Analysis of Cash Flow Statements: Wesfarmers Ltd and Woolworths Ltd

This report presents a comprehensive analysis of the financial performance of Wesfarmers Limited and Woolworths Limited, focusing on their cash flow statements. The analysis includes a detailed examination of cash flow from operating, investing, and financing activities for both companies, comparing their performance over two years. Various financial ratios, such as cash adequacy ratio, cash flow ratio (liquidity), debt coverage ratio (solvency), and cash flow to sales ratio (profitability), are computed and compared to assess each company's financial health. The report evaluates the companies' short-term credit risk, cash resource adequacy, long-term survival ability, and efficiency in generating cash from sales revenue, providing insightful conclusions and recommendations based on the financial data and ratio analysis. The report also identifies the methods used in preparing the cash flow statements, and provides recommendations based on the analysis.

ACCOUNTING FOR MANAGEMENT DECISION
MAKING
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Contents
Introduction......................................................................................................................................3
1. Outline the method used in presenting the statement of cash flows for each company. If the
direct method is used, identify whether an appropriate reconciliation has been reported in the
notes to the accounts........................................................................................................................3
2. Examine the information in relation to cash flow from operating activities, cash flow from
investing activities and cash flow from financing activities retrieved from the Wesfarmers Ltd
and Woolworths Ltd financial reports.............................................................................................4
3. Undertake an analysis of the cash flow information given for Wesfarmers Ltd and Woolworths
Ltd. Include in this analysis the computation of measuring Cash Adequacy Ratio, Cash Flow
Ratio (Liquidity), Debt Coverage Ratio (Solvency), Cash Flow to Sales Ratio (Profitability)......6
4. Based on the analysis, you are required to make conclusions and recommendation which will
answer the following questions:....................................................................................................11
a. Which business would you expect to be a better short-term credit risk?...............................11
b. Do you think both companies have adequate cash resources?..............................................11
c. Assess both companies’ ability to survive in the longer term...............................................11
d. Which company is better at generating cash from their sales revenue?................................12
Conclusion.....................................................................................................................................12
References......................................................................................................................................14
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Introduction
In this report analysis of financial position and financial performance of Wesfarmers Limited and
Woolworth Limited has been undertaken. Financial statement analysis helps in deciding financial
position of business organisation by using ratio analysis. Australian retail industry is very vast
and fluctuating in nature. In this report, ratio analysis has been used to analyse financial
performance by using financial statements i.e. income statement, statement of financial position,
cash flow statement and notes to accounts. In this report, analysis of cash flow statement has
been done and method used to prepare cash flow statement has been identified... In this report,
different a type of ratios has been calculated i.e. liquidity ratios, solvency ratios, profitability
ratios and cash ratios to analyse both the companies
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1. Outline the method used in presenting the statement of cash flows for each
company. If the direct method is used, identify whether an appropriate
reconciliation has been reported in the notes to the accounts.
The cash flow statement of both companies divulges all the inflow and outflow in the present
year irrespective of the fact that whether it relates to the present year or not. Cash flow statement
is the statement which reflects flow of cash (i.e. both inflow and outflow) in the business
organisation. Wesfarmers Limited and Woolworth Limited both the companies are operating
their business operation in retail industry which shows high amount of cash inflow.
These both companies Wesfarmers and Woolworths have been flowing direct method to prepare
their cash flow statement (Woolworths, 2018).
Wesfarmers Limited: Indirect Method and Woolworth Limited: Indirect Method
The cash flow from the operative activities is calculated by adjusting the non-cash expenses,
losses and profit impaired by company which cannot be counted in cash terms. In addition to
this, disclosure of the all these three activities named, operating, financial and investing activities
are made with a view to make business more transparent to stakeholders. The notes to financial
statements also contain several other details which reflect the key information which needs to be
disclosed to stakeholders.
2. Examine the information in relation to cash flow from operating activities,
cash flow from investing activities and cash flow from financing activities
retrieved from the Wesfarmers Ltd and Woolworths Ltd financial reports.
Analysis
 After analysing the cash flow statement of Wesfarmers Plc, it is evaluated that the main
cash outflow from the business is made for the payment to suppliers for the goods and
salary paid to staff and employees (Wesfarmers, 2018).
 Depreciation, amortisation and impairment of assets have also been considered in the
operative activities of company.
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 Inventory turnover and efficiency of the Wesfarmers Plc is not effective which have
resulted to high blockage of cash in the busienss.
 There is high cash outflow from the investing activities for buying the machineries and
plants in business.
 Company has sold its business units and other business segments which have resulted to
high cash inflow from the investing activities.
After evaluating the financial activities, it is analysed that company has high cash inflow from its
financial activities in 2017.
Wesfarmers: Indirect Method
Cash flow 2017 2016
Cash flow from operating-activities $4,226 $3,365
Cash flow from investing-activities ($53) ($2,132)
Cash flow from financing-activities ($3,771) ($1,333)
Woolworth: Indirect Method
Cash flow 2017 2016
Cash flow from operating activities $3,122.0 $2,357.5
Cash flow from investing activities ($1,431.4) ($1,266.7)
Cash flow from financing activities ($1,729.3) ($1,474.9)
Analysis
The Woolworth Company has shown the positive amount of increment in its free cash flow from
its business. The operating activities of company include all the cash paid for operating activities.
It also includes payment to employees, suppliers and other concerned person. It has also
increased its payment to staff members and suppliers which have shown high outflow of cash.
The investing activities of company have also shown the generating cash inflow in both years
which is positive indicator for its business (Woolworths, 2018). However, there is Hugh outflow
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of cash which was made to buy fixed assets in busienss. Company used its all of its cash amount
to pay off its short term and long term borrowing throughout the time (Yahoo Finance, 2018).
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3. Undertake an analysis of the cash flow information given for Wesfarmers
Ltd and Woolworths Ltd. Include in this analysis the computation of
measuring Cash Adequacy Ratio, Cash Flow Ratio (Liquidity), Debt Coverage
Ratio (Solvency), Cash Flow to Sales Ratio (Profitability).
Woolworth Limited
Cash Adequacy Ratio
Cash Flow Adequacy Ratio = (Cash Flow from Operations) / (Long-term debt paid + Fixed
assets purchased + Cash dividends distributed)
Cash Flow Ratio (Liquidity)
Current Ratio
Current assets / Current liabilities
Quick Ratio
Current assets – (stock + prepaid expenses) / Current liabilities
Debt Coverage Ratio (Solvency)
Debt – Equity ratio
Debt / Equity
Interest coverage Ratio
Earnings before interest and tax / Interest Cost
Cash Flow to Sales Ratio (Profitability)
Net profit ratio
Net profit / net sales X 100
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Return on total assets
Earnings before interest and tax / total assets X 100
Ratios
Woolworth Limited Wesfarmers Limited
2017 2016 2017 2016
Current ratio 0.793times 0.826times 0.928times 0.929times
Acid Test Ratio 0.292times 0.282times 0.299times 0.332times
Net profit ratio 2.86% -4.22% 4.2% 0.62%
Return on total assets 6.95% -9.99% 7.16% 1%
Debt-to-equity 1.32times 1.68times 0.68times 0.78times
Interest coverage Ratio 12.01times 6.08times 22.73times 5.48times
Cash Adequacy Ratio 0.80times 0.56times 0.74times 0.60times
Analysis of liquidity position
The Liquidity position of company reflects the positive indicator for expanding the business by
increasing its overall operative activities. The liquidity ratio of Woolworth is calculated in two
different segments such as current ratio and acid test ratio.
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The current ratio of Woolworth Company has gone down to .79 times which is .11 times lower
as compared to last five year data. It has shown that company has reduced its cash blockage with
a view to increase the overall return on capital employed. The Acid test ratio of company has
also gone down to .292 which is .10 times lower as compared to last five year data. As per the
statistical data, the retail industry market is reflecting high amount growth which shows that
company should increase its liquidity position with a view to increase its overall sales.
Therefore, it could be concluded that the liqudity position of company is very weak which should
be changed as per the market detials and posibiltiy.
On the other hand, Wesfarmers have shown positive liquidity ratio in context with the market
risk and outlook. It has maintained .96 current ratio which shows the positive indicators towards
increasing the overall production level if in case the market is having high demand growth.
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Analysis of Profitability
The profitability of company has been increased throughout the time. The profitability ratio of
company shows the earning capacity of company based on the overall turnover. It is analysed
that net profit ratio of company has increased to 2.86% which is 2% higher as compared to last
five year data. The return on total assets of Woolworths has also shown the increased return
earned by company by deploying the total assets in its business (Yahoo Finance, 2018).
The Wesfarmers Limited has not able to manage the adequate level of profit during the year. It
has observed company has increased its operating expenses which have ultimately resulted to
reduction in its profitability throughout the time. The net profit of company is not adequate
which shows negative business functioning of company (Financial times, 2018).
Analysis of Solvency position
The solvency ratio is used to analyst the capital structure of business and solvency throughout
the time.
The debt to equity ratio is used to evaluate the contribution of debt funding and equity funding in
the capital structure of company. Company should have balanced debt to equity ratio with view
to maintain effective financial risk and low cost of capital. Increased amount of debt funding
may result to decreased cost of capital but eventually it increases the financial risk of company.
The Woolworth company has maintained effective debt to equity ratio but exposed to the market
risk due to its less profitability.
On the other side, Wesfarmers company has shown less financial leverage due to the low amount
of debt funding in its business. The interest coverage ratio of both companies has improved with
the increased profitability and less charge on its profit. The EBIT of both companies is enough to
cover its interest payment which might be considered as positive indicator for the organization.
Woolworth should lower down its debt funding otherwise in case of sluggish market condition, it
may face high amount of financial leverage throughout the time.
Analysis of cash adequacy ratio
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The cash adequacy ratio divulges the financial prosperity of company. It shows the uses of cash
flow from the operational functions of company for determining the financial situation.
It shows the cash measurement after deducting the payment for fixed assets purchased and other
investing and financial activities (Yahoo Finance, 2018).
The cash adequacy ratio of both companies has been increased with the increased turnover and
profitability as compared to last year data.
In 2017, Woolworth Company has generated cash from its given operating activities @ .80 times
and .74 from its financial and investing activities (Yahoo Finance, 2018).
The lower level of cash adequacy ratio reflect the weakest point of company which may result to
negative business functioning in case of sluggish market condition.
4. Based on the analysis, you are required to make conclusions and
recommendation which will answer the following questions:
a. Which business would you expect to be a better short-term credit risk?
It is analysed that credit risk is the risk which shows inefficiency of the borrowers to pay back
the debt amount. Both companies will face short term and long term risk which may increase the
credit risk throughout the time. The short term credit risk is related to non- payment of current
obligation of company. These both companies such as Wesfarmers and Woolworths are having
less liquidity position. However, the trade receivable of the Woolworth is less as compared to
Wesfarmers which reflects that Woolworth will have low amount of credit risk in its business. It
shows that Wesfarmers has higher credit risk and need to lower down to its industry average
credit risk (Yahoo Finance, 2018).
b. Do you think both companies have adequate cash resources?
It is evaluated that the cash resources and liquidity position of both companies are adequate if we
consider the present growth rate and market factors. However, with the ramified economic
change, company should increase its liquidity position. The Wesfarmers has total $ 2646 million
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cash and trade receivables in 2017. On the other hand, Woolworth has also maintained $ 1654.10
million current assets.
These both companies have managed to have high blockage of cash in its inventory which might
be negative indicator and will result to increased cost of capital at large (Bloomberg, 2018).
c. Assess both companies’ ability to survive in the longer term.
It is evaltued that long term survival of company is highly depends upon the Liquidyt position,
profitabiltiy and investment made by comapmnies. The finanical leverage of company soudl be
based on the profitbailtiy of company. it is analyzed that Wesfarmers has less profitbailtiy as
compared to Woolworth. However, the finanical levergae of Wesfarmers is high. It is observe
that Wesfarmers has managed to raise funds by using the debt fundignand incresed its debt
funding with a view to increase the overall reutrn on capital employed. The increased debt
fundignin the captial strucutre of company will also reduce the cost of capital. However, it would
be negative for Wesfarmers in negative businss sitiuation when it would not be able to earn good
amount of profit.
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