Financial Analysis of Wesfarmers Ltd †Free Samples to Students

Question: Discuss about the Financial Analysis of Wesfarmers Ltd. Answer: Introduction The aim of this report is to examine financial performance of Wesfarmers Ltd over the year 2015 and 2016 financial years. The area of efficiency, liquidity, solvency and profitability would be assessed and which would be of great interest to potential investors who are key stakeholders in this case and who invests in highly competitive business conditions. Data from the companys 2015 and 2016 annual reports would be used in presenting and analysing the company financial performance and in making inferences or recommendations about its financial prospects. In essence, only consolidated figures are used including analysis of balance sheet, statement of cash flow and income statement. Further, overall summary with key recommendations about the company on whether potential investors should invest in the company or not will be made. Wesfarmers Ltd is the largest conglomerates in the globe operating over six business segments in Australia, whose headquarter is in Perth, Australia. Furthermore, Wesfarmers Ltd is one of the highly reputable firms listed on ASX, with around 500,000 shareholders and 200,000 employees (Wesfarmers 2016). It was usually established as small Western Australian Farmer Co-operative but has not diversified into numerous sectors like resource, insurance and retail and is currently generating revenue of more than $50 billion per year. Basically, Wesfarmers Ltd is usually a diversified firm operating departmental stores, coal mining, supermarkets, officer supplies and home improvement, chemicals, industrial and safety products, insurance, fertilize and energy products. It most common brands of this company include Coles, Kmart and Target. In addition, Wesfarmers Ltd is known as a highly profit making firm in Australia. Wesfarmers competes with Myer Holdings, ADAIRS FPO, Reject Shop and JB Hi a nd operates over 787 Coles supermarket and offer credit cards, car, home, landlord and life insurance products. It also has over 865 liquor stores under Vintage Cellars, First Choice Liquor and Liquorland (Wesfarmers 2016). The company supplies building materials, technology products, and retail office and also supplies ammonium nitrate, sodium cyanide, wood plastic composite decking, industrial chemicals, polyvinyl chloride resins as well as sodium. Financial analysis is very crucial in this case since it help potential investors in making better decisions as to whether to invest in Wesfarmers Ltd. While conducting a financial analysis, three categories are used, that is financial statement analysis, ratio analysis as well as stock movement analysis for the past two years. Based on the company income statement, it is evident that Wesfarmers Ltd has a net profit of around $407 million in the financial year 2016. This was relatively lesser as compared to the previous year. In addition, a strong performance across most of it business are found to have been offset by the challenging trading situations as well as restructuring activities in the Target as well as the impacts of relatively lower commodity prices in the resources business. Despite relatively lower net income, Wesfarmers reported a net sale of around $65,981million in the financial year 2016 which was mostly attributed by its continued efforts to invest in the customer value, stores, service, improved merchandise ranges and online ranges in delivering improved returns and long-term growth (Wesfarmers 2016). Further, based on its cash flow statement, it is evident that Wesfarmers reported an operating cash flow of around $3,365 million in the financial year 2016 which was $426 or 11.2% far much below the previous year. This lower operating cash flow mostly displayed a higher working capital in retail portfolio. In addition, its net capital expenditure was around $1,336 million which was 13.9% lower as compared to the previous year. Further, proceeds from the disposals for the company in 2016 was $563 million which was also relatively lower compared to the financial year 2015, which was as a result of fewer retail property sales (Wesfarmers 2016). Overall, the company had a gross capital expenditure of around $1,899 million which was $340 million lower compared 2015. Its free cash flow was $1,233 million which was 34.9% below the previous year. Further, Wesfarmers Ltd maintained strong balance sheet within the year. The net financial debt for the company over the financial year 2016 was $5,727 million which was far much above the previous year. The increase was as a result of acquisition of the Homebase as well as working capital investments. Capital employed in 2016 was $27,663 million which was lower as compared to the figures recorded in 2015. Further, based on Wesfarmers Ltd balance sheet, working capital for the company increased with receivables and inventories increasing in 2016 partially offset by increasing payables (Wesfarmers 2016). This ratio is used in measuring level of liquidity in an organization. It is also referred to as working capital ratio as it is obtained by dividing current assets by an organizations current liabilities (Peavier 2012). Based on the Table 1 below, it is evident that current ratio for Wesfarmers Ltd for the past two years was 0.935 in 2015 and 0.929 in 2016. This means that for the past two years, the company was experiencing difficulties in settling its short-term debts commitments. 2015 2016 Current ratio 0.935 0.929 The ratio is used assessing the capacity of a given company in settling off all its short-term debts with it most liquid assets without liquidation of inventories (Peavier 2012). From the Table 2 below, it is evident that Wesfarmers Ltd quick ratio was 0.23 in 2015 which later decreased in 2016. The figures are clear indication that for the past two years, Wesfarmers Ltd was experiencing some issues in paying off its short-term obligations. 2015 2016 Quick ratio 0.23 0.19 This ratio is used in measuring amount of income or profit that is earned per each dollar of sales. It is computed by dividing net income by total revenue (Peavier 2012). The results from Table 3 below show that profit margin for the company was 0.62%. The figure was relatively higher as compared to the peer average which was -5.5% but it was relatively lower as compared to the previous year. The decrease in net profit margin is a clear indication that the company income earned per dollar of sales has been decreasing over the years. Table 3: Wesfarmers Ltd net profit margin for the past two years 2015 2016 Net profit margin 3.91% 0.62% Return on asset This ratio is used in measuring efficiency of an organization in utilizing assets to generate income (Peavier 2012). Based on Table 2 below, it is evident that is ROA for the financial year 2016 was 1.00%. This figure shows a significant decrease from 2015 where a ROA of around 6.04 was recorded. The decrease in ROA is a clear indication that Wesfarmers is inefficient or ineffective in managing its assets to generate income. 2015 2016 ROA 6.04% 1.00% Return on equity The ratio is used in measuring overall performance of an organization earned per each dollar of investment. It is computed by dividing net income by an organizations equity (Peavier 2012). As from Table 5 below, it is evident that is ROE for the year was 1.77%. This figure is relatively high as compared to its peer average which is -15.17%, meaning that the company is more efficient in utilizing its equity to generate income as compared to its peers. Nonetheless, the figure was relatively lower as compared to the figures recorded in 2015, meaning that the company was not efficient enough in utilizing its shareholders equity to generate income. 2015 2016 ROE 9.85% 1.77% The ratio is useful since it is used in measuring organization efficiency. Here, a higher asset turnover shows how efficient an organization is in utilizing its total assets to generate revenue (Peavier 2012). Based on the Table 6 below, it is evident that total asset turnover for the company was 1.55 in 2015 which later increased to 1.62 in 2016. The increase in total asset turnover is a clear indication that Wesfarmers Ltd is more efficient in utilizing its assets to generate revenue. 2015 2016 Asset turnover 1.55 1.62 The ratio is used in measuring number of times an organizations inventories are used or sold within a given period. From Table 7 below, it is evident that Wesfarmers Ltd inventory turnover was 7.90 in 2015 and in 2016 it was 7.34. 2015 2016 inventory turnover 7.90 7.34 Receivable turnover According to Peavier (2012), receivable turnover is usually a ratio used in measuring how efficiently an organization utilizes its assets. As from Table 8, it is evident that Wesfarmers Ltd receivable turnover increased as from 42.68 in 2015 to around 40.53 in 2016. The figures show that Wesfarmers is efficient in managing its receivables. 2015 2016 Receivable turnover 40.53 42.68 This is a financial ratio used in measuring an organization level of leverage. It is usually obtained by dividing total liabilities of an organization by its total assets (Peavier 2012). From Table 9 below, it is evident that for the last two years, Wesfarmers experienced an increase in debt ratio as from 0.39 in 2015 to 0.44 in 2016. The figures are clear indication that the company is less leverage and therefore does not heavily rely on debt in financing its assets. 2015 2016 Debt ratio 0.39 0.44 Debt to equity ratio The ratio is useful since it is utilized in measuring overall level of debt financing in relation to the equity financing. It is usually regarded as the guide to level of control in existence and is computed by dividing an organizations total debts by its shareholders equity (Peavier 2012). Based on Table 10 below, it is evident that debt to equity ratio for the company increased as from 0.63 in 2015 to 0.78 in 2016. Despite the increase in debt to equity ratio, it is evident that for the past two years, the company has been relying heavily on equity financing instead of debt financing. 2015 2016 Debt to equity ratio 0.63 0.78 Market value of Wesfarmers Ltd shares was $41.17 by the first quarter in 2016. This is a decrease from the fourth quarter in 2015. In essence, by looking at the trend in the company stock price for the past one year, it is evident that its stock prices have been on increase with some fluctuations. Furthermore, for the past one year, there has not been major variation in Wesfarmers Ltd stock price and therefore it can be stated that the company has had stable price movement in the last one year. His is mainly due to the fact that its earnings have been relatively strong and have been increasing every year. Wesfarmers Ltd focuses on its operational excellence as well as on diversifying its main operation by acquiring numerous businesses that have sound financials and that has been disposing of their business operations which are viewed to be unprofitable. In addition, the firm reinvested billions of money for it acquisition and growth and focused on paying dividends to its shareholders , which resulted in the positive sentiment for its share price and therefore its stock price has some increasing movement, which is viewed as more or less stable. Conclusion In conclusion, it can be stated that Wesfarmers has lower debt liabilities as compared to its equity and assets. This is a clear view that Wesfarmers is a strong investment quality for potential investors. In addition, it can be concluded that Wesfarmers management is not efficient enough in managing its assets and equity to generate income. This is evidence by a relatively lower ROE and ROA over the years. Nonetheless, based on efficiency and solvency ratios, it can be concluded that Wesfarmers Ltd has very strong performers with significantly robust financial positions which is geared towards its improvement and growth in near future. Therefore, it is recommendable that Wesfarmers could make a good investment opportunity for potential investors who are looking forward to invest their money in a financially strong and healthy company. References Peavier, R., 2012, Financial Ratio Analysis Tutorial 101. [Online]Available at:htp:/bizfinance.about.com/od/yourfinancialpositon/s/financial-ratio-analysis-tutorial- 101.htm [Acesed 6 October 2017] Wesfarmers 2016, Wesfarmers Annual Report, 2016 [Online]Available at:https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4 [Acesed 6 October 2017]