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