LB5212 Financial Analysis: Wesfarmers Performance 2018 and 2019

This report presents a comprehensive financial analysis of Wesfarmers Limited, evaluating its performance for the fiscal years 2018 and 2019. The analysis employs vertical, horizontal, and ratio analysis techniques to assess key financial aspects. The report examines the company's income statement and balance sheet, highlighting trends in revenue, costs, profitability, liquidity, and market valuation ratios. It identifies improvements in 2019, such as increased cash reserves, improved inventory turnover, and reduced liabilities, while also pointing out increased reliance on long-term debt and a decline in equity value. The analysis concludes with an assessment of Wesfarmers' overall financial health, emphasizing the need for continued operational improvements and reduced debt dependence to sustain long-term performance and growth. The report references the company's annual reports and relevant financial literature to support its findings and recommendations.

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Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction..................................................................................................................................2
Discussion and Critical Analysis.....................................................................................................2
Vertical Analysis of the financial statements...............................................................................2
Horizontal Analysis......................................................................................................................4
Ratio Analysis..............................................................................................................................6
Conclusion...................................................................................................................................7
References....................................................................................................................................8
Appendix......................................................................................................................................9

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Introduction
Wesfarmers Ltd. is one of the oldest conglomerates in Australia with its headquarters in
Perth. The main businesses of the entity include retail, fertilisers, chemicals and coal mining in
Australia and New Zealand. Since its establishment in 1914, the company has grown on a
consistent basis and is one of the largest private employers in Australia as of 2019. It was first
listed in the Australian Securities Exchange in 1984 and is still trading its shares in the market
(Wesfarmers.com.au. 2020). The purpose of the analysis is to conduct a thorough study of the
financial statements of Wesfarmers Limited and understand its financial performance for the
financial years 2018 and 2019. For doing the same, the annual reports containing the financial
statements of the entity for both the years are used in measuring the performance of the entity.
The tools that are used in conducting the analysis are the Vertical Analysis, Horizontal Analysis
and the Ratio Analysis of the financial statements. These tools have been chosen due to their
proven effectiveness in communicating the underlying information in the financial statements
and providing a better picture of the true financial position of the entity (Robinson, 2020). They
also help in highlighting the areas where the performance of the entity is lacking and identify the
reasons and remedial measures for the same.
Discussion and Critical Analysis
Vertical Analysis of the financial statements
One of the aspects that is evident from the analysis is that the financial performance of
the entity in 2019 has improved to some extent when compared to 2018. The costs of the raw
materials and employee benefit expenses in relation to the revenue generated during the year has
remained consistent. The company has also succeeded in reducing its other expenses and
increased the indirect income generated from indirect business activities. The gains earned by the

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entity from the disposal of the plant and equipment has increased from $25 million to $124
million in 2019. The other income has also improved from $74 million to $115 million. The
disposal of unwanted plant and equipment also benefits the entity by improving its efficiency
through the reduction of wastage. The Profit Before Taxation (PBT) and Profit After Taxation
(PAT) have also improved. The main reasons for the improvement in the performance of the
company are the significant items arising from its demerger of the Coles Group and the profits
earned through the sales of Bengalla, KTAS and Quadrant energy. Even though the profits of the
company from the Kmart Group fell in 2019, the improved contributions from Bunnings, Office
Works and other businesses resulted in off-setting the losses to a great extent. The year 2019 was
important for the entity in getting rid of its unproductive assets and investments. This shows that
the focus of the entity lies in improving its efficiency in the long run.
The vertical analysis of the Balance Sheet is conducted by taking the Assets as the base
of measuring the performance. The cash balance of the entity has improved from 1.85% in 2018
to 4.34% in 2019 as a percentage of total assets. This is a good sign as having improved cash
reserves provides the entity with a flexibility to undertake new investment opportunities and also
be ready to pay any unexpected expenditures arising during the business (Harford, Klasa &
Maxwell, 2014). A quicker turnover of the inventory suggests an improved efficiency in the
operations of the business. Hence, the entity should work on achieving a quicker sale of the
inventory available with it. The investment of the entity in its associates and joint ventures has
also markedly improved. However, this means that the entity’s profitability will depend on the
performance of these entities. The company’s investments have increased from $748 million in
2018 to $3393 million in 2019. Another major factor which is extremely significant in the
Balance Sheet is the decline in the Goodwill of the entity from 36.53% of the total assets in 2018

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to 16.85% in 2019. This decline in goodwill is due to the re-estimation of the valuation of certain
brands in the company’s business group. In the year 2019, the business has written off most of its
assets for impairment because of their inability to generate the level of cash flow to the initially
expected amount. The liabilities side of the balance sheet suggests that there has been an overall
increase in the liabilities of the business in comparison to the total assets employed by it. This is
due to a significant increase in the non-current liabilities employed by the business. This
suggests that the entity is employing more long term funds to finance its growth in the short run
while also slightly increasing its share of short term liabilities.
Horizontal Analysis
The horizontal analysis of the financial statements’ purpose is to observe the trends that
are being followed by the business. The major limitation of analysing the performance of an
entity using a single year’s financial statements is that it does not give an idea of the operating
preferences and the risk taking ability of the entity. The trends are useful in predicting the future
performances and the risks faced by the company in the short run (Weygandt, Kimmel & Kieso,
2019).
The horizontal analysis of the income statement suggests that the income earned by the
entity from other activities outside of its operations has increased by more than 140%. This is
due to the change in the accounting policies of the entity. The entity began to apply AASB 15
Revenue from Contracts with Customers in recognising its revenue on a retrospective basis. This
has resulted in a significant increase in the income earned by the entity (Aasb.gov.au. 2020). The
net profits earned by its joint ventures and associates has also improved in financial year 2019.
This is due to the disposal of the loss making entities by the group which has resulted in an
improvement in the efficiency of the operations undertaken by the entity. The EBIT of the entity

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has also gone up by a margin of 26 percent. This is due to a significant decline in the impairment
expenses of the entity. The impairments which took place in 2019 did not result in the entity
incurring any additional expenditure. Despite the increase in the effective tax rate on revenue
from 27% to 30%, the entity has been able to maintain an increase in the profits earned by it.
However, it should be kept in mind that the profit earned by the entity is a result of the disposal
of the plant and equipment and some of the subsidiaries by the entity. The same level of profits
may be difficult to maintain in the long run and the entity needs to improve its operations and
reduce the dependency on the debt funding used in financing the business.
The Balance Sheet highlights the steps taken by the entity in improving the manner in
which it conducts its operations. The cash reserves available with the entity have improved
significantly while the trade receivables have also come down by more than 30%. This results in
an increased availability of funds with the entity for investing in the business while also
enhancing the value of money. A quicker collection of the debts by the company also results in
the increase in its efficiency and the money becomes more valuable due to the concept of time
value of money (Mathuva, 2015).. The inventories and derivatives of the entity have also
decreased significantly. This is due to the improved turnover of the inventory by the entity which
results in a decrease in the holding costs and improves the overall profitability (Shardeo, 2015).
However, the entity has also reduced its deferred tax assets significantly. This means that the tax
which will be payable by the entity in the future will increase. This results in a reduction in the
profits from the future operations that will be generated by the entity. This is also the case with
the goodwill and other intangible assets generated by the entity. A reduction in their value
suggests a decline in the brand value of the entity and hence it becomes imperative for the
business to improve the focus on its operations and generate similar levels of revenue in the

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future. However, there has also been a significant decline in the liabilities of the entity. This
improves the solvency of the entity and allows it to enhance its performance in the long run.
However, a significant decline in the equity combined with a similar level of long term
borrowings indicates an increasing dependence on debt.
Ratio Analysis
The ratio analysis indicates the position of the entity in important areas like profitability,
liquidity, market valuation of the entity and the overall efficiency of the manner in which the
business is being conducted by the entity (Gitman, Juchau & Flanagan, 2015). The profit before
tax of the entity as a percentage of the revenue generated by the entity has improved by more
than 3%. This means that the entity is able to generate better revenue for the costs incurred by it.
In 2018, the business ended up making net losses of 0.79%. However, the improved focus on
letting off the loss making entities has resulted in the improvement of the net profits. The
liquidity ratio is not very healthy as the company will not be able to meet its short term
obligations conveniently. The quick ratio is also lower than one. This indicates that the company
will not be able to pay off its short term liabilities immediately and needs to generate additional
cash flows to remain profitable. The inventory turnover has significantly improved from 2.7 to
4.0. This means that the entity is able to quickly sell off its inventory than previously. This
improves the scope for expanding the operations by the entity. There has however, been a
decline in the market valuation ratios of the entity. These ratios are essential for the entity in
generating funds from additional equity capital (Hoggett, 2018). The Dividend Payout ratio has
declined from 2.12 to 0.5. The dividend yield has however improved from 0.04 to 0.07. This
means that the dividend paid by the entity on the price paid by the customers has improved while
the dividend paid out of the earnings per share has decreased significantly.

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Conclusion
On the basis of the above discussion, a few aspects can be clearly understood about the
financial performance of Wesfarmers Limited. The performance of the entity was extremely
weak in financial year 2018 and the entity ended up making losses as a result. However, in 2019,
the focus laid on improving the efficiency and stability of the business. As a result, the entity
disposed off some of the unproductive equipment and loss making subsidiaries which made
funds available to the entity. The short term liabilities of the entity have also been paid off
significantly. However, the entity has become dependent on long term debts and has reduced the
value of its equity. This suggests that the entity is investing the profits generated in the current
year to finance its operations and improve the performance of the brands whose value has
declined significantly over the years. The company is in dire need of maintaining the improved
level of performances to sustain in the long run. It also needs to reduce its dependence on the
debt sources of funding.

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References
Aasb.gov.au. (2020). Retrieved 13 January 2020, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB15_12-14_COMPsep18_01-
19.pdf
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Harford, J., Klasa, S., & Maxwell, W. F. (2014). Refinancing risk and cash holdings. The
Journal of Finance, 69(3), 975-1012.
Hoggett, J., Medlin, J., Chalmers, K., Beattie, C., Hellmann, A., & Maxfield, J.
(2018). Financial accounting. Wiley.
Mathuva, D. (2015). The Influence of working capital management components on corporate
profitability.
Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.
Shardeo, V. (2015). Impact of Inventory Management on the Financial Performance of the
firm. IOSR Journal of Business and Management (IOSR-JBM), 1-12.
Wesfarmers.com.au. N. p., 2020. Web. 13 Jan. 2020.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting. Wiley.

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Appendix
Vertical Analysis of Income Statement
Particulars 2018 Percentage 2019 Percentage
Revenue 26763 100% 27920 100%
Raw Materials and Inventory 16344 61.07% 17240 61.75%
Employee benefits expense 4290 16.03% 4525 16.21%
Freight and other related expenses 326 1.99% 381 1.36%
Occupancy related expenses 1474 5.51% 1533 5.49%
Depreciation and amortisation 521 1.95% 537 1.92%
Impairment expenses 373 1.39% - -
Other expenses 1264 4.72% 1198 4.29%
Total Expenses 24592 91.89% 25414 91.02%
Other Income 99 0.37% 239 0.86%
Profits/Losses of associates and joint
ventures
74 0.28% 229 0.82%
EBIT 2344 8.76% 2974 10.65%
PBT 2134 7.97% 2799 10.03%
PAT 1409 5.26% 1940 6.95%
Vertical Analysis of Balance Sheet
Particulars 2018 Percentage 2019 Percentage
Total Assets 36933 100% 18333 100.00%

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Cash and Cash equivalents 683 1.85% 795 4.34%
Receivables 1657 4.49% 1027 5.60%
Inventories 6011 16.28% 4246 23.16%
Derivatives 126 0.34% 101 0.55%
Other 229 0.62% 181 0.99%
Investment in associates and joint
ventures
748 2.03% 3393 18.51%
Deferred Tax Assets 692 1.87% 194 1.06%
Property 1920 5.20% 819 4.47%
Plant and Equipment 6488 17.57% 3059 16.69%
Goodwill 13491 36.53% 3090 16.85%
Intangible Assets 4369 11.83% 986 5.38%
Long term Derivatives 391 1.06% 393 2.14%
Other non-current assets 128 0.35% 49 0.27%
Trade and Other Payables 6541 17.71% 3620 19.75%
Interest-bearing loans and borrowings 1159 3.14% 356 1.94%
Income Tax Payable 299 0.81% 222 1.21%
Provisions 1726 4.67% 851 4.64%
Derivatives 16 0.04% 7 0.04%
Other 284 0.77% 160 0.87%
Total Current Liabilities 10025 27.14% 5216 28.45%
Interest-bearing loans and borrowings 2965 8.03% 2673 14.58%

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Provisions 1033 2.80% 381 2.08%
Derivatives - - 1 0.01%
Other 156 0.42% 91 0.50%
Total non-current liabilities 4154 11.25% 3146 17.16%
Net Assets 22754 61.61% 9971 54.39%
Horizontal Analysis of Income Statement
Particulars 2018 2019 Change %
Change
Revenue 26763 27920 1157 4.32%
Total Expenditure 24592 25414 822 3.34%
Other Income 99 239 140 141.41%
Net Profits of Joint Ventures and Associates 74 229 155 209.46%
EBIT 2344 2974 630 26.88%
Profit Before Tax 2134 2799 665 31.16%
Income Tax Expenses 725 859 134 18.48%
Profit after tax from continuing operations 1409 1940 531 37.69%
Basic Earnings per share (in cents) 124.6 171.5 46.9 37.64%
Horizontal Analysis of Balance Sheet
Particulars 2018 2019 Change %