Financial Analysis Report: Wesfarmers Limited Performance and Risks

This report offers a comprehensive financial analysis of Wesfarmers Limited, a major Australian retail company. It examines the company's performance, risks, and investment potential, based on its 2019 annual report. The analysis covers key financial statements, including the balance sheet, profit and loss report, and cash flow statement, along with ratio analysis to assess liquidity, financial stability, and profitability. The report also interprets the company's structure, management, and market position, including its strategic, operational, regulatory, and financial risks. The conclusion provides recommendations for both internal managers and potential investors, emphasizing the importance of risk management, strategic planning, and market expansion. The report also highlights the company's commitment to customer service and ethical practices, making it a valuable resource for understanding Wesfarmers' financial health and future prospects.

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Financial Analysis Report for Wesfarmers Limited
Executive summary
The selected company is Wesfarmers Limited. Wesfarmers Limited is a company in the
retail sector, founded as co-operative in the year 1914, and has become the largest employer with
more than 220,000 employees. Wesfarmers Limited is a corporation with the main interests of
dealing in the retail of fertilizers, mining coal, chemicals, and safety products in New Zealand
and Australia. It takes the 9th position in the top 30 companies listed in the Australian Securities
Exchange (ASX). The operations under Wesfarmers include Bunnings in Australia and NZ,
Kmart group, office works, WesCEF, Industrial and Safety. (Top 30 companies listed in the
Australian Securities Exchange Index (ASX), 2019; Sheilla & Nichlas, 2013, 43). This is a report
to help individuals determine the value of an investment in stock, business, or other assets with
this company.
Analysis of the Report
The annual report of a company provides the existing and potential investors with facts about its
performance and position in terms of finance. It also explains the company’s financial position
throughout the year, usually an annual report is issued to the stakeholders and creditors of the
company at the end of a financial year. An annual report comprises the profit and loss report,
cash flow statements, balance sheet and notes about the financial statements. Other components
of an annual report include the messages from the Chairman and directors or auditors ( Patricia
& John, 1-29)
Of the three primary statements of a company, a balance sheet comes first; this statement
summarizes the company's assets, liabilities and stockholder's equity. The balance sheet is
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important for explaining the company's liquidity, the level of its financial stability and other
indicators. Liquidity Ratio Analysis in a balance sheet gages the firm's ability to pay its debts or
detect if the company will meet its obligations to its creditors on a short term basis. Financial
stability analysis is used to detect the risks of bankruptcy of the company (Osadchy et al, 2018, 339-350)
The profit and loss report is the component of the annual report that highlights its revenues and
expenses. The objects of the income statement (profit and loss report) is to take the difference
between the company's net sales and expenses (including taxes) to get the net income. This
report can aid calculation of several useful ratios to analyze the company's profitability
(profitability analysis) and its ability of pay its debts that is financial stability (activity ratio
analysis) (Osadchy et al, 2018, 339-350)
The cash flow statement is the last one of the three financial statements in the annual report. All
shareholders, managers and analysts are interested in this statement since cash is one of the most
fundamental and monetary assets. This statement records all the exchanges that affect the cash
flow of the business not excluding the most liquid assets. This records separates the operating,
investing and recording activities (Osadchy et al, 2018, 339-350)
Interpretation
Being one of the largest employers in the private sector of Australia, the approximate
number of team members in Wesfarmers is 105,000(One hundred five thousand) and an estimate
of 484,000(four hundred eighty four thousand) shareholders. (Wesfarmers 2019 annual report,
2019, 2). Wesfarmers Limited is governed by a board of directors which comprises the Chairman
and several experienced Directors. The leadership team of Wesfarmers limited includes
Managing director, the chief financial officer, group general counsel, managing director(business
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development) and the company secretary. The significant role of management and board is to
approve the values, purpose, and strategic direction of the group. The board has different
committees that have differing roles. The nomination committee for overseeing plans of
succession. The remuneration committee which is responsible for the salaries and benefits paid
to different dignitaries and the committee responsible for audit and risk (Wesfarmers2019 annual
report, 2019, 78; Fitriya & Stuart, 2012, 67).
Wesfarmers Limited has its headquarters in Perth. This year, it was involved in the
divergent business, including home improvement apparel, general merchandise, and office
supplies. There has been a division of the Industry into business in safety products, energy and
fertilizers, and chemicals. Analyzing performance from the financial perspective, there has been
a slight improvement in performance compared to the previous year that is increased income in
all its dealings (Wesfarmers annual report, 2019).
Earnings from the chemicals, fertilizers, and energy have continued to progress.
Progressive earnings from businesses reveal robust working performance and demand from
customers. There has been a commitment to improving customer service, both online and in-
store. The undying commitment to improving customer service both online and in-store is an
essential part of the game since business is all about customers. There has been continued to the
growth of earnings in both client and viable markets in all trading areas and categories of
products.
Right sourcing upgraded clearness in supplying our products with 3773 plants and trader
sites. Sourcing from the right places increases customer confidence and reliability with the
company, which is essential for a stable market. The continued growth of earnings in both the
client and the salable market is an assurance for the best quality products. The recordable injury
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frequency rate has been reduced to 13.5 in continuing businesses (Wesfarmers annual report,
2019). Reduction in the occurrence of recordable injury in continuing business is an assurance
for proper management of the business.
The per earnings NTM ratio of Wesfarmers limited is higher than the median of other
companies in the same industry. The per earnings NTM ratio of Wesfarmers limited is
considerably higher than the mean of its sector. The per earnings NTM ratio of Wesfarmers
limited is measurably more significant than its past 5-year average. Therefore, the current
company valuation is much higher than the one over the last five years (Market multiple
valuations of Wesfarmers, 2019; Dincer, 2013, 9). From 2019, market valuation relates to the
current share price with the market expectations in terms of earning per share. The relatively
higher market value of the company reveals the better position of Wesfarmers limited relative to
other companies in the same sector in terms of sales, customer awareness, and probably product
quality.
The company is liable to several risks which are strategic, operational, regulatory, and
financial. Strategic risks refer to risks that come as a result of failed business decisions and they
were the commonest in the 2018/2019 financial year. They included increased competition, the
ineffectiveness of executed strategy, principal management personnel loss, reduction in customer
loyalty to Wesfarmers brands, and disruption to industry structures. Operational risks (due to
chance in value) include data gaps and losses, loss of significant supply inputs, interruption of
business, risks in distribution and sale of products, breaches in the code of conduct of the
company and failure of ethical sourcing. Regulatory risks (changes in laws) are Non-compliance
with legal procedures and unfavorable regulatory changes. Financial risks (resulting from from
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changes market) are the volatility of the currency, adverse fluctuation prices of commodities, and
a decrease in access to finance ( Wesfarmers Limited, 2019, 23; Michael & Stephen, 2014, 65).
Owing to the many risks, Wesfarmers is committed to detecting, checking, and
management of quantifiable monetary and non-monetary risks connected to its commercial
undertakings all over the group. The board acknowledges a rigorous culture as an active risk
management strategy. The company instills and endorses a culture that standardises principles of
honesty, integrity, fairness, accountability and constructive challenge care of the board, and its
code of conduct reflects these values (Wesfarmers Limited, 2019, 81; Saudah et al., 2014, 7).
Conclusion
The aim of the paper is to provide an analysis of the report and recommendation basing
on the analysis. To the internal managers, They should invest in the implementation of high-risk
analysis and management because of the many risks from the report. Strategic and operational
management should take first place because of the many risks coming from this part of the
business. Advertising of the products to overcome the competition from existing and entering
companies. The possible cause of critical employee loss could be a misallocation of funds.
Misallocation of funds could also be the cause of the decline in the growth process of the
company. The company can also improve and maintain its market share by improving the quality
of the products they supply. The managers should consider expanding the market to outside
countries to maximize sales and market share. The managers should also consider seeking
copyrights to overcome competition from new firms entering the industry. For an investor who
wishes to invest in the company, he/she should consider investing in an alternative business.
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References
“Market Multiple valuations," 2019. Market Multiple valuations of Wesfarmers Limited.
Available on https://www.infrontanalytics.com/fe-EN/21304AA/Wesfarmers-Limited/market-
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Dinner, D. B., 2013. Corporate governance and market value evidence from Turkish banks.
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https://disfold.com/top-companies-australia-asx/
E.A. Osadchy, E.M. Akhmetshin, E.F. Amirova, T.N Bochkareva, Yu.Yu.Gazizyanova &
A.V.Yumashev, 2018. Financial statements of a Company as an Information Base for Decision-
Making in a Transforming Economy, 339-350
Available on:https://www.ersj.eu/dmdocuments/26.OSADCHY_ET_AL_XXI_2_18.pdf
Fitriya F. & Stuart L. 2012. Board structure, ownership structure, and firm performance; a case
study of New Zealand listed-firms. Asian Academy of Management Journal of Accounting and
Finance 8(2):43-67
Michael, E. & Stephen, D., 2014. Legal aspects of risk management in Australia. Available on
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Australia 61-65
Patricia A. Stanton & John Stanton, N.D. Researching Corporate Annual Reports: An Analysis Of
Perspectives Used. Available on
https://pdfs.semanticscholar.org/f9d5/fbb1fdbeda996031bd1350d345f8530e29df.pdf
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Saudah, A., Chew, N. & Lisa, A. M., 2014. Enterprise risk management(ERM) implementation:
Some empirical evidence from large Australian companies. Procedia - Social and Behavioral
Sciences 164, 541 – 547
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Wesfarmers, 2019. Wesfarmers 2019 annual report. Available on
https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2019-annual-
report.pdf?sfvrsn=0 1-112
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