Principle of Financial Market Analysis: Wesfarmers & Woolworths

This report presents a comprehensive financial analysis of two leading Australian retail firms, Wesfarmers and Woolworths, utilizing both top-down and bottom-up analytical approaches. The top-down analysis examines the broader economic context of Australia, including GDP, inflation, unemployment, and exchange rates, and their impact on the retail industry's performance. The report explores how these macroeconomic factors influence the firms' operations and financial outcomes. The bottom-up analysis focuses on the individual financial performance of Wesfarmers and Woolworths, evaluating key financial indicators to understand their contributions to the overall retail sector in Australia. The report highlights the firms' leading positions in the retail market, their responses to economic changes, and their strategies for maintaining growth and market share. The analysis includes an examination of revenue, market share, and operational strategies, providing a detailed view of the competitive landscape and the firms' adaptation to market dynamics. The report concludes with recommendations based on the findings.

Running head: PRINCIPLE OF FINANCIAL MARKET
PRINCIPLE OF FINANCIAL MARKET
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TABLE OF CONTENT
INTRODUCTION...........................................................................................................................3
TOP DOWN ANALYSIS................................................................................................................4
BOTTOM UP ANALYSIS..............................................................................................................8
FINANCIAL PERFORMANCE.................................................................................................9
RECOMMENDATION.................................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCE:...............................................................................................................................14

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EXECUTIVE SUMMARY
Top down and bottom up analysis are important devices to make systematic representation of
information that further helps in building up strategies. While the former starts with bigger
scenario of any event and breaks down slowly to the smaller components, the later one focuses
on smaller components first and then make addition of them by inking to obtain the bigger
picture. This paper comprises of such analyses based upon two of the retail firms in the
Australian economy. The top down analysis sheds light on the impacts that the economic
indicators and their changes have on the operation and performance of the firms. The bottom up
analysis depicts the individual financial condition and performance and how that adds up to
overall performance of the retail industry in the economy of Australia. it has been found that
both the firms Wesfarmers and Woolworth are carrying leading position in the retail industry and
earning much importance globally. There has been a declination in the key financial performance
indicators yet they lead the global retail transaction and continue expansion.

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INTRODUCTION
In order to conduct performance evaluation of any firm operating in certain industry, the
importance of top down as well as bottom up analysis is inevitable. These are the mechanism to
represent information and plan strategies with a broader point of view keeping prime focus on
overall performance of the firm.
The top down analysis consists of the process that involves looking into broader view at
first and then enters the system slowly in order to gain insight similar to backward calculation.
The system is broken into subsystems consecutively until the expected core insight is obtained
(Biswas et al. 2012). It helps to give an overview regarding the design, formulation of strategies
and analysis of performance. The bottom up approach of analysis focuses on detailed
specification of elements in the first stance and then they are linked to form the bigger
subsystems. Adding them up further the larger system is obtained. It is upward moving process
of analyzing and integrating information.
This report is designed to present a top down and bottom up analysis of two Australian
leading firms in the retail industry, Wesfarmers and Woolworth. The motive behind this paper is
to portray how the economic situation in Australia and world are influencing their operation and
how their performance is influencing the national as well as global retail industry. The
simultaneity and combined effect of their operation are intended to be captured and depicted in
the discussion here.

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TOP DOWN ANALYSIS
In order to conduct top down analysis, the panoramic view of the national economy
should be elaborated with prime focus on the impact on retail industry. The economic condition
of the nation reinforces the financial performance of the companies and that further reinstates the
health of national and global retail market. Having one of the major mixed market economies
among developed countries, Australia has been able to carry out a record of consistent growth
over almost more than twenty-six years. The secret behind this consistency and over time
improvement is the stable economic condition that further brings forth low inflation, less
unemployment, steady state growth, flexible exchange rate and steady cash rate operating in the
money market.
As per the current economic snapshot as produced by Reserve Bank of Australia, the
GDP of Australia is 1.205 trillion USD in 2016, inflation rate is 1.9%, unemployment rate is
5.6% with an employment rate of growth is 2%, Cash rate is 1.5% and overall economic growth
is 1.8% (RBA 2017). Over the years, Australia has been blessed with a steady GDP, low
inflation, low unemployment and steady exchange rate. The economic performance of the
country lay the ground of the health growth of the retail industry. Mostly dominated by service
sector the nation is globally larger provider of consumer goods and services. The existing and
growing market of the country as well as the cross border expansion in demand, there rae ample
opportunities for its retail industry to grow.
The growth of population partly boosted by increasing migration, increasing employment
due to the expansion of the service sector have actually resulted in increase in income that further
enhanced the aggregate demand of the economy. More the aggregate demand, more is the

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production and greater is the growth of the national economic performance. The economic
growth owing to these positive factors has also benefitted the supermarket and grocery services
included in the retail that experienced increase in demand and sales.
The globalization and liberal economic policies of Australia along with a stable
exchange rate, the scope of international trade has increased much more in the past decade. As
the RBA maintains a stable cash rate, the inflation is controlled in the country. At the same time,
the creation of jobs in the economy injects more money into the economy. Thus, people have
more money to spend. As the aggregate demand is rising in the domestic market, the production
has increased . Exchange rate is AUD 0.80 per USD. This has helped in keeping the economy
stable even during large crisis periods, such as, the global financial crisis during 2008 (Mortimer
2013). It also has helped in improving the international trade position of Australia. RBA follows
appreciation or depreciation of the currency as per the situation in international trade market in
order to response and cater to the international market needs (Baumohl 2012). When exports
needed to be increased, RBA has declined the exchange rate and depreciated the currency. It has
been able to control inflation and has made the exports of Australia cheaper in the global market.
This accelerated the exports and that further generates more competition among the domestic
producers. It has helped in increase in production, thereby increasing GDP. The supermarket
industry has also benefitted from this economic condition. The increase in demand in the
domestic as well as in the international market has helped in the growth of the industry.
The retail industry of Australia is one of the most growing and established industries in
the country. It contributes around 29% in the GDP of the country (Dwivedi et al. 2012).
Wesfarmers and Woolworths are two leading giants in the supermarkets retail sector of
Australia. These two conglomerates attract the maximum market share. Woolworths has

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captured the highest market share in the supermarket and grocery retail in Australia, followed by
Coles, which is the supermarket division of Wesfarmers (Roy Morgan Research 2016). These
two companies have captured almost 70% of the market. Thus, if the economy is hit by any
shock or recession, the businesses of the supermarkets will be affected too and that would disturb
their market shares.
Woolworths:
Woolworths Limited owns Woolworth chain operating in the supermarket. It owns
position the Australian Stock Exchange as WOW. The company came into operation on 5th
December, 1924. Over 92 years, the company has experienced difficulties and challenges, but in
the last two decades, it has captured the leading position in the market. The company operates
more than 1000 stores across the country. Among those, 968 stores are supermarkets and 19 are
convenience stores. In 2015, the revenue of the company was AUD 42.132 billion, with a
number of employees of 111,000 (Woolworths.com.au 2017).
The economic growth of the country has contributed in the growth of Woolworths. The
company had focused on all the sections of the economy to boost its sales, Hence, as the
employment level had increased and wage growth occurred at the level of 1.9%, the aggregate
demand had increased in the country leading to a growth in production and as well as level of
employment increased too.
Wesfarmers
It came into operation in 1914 as cooperative firm for the farmers of the West Australia.
Currently the company is one of the largest stock market enlisted companies of Australia with
ample business companies operating under the umbrella brand. Some of the other industries the

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company has invested in are: supermarkets, liquor, hotels and convenience stores; home
improvement; office supplies; department stores; and an industrials division with businesses in
chemicals, energy and fertilizers, industrial and safety products and coal (Lewis and Huber
2015). Since inception the company has gained a lot of support from the internal and external
environment of Australia and has grown to be a super power in the recent times
To deal with the dynamics of the economies and the ever changing policies of the government
the company keeps on changing and innovating the process of operation. Sustainability is one of
the major changes that have been incorporated by all the industries that Wesfarmers have
invested in. Wesfarmers are also a big employer there are almost 220,000 people who get
remuneration of $8-9 billion annually which in turn is contributing by giving purchasing power
in the hands of the people (Trevena et al. 2015). e. The company’s contribution to the economy
in terms of employment, generation of purchasing power and creating of demand for other goods
and services is significant. The taxes paid by the company every year are collectively responsible
for the betterment of the society and the government (Olstad et al. 2017).
Increasing demand is a direct reason for the company’s growth and rapid expansion since
the inflation rate in Australia is at a rate that is not alarming the flowing of goods in the economy
is common. Australia competing The Company has invested in industries that face higher
demands. Supermarket like Coles being one of the biggest chain in Australian economy, sources
that kind of higher demand even amidst existent competition among multinational brands like
Woolworths and Aldi etc Hence the supermarket group of Wesfarmers the Coles group is
continuously expanding the business and focusing on improving the service and meets the
expectations of the consumers Coles group follow a pattern where they are pushed to lease new,
usually smaller- arrangement, stores to preserve customer patronage, but moving out of their

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older sites is rarely feasible. In order to change with the changing economy the company is
trying to refurbish their retail locations. This could also mean that the company is opting for a
rebranding. The Coles group are also adding extensive floor space to a business. To keep up to
the changing demand and taste in the customer preference the inventories are continuously
refreshed and re stocked which includes a lot of investment (Hatfield-Dodds et al 2015).
BOTTOM UP ANALYSIS
This section prepares a bottom-up analysis of the two of Australia’s retail giant
companies: Wesfarmers Limited and Woolworths Limited.
Woolworths Limited is one of the major Australian company operating in retail industry of both
Australia and New Zealand. It is the second largest company in the retail industry as per revenue
generated. The revenue of the firm being AU$59 billion. (2016) following the Wesfarmers and it
is operating in Bella Vista (Parmenter 2015).
Wesfarmers Limited is a retailer conglomerate producing consumer service fro the Australian
from 1914, operating in Perth, Western Australia. Other than retail, the company also focuses on
coal mining, chemical and fertilizer production, safety products and so on generating revenue of
total AU$65.98 billion (2016) owing to the Australian economy as the largest company revenue
wise. It is also providing largest employment to Australian population.
Irrespective of the industry and sector operating in, the financial performance of companies
depends on several factors that determine the short term as well as long term scenario. The
indicators of financial performance of any company can be categorized into two aspect:
Financial Key Indicators and Non-Financial key indicators.

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The financial indicators of performance include broad range of components like : revenue, net
profit, current ratio, debt financing, operating cash flow, net sales, book value per share, return
on equity, return on invested capital (ROIC), earning per share and debt-to-net profit ratio (Marr
2012). Based on the indicators the information of the two companies are derived from their
respective financial report and analyzed to track the performance trajectory, position in the said
industry with prime focus given on the current financial operation of them.
FINANCIAL PERFORMANCE
Wesfarmers:
As per the financial year of 2016-17, the firm has managed to generate revenue
equivalent to AU$ 65.98 billion compared to the last year, which was recorded to be AU$ 62.44
billion in 2015 (Olstad, Crawford, Abbott, McNaughton, SMhurchu., Pollard and Ball 2017).
There has been 5.6% growth in the revenue from the last financial year. In domain of gross
capital expenditure, Strong retention of discipline is captured in the capital expenditure which
has been $1,899 million recently. This is was $340 million or 15.2 per cent lower than the figures
reported in the last financial year and the fall is owing to the lower expenditure incurred on the
newly opened stores (Ghosh and Wu 2012.). The firm has recorded $2440 million as net profit
after tax for the 2015-16 financial years. The recent estimate of it is reported to be $2353 million
showing a 3.6% fall in the net profit in the recent years. The firm manages to earn 209.5 cents as
basic earnings per share. This has been 216.1 cents in the previous financial year (Olstad et al.
2017). Return on average shareholder’s equity has been 9.6% falling only by 0.2 % as per the
9.8% rate of return in the last financial years. One of the significant indicators of company’s

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financial performance is return on equity on the investment made by the firm (Damodaran 2016).
The importance behind such indicator is that it makes a demonstration of the ability that
companies have to generate profit from the equities of the shareholders. This is also termed as
net asset, which is received by subtracting liabilities from the asset.
The mode of usability of investment funds by the company is well captured in this
indicator and helps in making comparison of the profitability of the company within the industry
of its operation. Greater the return on equity, greater the attraction for the investors for the
company since higher return is confirmed. The total operative cash flow of the retail firm is
reported to be $3365 million as compared to $3791 million in the past year. This has reduced the
operating cash flow per share also (Chiew, Graham, Grundy, Harwood and McCallum 2015.).
This has been 299.2 cents compared to the previous estimate of 335.1 cents showing a 10% fall
in the estimation. The net debt has increased remarkably within just a year $7103 million from
$6209 million in the last year. The company has accelerated the net debt to equity by 2.31%
compared to the last year (Keith 2012.). The recent figure is captured to be 30.9% contrast to the
25.1% previously. This has led to increased deficit financing of the firm. The major sources of
debt and financing have been: bank (38%), US bonds (11%) , euro bonds (24%) and domestic
bonds (27%) (Tennen and Lockie 2012).
The free cash flow of the conglomerate has been $1233 million recently falling from $1893
million in previous financial year marking a 3.5% fall in the indicator. Dividend paid to per share
capture the entire picture of the shareholder return of the firm. The firm is focused to deliver
increased payment to dividends subject to group’s earnings, cash flows and available credits. The
recent estimate of it has been 186 cents compared to 200 cents in 2015-16.

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Woolworth:
The firm has been able to generate operating revenue of the firm in recent year recorded at
$58.27 million as compared to $59 million in the last financial year. The estimation show
negligible decline in the performance of the indicators. Sales of the group have been worth
$53.47 million compared to $58.81 million in the past year (Miller and Power 2013). This
implies decline in the sales of the company over the recent financial year. Operating cash flow
$2,357.5 million falling steeply from the last year figure of $3,345.1 million.
The net profit after tax of the group has been $2,347.9 million in 2016 as compared to the
$2,137.4 million in 2015. This implies the company has been able to capture profit for the last
financial year activities. There has been remarkable decline in the total dividend payment per
share. In 2016 it has been captured at 77.0 cents compared to139.0 cents in 2015 (Aldazabal,
Ibanez, Quevedo and Uranga 2012).. This is due to fall in the profit margin of the firm in
presence of increased cost and decreased revenue. Basic earnings per share has fallen to 97.7
cents in 2016 from the 170.8 cents in the last year owing to the fall in the revenue of the firm as a
whole. In 2016, book value per share has been -287.89 cents compared to -271.03 cents in 2015.
Current ratio of the company has been 0.39 % in 2016 compared to 0.41 % in the 2015. The
company shows growing capital expenditure to EBITDA. The figure in 2016 is 57.96% as
compared to the 45.24% in 2015 (Vernon 2012.).
Other than financial indicators, there are several non financial indicators that impacts the
overall performance of any company financially. These companies might not be reported in the
financial statement but they do posses much of importance in the growth of the company over