Cash Flow Analysis and Security Valuation of Wesfarmers Ltd Report

This report provides a detailed cash flow analysis and security valuation of Wesfarmers Ltd. It begins with an introduction to the importance of security valuation and the analysis of financial statements, including the income statement, balance sheet, and cash flow statement. The report examines Wesfarmers' background and current operations, utilizing profitability ratios to assess its financial performance. It includes graphical representations of Wesfarmers' share price and return, followed by an identification of key areas within the cash flow statement requiring attention. The report then recommends investment and financing strategies to improve the company's cash position and concludes with suggestions aimed at maximizing shareholders' wealth, such as focusing on dividend payouts and increasing sales and profit margins. The report uses financial data from various sources to provide a comprehensive overview of Wesfarmers' financial health and market position.

CASH FLOW ANALYSIS AND
SECURITY VALUATION
WESFARMERS LTD
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Table of Contents
INTRODUCTION...........................................................................................................................3
Background..................................................................................................................................3
Explain purpose of financial statements' analysis........................................................................4
Analyze the firm’s current operation using its financial statements............................................5
Dividend valuation model to value Wesfarmers's shares..........................................................18
Draw graphs for Wesfarmers's adjusted share price and return.................................................19
Identify areas in the cash flow on which higher attention to be payed by the firm...................21
Recommend investment and financing strategies to improve the position of cash...................21
State and Justify suggestions in terms of shareholders’ wealth maximization..........................22
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................24
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INTRODUCTION
Valuation of securities is an important weapon used by an entity owner in order to
ascertain its existing performance in the external market. Ensuring an entity's conditions will
help them in order to craft several strategies to uplift their current position in the market.
Wesfarmers Ltd has been selected for the project report in order to analyze its existing cash
position and assessing all kinds of securities held in the business for long time. This project
report is all about collecting financial data from various external sources that provides reliable
data in facilitating variety of clients of the business. Cash flow and securities analysis will be
helpful for an entity in order to achieve desired market aims and targets. Accomplishing all
market goals is essential for an entity as in this way an entity will achieve all its aims and targets
within a given span of time. Different financial statements are analyzed by an entity in order to
identifies all kinds of errors lies in the current financial statements in meeting all kinds of needs
and higher expectations of an individual. Financial statements such as income statements,
balance sheet and most importantly cash flow statements are evaluated by an individual using
ratio analysis as the major source of comparison technique. Cash is regarded as the essential
element which will be retained in the business for long time period. Status of an entity in the
external market is need to be determined as this would help an entity owner in order to gain
higher level of competitive advantage in order to beat market rivals. Maintaining good and
strong position in the market would be helpful for an entity to create additional value for the
business concern in the external environment.
Background
Wesfarmers is an Australian conglomerate firm deals in various businesses such as retail
stores, providing chemicals, fertilizers and input used in mining that is coal and mining.
Industrial and safety products are also supplied by this entity to facilitate all its potential
customers. An entity will strengthen its business by retaining all the customers in their business
as creation of large base of customers is the ultimate aim of the business. Offering wide range of
products or services is a direct way through which customers are attracted towards the
capabilities of the firm as this helps in increasing higher level of customer satisfaction. Providing
discounts and offers in the initial phase an entity will Satisfy all the customers in order to create
trust relationships with all of them. Current financial performance of this organization is higher
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grab the attention of all the stakeholders especially investors who intends to invest in a business
whose current financial strength in higher in order to generate higher revenues in the near future.
Wide number of external parties are invited to take interest in the services offered by the firm to
get experience of the services provided by the firm in order to give negative or positive feedback.
This entity is registered in the Australian stock exchange in order to create higher market
volatility in boosting the existing performance of an entity (Grant, 2016). Revenues generated
from all the securities invested by the business will create unique identity of the business in front
of all the users located in the similar market. Target market of this entity includes home country
that is Australia in which its regular customers are set up in generating higher revenues for the
business. Market share of this organization extends to UK which is famous tour destination
which attract variety of visitors from all across the world towards the aesthetic beauty of the
current place.
Explain purpose of financial statements analysis
Financial statements prepared by an entity is to reflect its overall performance in the
financial context in order to explore higher external market opportunities. It is regarded as the
process of evaluating standard formats of the financial statements such as income statements,
balance sheet and cash flow statements. In this process all aspect will be reviewed by an
individual in order to target all prospective factors that enhances the quality of resources
recorded in the financial statements of the business. In this particular process financial health of
Wesfarmers will b analyzed by identifying all the frauds and errors lies in the system which
needs to be identified in the initial phase in order to target an entity's existing business
performance. The financial statement analysis used by various stakeholders who are taking
decisions of investing higher capital in the business that creates higher value of the business in
front of its external market users located outside the business (Wu, Al-Khateeb, Teng and
Cárdenas-Barrón, 2016.). Future performance of an entity will be identifies by an entity owner
by analyzing its current financial resources in order to grab higher advantages over all the users
located in the internal as well as external business environment. Various decisions makers who
make important decisions based on the financial information of an entity will accomplish all their
needs and expectations. Business efficiency will get increases with the passage of time as each
and every factors of the business will be redefined in order to enhance the overall quality of all
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the business resources takes places in an entity. Different methods of financial statements used
by an entity owner includes fundamental analysis and Du-pont analysis that emphasis on each
and every component of an entity that are included in the balance sheet. Vertical and horizontal
analysis of financial statements will also ascertain the financial efficiency of an entity in order to
generate higher output in the near future. Financial adjustments can be made in the existing
financial statements in order to uplift the current role of the business. Market opportunities
explored by the business is essential in order to grab higher level of trust and confidence of all
the external market users in achieving all the market aims and targets for the beneficial of the
business. Getting high level of customer satisfaction is essential for the firm in creating its
business position in eliminating all kinds of market threats imposed on an entity.
Analyze the firm’s current operation using its financial statements
Profitability Ratios
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Net
Margin
% 8.11 3.13 3.02 3.03 3.51 3.67 3.79 4.47 3.93
Gross
Margin 49.81 34.86 33.26 33.41 33.28 33.71 33.64 30.97 30.53
Asset
Turnove
r
(Averag
e) 0.99 1.36 1.33 1.32 1.37 1.39 1.4 1.45 1.55
Return
on
Assets
% 8.03 4.25 4.01 3.99 4.8 5.12 5.29 6.49 6.09
Return 23.58 9.09 7 6.39 7.68 8.34 8.76 10.34 9.61
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on
Equity
%
Interest
Coverag
e 6.52 2.8 3.09 4.39 6.14 7.03 8.47 8.35 11.93
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
1
2
3
4
5
6
7
8
9
Net Margin %
Interpretation
In the external business environment, final profit used by an entity in reflecting its
external brand image is the net profit. The net profit produces by an entity after deducting all
kinds of expenses from the sales of the business. Net profit is decreasing from one period to
another due to higher tax obligations imposes on an entity.
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
5
10
15
20
25
30
35
40
45
50
Gross Margin
Interpretation
Gross profit is generated in the business concern when cost of sales are excluded from the
sales and the revenue of an entity. This shows the burden of cost of goods sold on an entity as the
cost will be regulated by an entity in order to maintain its sales level.
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
1
2
3
4
5
6
7
8
9
Return on Assets %
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Interpretation
Efficiency of assets are judged by an individual as higher the utilization of assets in
creating higher amount of sales higher will be the Chance of business in generating returns for
the business in the near future.
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
5
10
15
20
25
Return on Equity %
Interpretation
Return will be earned by an individual by investing its own capital in the business in
generating higher amount of returns for the betterment of the business entity. Return on equity
initially has higher that later on get decreases due to higher cost incurred by the firm in relation
to return generated.
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2007
2008
2009
2010
2011
2012
2013
2014
2015
0 2 4 6 8 10 12 14
Interest Coverage
Interpretation
This shows the capability of the business as interest paid on the amount borrowed by an
entity owner from external party. Ability of the firm will be assessed as an entity is required to
meet its external market obligations by increasing its existing sales and the revenue within a
financial year.
Liquidity ratios
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Current
Ratio 0.56 1.09 1.29 1.23 1.17 1.02 1.11 1.13 0.93
Quick
Ratio 0.25 0.48 0.66 0.62 0.55 0.5 0.54 0.45 0.27
Debt/
Equity 0.2 0.42 0.23 0.2 0.18 0.15 0.22 0.17 0.19
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Current Ratio
Interpretation
Current ratio shows the relationship among current asset and current liabilities as this
reflects that higher current assets are used to overcome all kinds of challenges imposed on an
entity in form of current liabilities. The current ratio is increases with the passage of time as
higher current assets are included in the business in order to meet all kinds of problems faced by
the business.
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Quick Ratio
Interpretations
Inventory is excluded from the current assets of an entity as this will not easily convert
into cash. The liquidity is essential to be checked by the business for all the current assets
included in the business to pay off its liabilities. The quick ratio is decreasing that shows that
without inventory current assets are non-longer strong enough.
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Debt/Equity
Interpretation
This ratio assesses the relation among debt and equity in the business as these are
regarded as the essential component of a capital structure. Higher equity will help an entity
owner in order to handle the heavy pressures of debt imposed on an entity. The position of
Wesfarmers remains the same for all of period shows the stability of both the factors in an entity.
Efficiency Ratios
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Payable
Period 75.27 43.58 43.05 45.82 48.29 49.79 52.6 50.15 47.28
Receiva
bles
Turnove
r 7.16 18.62 25.51 25.98 25.85 25.56 25.27 30.67 40.76
Inventor
y
Turnove
4.09 7.44 7.28 7.37 7.57 7.69 7.88 8 7.97
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