Financial Analysis Report: Wesfarmers and Harvey Norman (ACC8105)

This report provides a financial analysis of the Consumer Discretionary sector, focusing on the performance of Wesfarmers and Harvey Norman. It begins with an industry analysis, examining the sector's growth and key characteristics. The report then applies Porter's Five Forces framework to assess the competitive landscape within the multiline retailing industry, highlighting the threats of new entrants, competitors, and substitutes, as well as the bargaining power of buyers and suppliers. A detailed financial analysis follows, comparing Wesfarmers and Harvey Norman using profitability, efficiency, liquidity, solvency, and cash flow ratios for the years 2018 and 2019. The analysis includes specific calculations and interpretations of the financial ratios, comparing the two companies' performance. The report concludes by summarizing the key findings and the financial positions of both companies.

Financial Analysis

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Contents
Introduction.................................................................................................................................................2
Industry Performances.................................................................................................................................2
Industry within Industry Group...................................................................................................................3
Porter Five Forces Framework....................................................................................................................3
Financial Analysis.......................................................................................................................................5
Reasons of selecting the companies.............................................................................................................9
Conclusion...................................................................................................................................................9
References.................................................................................................................................................11

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Introduction
In this paper, Industry Analysis will be done by evaluating the company’s performance and
industry activeness. In the beginning of the paper, performance of the industry will be measured.
After that, Porters Five Forces Framework will be used to examine the competitor threat of the
industry. At the end, financial analysis of two companies will be evaluated those have been taken
from industry group.
Industry Performances
Consumer Discretionary is the industry that has been taken into consideration. Consumer
Discretionary sector encompasses those industries that tend to be most sensitive. This sector
includes the retailing, automotive, textiles & apparel industries (CEIC, 2019). Consumer
Discretionary data was reported at 2531.60 in Feb, 2020. The Consumer Discretionary sector has
been growing continuously.

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(Source: Market Index, 2019)
As per the above image, it has been found that Consumer Discretionary sector satisfies the need
and wants of consumers due to which the demand of consumers has been increases for this
industry. The industry has huge scope to grow the business at the higher level. The percentage of
return of profit is high such as 24.4%, it helps the investors to gets the high return which is
beneficial for the high scope (Market Index, 2019).
Industry within Industry Group
In this paper, Multiline industry has been selected among retailing industry group. Multiline
industry is the common industry as the consumers can purchase their product on daily basis due
to which their demand has been increases towards it that is why; these industries has been
selected for analyzes (Listcorp, 2019).
Porter Five Forces Framework
The threat of new entrants:
The degree of threat of new entrants has been increases as it is very easy for the companies to
enter the retailing industry. It has been found that the retailing companies required less capital as
compare to the other industry operations. The main aim of Consumer Discretionary sector is to
satisfy the demand of the consumers and in this sector multiline retailing industry is highly
popular for satisfaction of the customers. The low amount of capital helps the new entrants to
enter the market easily (Ansoff, Kipley, Lewis, Helm-Stevens, and Ansoff, 2018).
The threat of competitors:

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It is observed that degree of threat of competitors is high as there are large numbers of firms in
the industry that operate the business in an industry. Wesfarmers, Myer Holdings Limited,
Harvey Norman and The Reject Shop are the main companies that operate the business in
multiline industry. These companies have high brand value in multiline industry due to which the
competition among the companies is high. These companies also attract the large number of
consumers as these all the companies provides the daily use goods to satisfies the demand of
customers. Wesfarmers is the leading company of multiline industry as its share price value is
32.25 which is high as compare to its competitors (Listcorp, 2019). The companies provides the
similar services due to which the customers has many options to purchase the goods and services
from different companies that enhance the threat level of competitors.
Bargaining power of buyers:
Negotiating power of buyers is also high as there are numerous firms in the industry that operates
the business. It has been seen that the companies offers the similar goods and services to
consumers in the different price rate and with the different offers. As there are many companies
that operate the business in industry such as Wesfarmers, Harvey Norman, Myer Holdings
Limited and The Reject Shop due to which the consumers has many options to buy the goods
and services from different prices. The companies also attract the consumers by offering the
goods and services at the different price rate and different offers. Consumers can easily switch
from one company to another company for purchasing the goods and services due to which the
bartering power of buyers has been increases (Mukherjee, 2018).
Bargaining power of suppliers:

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Negotiating power of suppliers is low as the material provided by the suppliers to the companies
is easily available in the market. It is also observed that this industry has huge scope of spreading
the business at the global level. Apart from it, it is also analyzed that the industry is rising with
the high market share and high net profit which attracts the suppliers to enter this market to earn
the high profit. The increasing number of suppliers increases the options for the companies to
buying the goods and services from the different suppliers. The switching cost of the suppliers
has been decreases due to which the company can shift from one supplier to other that directly
decreases the negotiation of power of suppliers.
The threat of substitute
Degree of threat of substitute is moderate as it is difficult for the companies to replace the goods
and services of the multiline industry. It has been found that there are no goods and services that
can provide by the other firms to replace the products and services of the industry that is why;
threat of substitute is low. Apart from it, it has been seen that there are numerous firms in the
market that have high brand image that can easily replace the each other due to which the degree
of threat of substitute is high. As per both the aspects, the threat of substitute is moderate.
Financial Analysis
In this paper, Wesfarmers and Harvey Norman have been taken into consideration to calculate
the financial situation.
Ratio's
Wesfar
mers
Harvey
Norman
AUD in Million 2018 2019 2018 2019

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Profitability Ratio
(Net) Profit margin
(a/b) Net Profit 1197 5510 375.3 402.3
Net Sales 66594 27818 2792.5
3205.
3
2% 20% 13% 13%
Gross Profit Margin Gross Profit 20876.00
10578.
00 1466.1
1694.
5
Net Sales 66594.00
27818.
00 2792.50
3205.
30
31% 38% 53% 53%
Efficiency Ratio
Days Debtors (a/b) Receivables (a) 1657 948 653 715.2
sales *365 (b) 66594 27818 2792.5
3205.
3
9.08 12.44 85.35 81.44
Days Creditors (a/b) Payables (a) 6541 3620 229.2 221.3
Sales*365 (b) 66594 27818 2792.5
3205.
3

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35.85 47.50 29.96 25.20
Liquidity Ratio
Current ratio (a/b)
Current assets (a) 8706 6350 1317.6
1456.
3
Current liabilities (b) 10025 5216 829.9 899.1
0.87 1.22 1.59 1.62
Quick ratio (a/b) Quick assets (a) 2340 5989 853.2 959
Current liabilities (b) 10025 5216 829.9 899.1
0.23 1.15 1.03 1.07
Solvency Ratio
Debt (to assets) ratio
(a/b) Total Liabilities (a) 14179 8362 1639.7
1600.
9
Total Assets (b)
36,933
18333 4557.6
4798.
7
38% 46% 36% 33%
Debt to Equity Total Debt 4154 3146 809.7 701.8
Total equity 22754 9971 2911
3167.
4
18% 32% 28% 22%
Cash Flow Ratio

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Operating Cash Flow
Margin
Cash Flow from operating
activities 4080 2718 735.5 680.9
Sales 66594 27818 2792.5
3205.
3
0.06 0.10 0.26 0.21
Cash Return on
owners equity Operating cash flow 4080 2718 2718 2718
Equity 22754 9971 2911
3167.
4
0.18 0.27 0.93 0.86
From the above evaluation, it has been determined that the liquidity position of Wesfarmers has
been decreases such as 0.87 and 1.22 in 2018 and 2019 respectively (Yahoo Finance, 2019b).
The liquidity position of Harvey Norman has been increases with the increasing current assets
and liability. 1.59 and 1.62 are the current ratio of Harvey Norman which states that the liquidity
position has been improved. Harvey Norman has high liquidity position as compare to
Wesfarmers. According to the efficiency ratio, it has been evaluated that Wesfarmers collects the
amount receivables in less days to improve the efficiency position such as 9.08, and 12.44 in
2018 and 2019 in a respective manner (Yahoo Finance, 2019a). But Harvey Norman collects the
amount of receivable in large days due to which the efficiency position has been affected. The
solvency ratio of Wesfarmers states that it has large amount of total assets as compare total debt
which increases its ability to pay the liabilities. Harvey Norman also has large amount of assets

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as compare to liability but it has less amount of assets of Wesfarmers (Schroeder, Clark, and
Cathey, 2019).
Reasons of selecting the companies
Wesfarmers and Harvey Norman are the companies those operates the business in multiline
retailing group in consumer discretionary industry. These companies provide the similar goods
and services to consumers with the high quality. The brand value of both the companies is high
in the multiline industry that’s why; these companies have been selected to analyze the financial
statement of the company.
Conclusion
From the above discussion, it is concluded that Consumer Discretionary is best sector to
understand the concept of industry analyzes. It is observed that the retailing industry earns the
high revenue among all the industries of Consumer Discretionary sector which helps to operate
smoothly and effectively. Financial position of the companies of Consumer Discretionary sector
is high which helps it to grow rapidly that help highly contribute in the economy.

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References
Ansoff, H.I., Kipley, D., Lewis, A.O., Helm-Stevens, R. and Ansoff, R. (2018) Implanting
strategic management. Springer.
CEIC. (2019) Australia ASX Index: Consumer Discretionary. Available
From:https://www.ceicdata.com/en/australia/australian-stock-exchange-indices/asx-index-
consumer-discretionary
Listcorp. (2019) ASX Multiline Retail Companies. Available
From:https://www.listcorp.com/asx/sectors/consumer-discretionary/retailing/multiline-retail
Market Index. (2019) ASX Sector. Available From: https://www.marketindex.com.au/asx-sectors
[Accessed 29/3/2020].
Mukherjee, I. (2018) Applying Porter’s Five Force Framework in Emerging Markets—Issues
and Recommendations. In Strategic Marketing Issues in Emerging Markets (pp. 307-316).
Springer, Singapore.
Schroeder, R.G., Clark, M.W. and Cathey, J.M. (2019) Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Yahoo Finance. (2019a) Harvey Norman Holdings Limited (HVN.AX). Available
From:https://au.finance.yahoo.com/quote/HVN.AX/financials?p=HVN.AX
Yahoo Finance. (2019b)Wesfarmers Limited (WES.AX). Available
From:https://uk.finance.yahoo.com/quote/WES.AX/financials?p=WES.AX&.tsrc=fin-srch

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