Growth Indicators For Return On Capital Employed – Financial Analysis Of Wesfarmers Retail Divisions

Growth Indicators

Discuss about the Growth Indicators for Return on Capital Employed.

Financial Performance of a Company can be evaluated using a variety of indicators and key ratios. The analysis given below analyses the key financial performance indicators for the retail divisions of the Westfarmers viz: Coles, Home Improvements, Department Stores and Office Works.

Growth Indicators help in understanding the growth of the Company over the last year. The growth rations selected below have been selected in order to provide a balanced view of the growth of the Company, in terms of absolute growth and efficiency. (CPA Australia, 2017)

Growth in revenues is the easiest and the most tangible metric to analyse the growth. Growth in revenues was calculated as (in AUD) Revenues earned in 2017 –  Revenues earned in 2016. (CPA Australia, 2017) Apart from absolute growth, the percentage growth was also calculated to understand the impact of growth better. The calculations are given below.

Table 1 Growth in Revenues (in Million AUD)  (Year- on -Year)

The Gross Revenues of Coles and the Department Stores divisions were less than the Gross in Revnues in 206 while Home Improvement and Office works managed to grow revenues in 2017. The star performer was Improvement which showed a 14% growth, year on year. 

The Return in Capital Employed, calculated in percentage terms, helps understand how efficient a business operation was in the past year. Calculating the return on capital employed will help understand whether the business operation became more profitable or less profitable within a given year. (CPA Australia, 2017)

Table 2 Growth in Return on Capital Employed (in Million AUD)   (Year- on -Year)

:  (Wesfarmers Limited , 2018)

Even though Home Improvement grew the most in monetary terms, in terms of efficiency in capital there has been a decline. This is indicative of growing pains in the Home Improvement Division. On the other hand, while the revenues of Department Stores shrunk, it became more efficient as there 217% increase in the return on capital.  The efficiency on capital also, grew for Office Works.

Net Assets can be defined as Assets – Liabilities. The growth in net assets symbolizes an internal growth. (CPA Australia, 2017)

Table 3 Growth in Net Assets (in Million AUD) (Year- on -Year)

:  (Wesfarmers Limited , 2018)

Growth in Net Assets was the worst for Coles as net assets declined by 28 million AUD. The net assets of Office Works  showed the highest growth in percentage terms while Department Stores also, increased their net assets.

Growth in Revenues

Based on the three indicators above, the Department Stores and Office Works divisions performed the best financially. Office Works grew, in financial terms, without losing sight of efficiency while the efficiency of Department Stores increased spectacularly. Even though , there was a decline in revenues, there was an increase in the net assets , implying internal growth. The worst performer was the Coles division whose financial performance declined on the various indicators. There was an overall loass in efficiency as well as growth. IF the divisional performance continues in this way, the division may soon experiences losses. Given that Coles is the biggest retail division among the four, bad performance by the Coles Division  may drag the growth of the entire group.

There are several other indicators that help understand the financial position of a firm from the point of view of “going concern” or the ability of the firm to stay in business but are not concerned with the profit or loss. (CPA Australia, 2017)

One such ratio is the liquidity Ratio. any liquidity ratio describes the amount of liquid balances that a firm hols , in order to be able to dispense off its current liabilities or the payments that must be made within the given year. A low liquidity ratio is dangerous because it can lead to loss of consumer confidence since the firm will find itself unable to pay off it’s liabilities, in spite of having sufficient assets. (CPA Australia, 2017)

One of the most commonly used ratios is the “Working Capital Ratio”. It is calculated as

“Working Capital Ratio=  Current Assets – Current Liabilities”. (CPA Australia, 2017)

The Working capital ratio for four firms was calculated as below:

Table 4 Working Capital Ratio

Source:  (Wesfarmers Limited , 2018)

The Working Capital ratio was the highest for Coles. All other retail business must focus on increasing their working capital since they are all below 30%.

The term business sustainability encompasses several aspects. Sustainable businesses must be built upon three pillars or the “Triple Bottom Line”. as introduced by John Elkington in 1994. (Hindle, 2009)  . The term encompasses three aspects of Financial, Environmental and Social . sustainability. Financial sustainability has been discussed in the question. It includes the ability of a business to manage its financial goals while staying in business. Modern firms, however, have added responsibilities as members of the society and seek to add net value to the society.

The two other important considerations are mentioned below:

Growth in Return on Capital Employed

Environmental Sustainability: Environmental sustainability often related to policies and processes regarding action against contamination, reduction of carbon footprint, energy and water saving and conservation of resources.

Recycle and Reduce: All the four retail business are introducing processes to reduce their wastage through the reduce and recycles strategy while also, helping customers to do the same.:  For example, Bunnings has a collection program to collect recyclable waste among communities that it operates in. Officeworks has adopted the Australian recycling label that makes it easier for customers to recycle the packaging of their product. (Wesfarmers Limited, 2018)

Energy savings: All the four retail businesses have placed an increased emphasis on energy saving which will ultimately help in reduction of the carbon footprint of the firms. Target, for example, has detailed goals regarding energy savings. A joint plan for natural resources conservation has also been adopted by the four business. (Wesfarmers Limited, 2018)

Sustainable Agriculture: Coles, has policies that promote sustainable agriculture by providing support to farmers via technological help. Similarly, many divisions of these four businesses have adopted recyclable packaging. (Wesfarmers Limited, 2018)

The Social aspects relate to and ensuring that all practices are aligned towards creating a better society and community. (Hindle, 2009)

People: Social Sustainability begins with “people”. It involves ensuring that the employees and contractors are being treated without bias, in hiring or in promotion. Policies regarding reducing or removing gender pay gap have been instituted by all the four firms. The people aspect also related to ensuring that safety standards for workers are being met. All the four firms have additional non-mandatory policies such as “‘Mind Your Health program” by Coles which provides online resources for  mental health awareness. (Wesfarmers Limited, 2018)

Inclusivity and Diversity: All four firms have placed an emphasis on increasing inclusivity and diversity within the Employment of Indigenous people and partnerships with indigenous people helps the retail business close some in equality within the society.  (Wesfarmers Limited, 2018)

Ethical Sourcing: Placing an emphasis on transparency in supply chain by the four Companies have instituted policies regarding ethical sourcing. For example, Office works has a program for sourcing wood fibre responsibly while Coles has a  Program called Australia First where it has contracted Australian Farmers for sourcing of local produce. Sourcing od local produce ensures reduced carbon footprint and contracting Australian farmers helps boost the local economy. Similarly, ethical sourcing of wood fibre ensures that illegally obtained timbre is not being sold by Officeworks. (Wesfarmers Limited, 2018)

Partnerships with non-profits: All the four firms have partnerships with non-profits that help them reach out to the underprivileged.

Business Sustainability would be achieved better if efforts towards financial, environmental and social sustainability are extra of the business operations but should be ingrained within the operations. Efforts such as introduction of recyclable packaging, promotion of sustainable farming and ethical sourcing achieve that. Additionally, each of these businesses have targeted, goal oriented, comprehensive action plans to achieve business sustainability goals. Hence, the business sustainability efforts of the retails businesses of Westfarmers should be rated highly. (Wesfarmers Limited, 2018)

1. Adjustment Entries

Table 5 Adjustment Entries

Narration

• Adjustment 1: Inventory Adjustment
• Expenses (Inventory Expense is increased)
• Assets Inventory is Decreased
• Adjustment 2: Depreciation
• This is a deferral Adjustment Entry
• 20% of $80000 is $16000
• This is an accrued expense. Hence, it is a liability. Hence, it will be credited.
• This is a contra asset. However, the entry is an expected. reduction Hence, it is a debit.

1. Income Statement

Table 6 Income Statement For Year Ended 31st May 2018

Changes in Owner’s Equity

Table 7 Change in Oneer’s Equity

 Balance Sheet

Table 8 Balance Sheet

Table 9 Closing Entries of Expenses

Table 10 Closing Entries of Revenues

Table 11 Closing Entries of Depreciation

References

CPA Australia. (2017). Financial Accounting and Reporting Study Guide (Seventh Edition). Retrieved from CPA Australia: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/cpaprogram/foundation-exams/farr-study-guide-seventh-edition.pdf?la=en

Hindle, T. (2009, November 17). Triple Bottom Line. Retrieved Spetember 16, 2017, from The Economist. https://www.economist.com/node/14301663

Wesfarmers Limited . (2018). Wesfarmers Annual report 2017. Retrieved from Wesfarmers: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0

Wesfarmers Limited. (2018). Sustainability Report 2017. Retrieved from Wesfarmers: https://sustainability.wesfarmers.com.au/media/2224/2017-wesfarmers-sustainability-full-report.pdf

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