Financial Accounting Analysis Report: Wesfarmers Financial Health

This report provides a comprehensive financial analysis of Wesfarmers, a major Australian company, evaluating its financial performance from 2015 to 2018. The analysis includes a detailed examination of financial ratios (efficiency, liquidity, solvency, profitability, and debt management), cash flow statements, and the company's current financial health. The report assesses Wesfarmers' strategic priorities, internal risks, and future growth prospects, including projected financial opportunities and potential scenarios. The analysis also covers the company's financial value, success factors, and business opportunities, offering insights into its market position and future outlook. The report concludes with a discussion of findings and recommendations based on the financial data and industry trends.

Running head: FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Name of the student:
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Author Note:

1FINANCIAL ACCOUNTING
Executive Summary
The assignment deals with detailed evaluation, analysis and interpretation of the financial
performance of the chosen company which is Wesfarmers. The evaluation is based on the
information’s which are generally obtained from the annual report of last 4 years which are
2015, 2016, 2017 and 2018 of Wesfarmers. It is significant for the upper level managers or
the board of directors of the firm to evaluate and analyze the criticality of the financial
statement of the company with the help of graph and charts. Each and every department
within an organization critically analyses the glitches or the loopholes in the system and tries
to make a report of that in order t rectify it accordingly. In case of taking the major financial
decision of the company it is needed to understand the current financial status of the firm and
then take decisions based on the conducted evaluation.

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Financial Ratios......................................................................................................................2
Financial Statement Analysis.................................................................................................7
Forecast and Risk Evaluation.................................................................................................9
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Financial Performance and Health
Organizational Context
Established in 1914 in Western Australia as a farmers’ cooperative, Wesfarmers is
one of the largest listed Australian companies today. It is involved in various businesses like
merchandise, retail, fertilizers and outdoor living. The main objective of the organisation is to
provide satisfactory returns to all of its shareholders while also conducting its business with
integrity and honesty. As a company looking to keep its reputation intact in the market,
Wesfarmers looks to maintain its target in aspects like safety, diversity, human rights and its
contribution to the community. Hence any decisions taken by the organisation do not violate
the principles and beliefs of the organization. The company is divided into various
subsidiaries like Coles, Bunnings and Kmart which operate in different parts of Australia and
operate in sectors different from each other (Wesfarmers.com.au, 2019).
Recent Financial Performance
2018 2017 2016
0
10000
20000
30000
40000
50000
60000
70000
Income position
Sales
EBIT
Net profit after tax
The computation of the financial ratios of the firm from the given information’s of the
company is necessary in order to understand the financial performance of the company in

4FINANCIAL ACCOUNTING
terms of ratio analysis. The financial ratios which are used in this case are the efficiency,
liquidity and solvency, profitability and debt management ratio (Robinson et al., 2015). The
financial information’s which are obtained from the income statement of Wesfarmers are
evaluated based on the computation of the horizontal analysis. From the trend it can be said
that the revenue of the firm has increased in 2016 by 6% compared to the base year 2015,
then it has decreased and increased again. This has reflected the same proportionate change in
the total expenses of the firm based on the last 4 years of comparison (Birch, 2017). But after
consideration of all the incomes or revenues and expenses of the firm, the overall profit of the
firm in that case has decreased by 83% in the year 2016 and increased to 18% in 2017. Hence
there is a significant change which took place in the year 2017 which is positive reflection in
the business operation of the firm (Zainudin & Hashim, 2016).
Cash Flow Statements
Cash flow details(in billions)
2018 2017 2016

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Operating activities 4.08 4.23 3.37
Investing Activities -0.658 -0.053 -2.13
Financing activities -3.75 -3.77 -1.33
The cash flow from the major activities of the firm shows that the operating activities
have generated a similar cash outflow in the previous three financial years. Investing
activities were very high in 2016 when compared to the other two years. Purchase of plant,
property and equipment along with other intangibles increased the investing amount to 1900
million dollars. Equity dividend paid in 2018 was the highest among the three years (Kraft,
2014). Borrowings were repaid on a higher basis in 2018 and 2017. On an overall basis, the
cash flow at the end of year 2017 was the highest due to a better management of the net
proceeds from sales in the financial year.
Underlying Financial Performance
Efficiency ratio

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2015 2016 2017 2018
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Efficiency Ratios
Average Trade Receivables turnover
Ratio (365/3) in days Average Trade Payables turnover
Ratio (365/3) in days
From the above computation of the efficiency ratio which includes the accounts
receivables and payables turnover ratio. The receivables turnover ratio of the firm is
comparatively much lower than that of the payable’s turnover. Both the turnovers of
Wesfarmers are computed in terms of ratios. The payable turnover ratio of the company is
sound and satisfactory where the tend is upward rising from 35.58 days in 2015 to 37.78 days
in 2018. The company needs to concentrate on the receivables of payments from the
customers. Wesfarmers needs to adopt some of the stringent policies in order to rectify the
problem of the receivables turnover ratio (Schaltegger & Burritt, 2017). The trend of the
receivable is proportionate reflected same like that of the payable’s turnover ratios of the
firm.
Liquidity and Solvency Ratio

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2015 2016 2017 2018
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Liquidity Ratio
Current Ratio Quick Ratio
The current and quick ratio of Wesfarmers are not upto the mark in related to the
standard which is 2:1. Here in case of Wesfarmers both the current and quick ratio of the firm
is low. Starting from the year 2015 the trend of both the ratios are simultaneously decreasing
and ended upto 0.87 in case of current ratio and 0.27 in case of the quick ratio of the firm
respectively. In order to enhance the liquidity of the firm it is needed to increase the liquid
cash and receivables of the firm (Libby, 2017).
Profitability Ratio

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2015 2016 2017 2018
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Profitability Ratios
Return on Asset Ratio (1/2) Net Profit/ loss Margin (1/3)
Return on Equity (1/4)
The profitability ratio of Wesfarmers comprises of return on asset, net profit margin
and return on equity. In case of the computation of these three ratios return generated in the
year 2017 was the highest and in 2016 was the lowest. The net profit margin of the company
was 0.62% which means that the company is in break even situation. Due to the effectiveness
of the management of the business in the year 2017, 2018 the company made a comeback
with a drastic increase in the return of the firm (Kaplan & Atkinson, 2015).
Debt Management Ratio

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2015 2016 2017 2018
0.00
0.05
0.10
0.15
0.20
0.25
0.30
Debt Management Ratio
Debt to Equity Ratio (1/2) Debt to Asset Ratio (1/3)
From the computation of debt management ratio of Wesfarmers, it can be
interpreted that the debt of the company in comparison with the equity and asset is much
higher. In such a situation the company needs to enhance the flow in the working capital of
the firm. The trend in recent years of the company is falling which stands on 0.13 in debt
equity and 0.08 in debt to asset ratio of the firm (Kieso, Weygandt & Warfield, 2016).
Current Financial Health
It can be identified from the above that the total debt is lower as compared to total equity of
the entity. Debt equity ratio of 0.62 is signifying that the company is lower leveraged as the
debt equity ratio is lower than 1. Current ratio of the entity is 0.87 which is signifying that the
current assets are not sufficient to pay off the current liabilities. However, the day’s sales

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outstanding ratio of 8.98 is signifying that the company is efficient in collecting the dues
from the debtors (Kanapickienė & Grundienė, 2015).
Future Growth of the company
The company has a good reputation in the Australian market. Along with it, it is
renowned as a big player in terms of technology, availability of resources and ability to
undertake a new business. The company has also undertaken timely decisions in terms of
entering and exiting a market. Its primary focus is to increase the value of the shareholders
and take decisions which benefit them (Wesfarmers.com.au, 2019). The future of the
company is estimated to be bright because of its proven competency in the market and the
increasing value of the business on an annual basis. In case of availability of excess funds, the
company should pay a large dividend because of its past performance. The company has sold
a lot of its existing businesses and invested in some new areas. The restructuring of the
management has also increased the necessity to prove itself all over in the existing areas of
business. Also, payment of dividend increases the confidence of the shareholders in the
decisions taken by the board (Wesfarmers.com.au, 2019).
Financial value of company
The P/E ratio of Wesfarmers in 2018 was $33.24 as provided in the annual report of
the company. The ratio has been increasing over the past few years and indicates that the
company is primed to do well in terms of increasing the returns of the shareholders. The
current market value is estimated approximately at $ 40000. The financial health of the
organisation is sound at the moment and is expected to grow due to the company creating
appropriate value for its shareholders on an increasing basis (Wesfarmers.com.au, 2019).

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Success factors and risks
Strategic priorities
The management of the company is clearly efficiency oriented as it does not hold on
to unproductive assets and business ventures for too long. The company’s strategic priorities
make it take decisions which make the business build its value on a consistent basis. Hence
the accounting procedures and business decisions are all aimed at increasing the value of the
business (Wesfarmers.com.au, 2019).
Capitalization of non-financial factors
The company has a reputation in the market as reliable due to its longevity and focus
on stakeholders. It also lays its emphasis on protecting the environment and focussing on the
welfare of its human resources. The company has a good opportunity to capitalise on these
factors to promote itself as a responsible company and increase its goodwill (Wong & Joshi,
2015).
Significant internal risks
Some of the significant internal risks that the organisation faces are people safety,
non-compliance with regulations, loss of key management personnel and loss of data.
Projections
Projected consolidated financial opportunities
Assumption –
 Earnings for Chemicals business in the 2019 financial years are expected to be
affected by oversupply of explosive-grade ammonium nitrate in the Western
Australian market, subject to competitive factors that will have adverse impact on
overall revenue