015 2016
Debt-Equity Ratio 0.630362
0.777114
5
0.67557
7
Interest coverage
Ratio
0.102140
1
0.479750
8
0.07164
2
Efficiency ratio

Financial analysis of Companies 11
This ratio reflects how well company is performing to draw effective result from its business
functioning.
BHP Billiton plc
Inventory turnover ratio- This ratio reflects company’s ability to manage the inventory by
comparing cost of goods sold with the average inventory for a period. In 2014, inventory
turnover ratio is 1.044 which has gone down to .41 due to its less level of turnover and sluggish
market conditions.
Debtor turnover ratio- This ratio reflects how efficiently company is using its assets in its value
chain activities. However, due to sluggish market factors and less level of turnover, BHP has
decreased its debtor turnover ratio by 10% since last three years (Dokas, Giokas and Tsamis,
2014).
Creditor turnover ratio- It is observed that if company wants to reduce its overall cost of capital
then it will have to keep efficient creditor turnover ratio. In 2014, company had 3.55 creditor
turnover ratios which decreased to 2.48. This level of reduction in creditor turnover ratio has
occurred due to less efficient business and company’s strategy to keep its financial risk low.
Efficiency Ratios 2014 2015 2016
Inventory turnover
ratio
1.044159
7
0.629446
6
0.41974
8
Debtor turnover ratio 15.96342
6.325067
3
5.13573
7
Creditor turnover ratio
3.556383
5 2.044039
2.48128
5
Wesfarmers plc

Financial analysis of Companies 12
Efficiency Ratios 2014 2015 2016
Inventory turnover
ratio 1.984043
1.936080
6
1.81231
4
Debtor turnover ratio
43.91937
8
42.38887
1 41.7142
Creditor turnover ratio
7.631555
7
7.431439
8 7.07447
Efficiency ratio
After evaluating the efficiency ratio of Wesfarmers plc, it is observed that company has
maintained effective inventory turnover ratio throughout the time. In 2014, company has 1.98
inventory turnover ratio which went down by .12 points and resulted to 1.81 inventory turnover
ratio. This reflects company has very low level of stock margin in its working channel. In
addition to this, debtor turnover ratio of company is also 43.919 which went down to 41.71 in
2016. This shows that company has reduced its overall credit sales as compared to last three
years credit sales. Nonetheless, company has maintained stable creditor turnover ratio since last
three years for creating shield against stability risk of company (Aye, et al. 2016).
Efficiency Ratios 2014 2015 2016
Inventory turnover
ratio 1.984043
1.936080
6
1.81231
4
Debtor turnover ratio
43.91937
8
42.38887
1 41.7142
Creditor turnover ratio
7.631555
7
7.431439
8 7.07447
Investment ratios
BHP Billiton plc

Financial analysis of Companies 13
This company has increased its dividend yield ratio to .064 in 2016 which has shown that
company may have decreased its overall turnover but it has increased its comparable profit and
distributed more dividends to shareholders.
Investment Ratios 2014 2015 2016
Dividend Yield Ratio
0.038642
4
0.050855
8
0.06463
5

Financial analysis of Companies 14
Wesfarmers plc
With the increasing ramification of economic changes and business functioning of
Wesfarmers plc, it has reduced the overall dividend yield ratio and plugged back most of its
earnings in its business functioning (Lee and Shin, 2016).
Investment Ratios 2014 2015 2016
Dividend Yield Ratio
0.041818
3
0.034650
1
0.02937
6
Analysis and recommendation on investment
It is observed that if investors wants to create value on their investment then they should invest
their money in Wesfarmers plc. Wesfarmers plc is showing more return to investors if they
invest their money value chain activities of Wesfarmers plc as compared to BP Billiton (Gitman,
Juchau and Flanagan, 2015).

Financial analysis of Companies 15
Strategic position of both companies in their particular industry
Wesfarmers plc
Wesfarmers plc is supermarket industry company which has covered at least 25% market
share around the globe with more than 2,20,000 employees. However, with the increasing
ramification of economic changes, company has increased its overall turnover. The latest
strategic position of Wesfarmers is related using enterprises resources planning accompanied by
cyber computing system in its business functioning. It helps company to establish automation in
its all the working value chain activities and increase overall client’s satisfactions. However,
company has also adopted loyalty card approach and monkey survey to boost its marketing
strategic plans for the betterment of client’s satisfactions and company’s welfare. This helps
company to come up in the supermarket industry with differentiation in products and services. It
will not only enhance the overall brand image of company but also increase the overall turnover
of company (Vernimmen, et al. 2014).
BHP Billiton plc
It is dual listed public company which has more than 65,000 employees. However,
company has adopted strategic plan to send its experienced employees in its different business
units. This will help company to increase the efficiency of its business and increase the overall
productivity. This strategic plan has helped company to supervise its non-experienced employees
in efficient manner for the better result of their functioning. In addition to this, company has also
adopted employees oriented business culture which enables all the employees to work
accordingly in determined approach.

Financial analysis of Companies 16
Large forecast related to equity analysis investment recommendation
This equity analysis investment will help shareholders to evaluate the business
performance of company in determined approach. However, changes in total turnover and profit
of company throughout the years could be used to make effective level changes in the business
functioning of organization. Trend analysis could reflect the future value of company’s result. In
addition to this, trend analysis and forecast errors could define the possible changes in the result
shown in determined approach. For instance, as per the trend analysis of Wesfarmers plc, Total
turnover of company has been increasing by average 5%. This shows that company could have
possible ups and down in its total turnover. Forecast error could be used to measure the changes
of 2% each and every year (Li, et al. 2016).
Particulars 2014 2015 2016
AUD$
'000
AUD$
'000
AUD$
'000
Total Revenue 62,102 65,512 68,015
Forecasted data of total turnover of Wesfarmers
Particulars 2014 2015 2016 2017 2018 2019
AUD$
'000
AUD$
'000
AUD$
'000
AUD$
'000
AUD$
'000
AUD$
'000
Total Revenue 62,102 65,512 68,015 72587 75845 80562
In this result, it is shown that company has been increasing its overall turnover by 5%
each and every year. However, as per the forecasted error, company could have possible error of
2% in its all financial years (Loughran and McDonald, 2016).
Another forecast result could be related to the change in total turnover of BHP Billiton plc. It is
given that if BHP Billiton plc has decreased its overall total turnover by very drastic amount.

Financial analysis of Companies 17
Since last three years there is downward slope in its total turnover which reflects more than 70%
negative result in its total turnover (Annual report, 2016).
Elementary discussion on the professional ethical behavior of fund
manager
It is evaluated that professional fund managers should be ethical and should not disclose
confidential information of company to other persons. However, they could use several
documents such as annual report, online sites, websites and other details for determining their
strategic decisions for the betterment of organizations. Professional fund manager should use
their critical understanding while evaluating the financial data of company to make effective
level of changes in the existing business functioning and understanding annual reports and
documents in determined approach. In addition to this, Professional fund manager needs to
adhere with their code of conducts and professional behavior while giving advice to their clients.
Furthermore, fund manager has to evaluate whether the information they are sharing with the
clients are not confidential and has no negative impact on the particular company. They should
be integrated towards their professional services and not be indulged in insider trading
transactions with any of the companies (Cheng, Ioannou, and Serafeim, 2014).

Financial analysis of Companies 18
Conclusion
This report has shown various key figures of two companies which could be used by
investors to make effective investment. However, after evaluating these two companies, it could
be inferred that investors should invest their money in the business functioning of Wesfarmers
plc. However, BP Billiton may showcase the profitable business but for that it needs long span of
time. Investors who wants to earn short term profit or value creation on their investment in
shorter span of time, may invest their money in Wesfarmers. Nonetheless, investors who could
keep their money invested for more than 10 years should invest their money invested in, BP
Billiton for the value creation on their investment.

Financial analysis of Companies 19
Refrences
Annual report, 2016, BP billition, retierived on 29th August 2017 from
http://www.bhp.com/investor-centre/annual-reporting-2016
Annual report, 2016, Wesfarmer plc, Retierved on 29th August 2017 from
https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4
Aye, G.C., Miller, S.M., Gupta, R. and Balcilar, M., 2016. Forecasting US real private residential
fixed investment using a large number of predictors. Empirical Economics, 51(4), pp.1557-1580.
Chapple, L. and Humphrey, J.E., 2014. Does board gender diversity have a financial impact?
Evidence using stock portfolio performance. Journal of Business Ethics, 122(4), pp.709-723.
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to
finance. Strategic Management Journal, 35(1), pp.1-23.
Dlamini, B.P. and Masuku, M.B., 2014. Factors affecting the competitiveness of the agribusiness
sector in Swaziland.
Dokas, I., Giokas, D. and Tsamis, A., 2014. Liquidity efficiency in the Greek listed firms: a
financial ratio based on data envelopment analysis. International Journal of Corporate Finance
and Accounting (IJCFA), 1(1), pp.40-59.
Fodor, A. and Stowe, J.D., 2015. Financial market reactions to a company disaster: the BP case.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.

Financial analysis of Companies 20
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Hussey, R. and Ong, A., 2017. Corporate Financial Reporting. Springer.
Lee, H. and Shin, S., 2016. A proposal and analysis of finance evaluation indicators for actuarial
review of the national pension. Journal of the Korean Data and Information Science
Society, 27(1), pp.75-89.
Li, Y., Wang, F., Sun, R. and Li, R., 2016, October. A novel model for stock market forecasting.
In Image and Signal Processing, BioMedical Engineering and Informatics (CISP-BMEI),
International Congress on (pp. 1995-1999). IEEE.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research, 54(4), pp.1187-1230.
Ozturk, I. and Acaravci, A., 2013. The long-run and causal analysis of energy, growth, openness
and financial development on carbon emissions in Turkey. Energy Economics, 36, pp.262-267.
Pettersson, S. and Brolin, D., 2014. Proposed new lease standard-Do investors adjust for
capitalized operating leases in their assessment on market value of equity?.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance:
theory and practice. John Wiley & Sons.

Financial analysis of Companies 21