Acquisition Of Wesfarmers Limited By Google Australia – Business Report

Brief overview of Wesfarmers Limited

The current report is based on the expansion plan of Google Australia from the perspective of a new CEO appointed in the organisation. The Australian Board of Directors has asked the CEO to expand into the retail sector of Australia. Therefore, the organisation that has been selected for acquisition is Wesfarmers Limited, which is the leading retailer in Australia. The paper would provide an overview of the chosen organisation, its mission, vision and goals along with its strategic plan and performance. Moreover, it would lay stress on analysing the strategic plan and performance of Wesfarmers Limited in the past three years based on the reports of the CEO and the Chairman. Along with this, a brief overview of the auditors and their opinion would be discussed in this paper. Finally, the report would shed light on evaluating the financial condition of the organisation by using its financial statements disclosed in the annual reports.

Wesfarmers Limited is an Australian conglomerate established in 1914 having it’s headquarter in Perth, Australia. It started its journey as a cooperative organisation by the “Farmers’ and Settlers’ Association” of Western Australia for acquiring the assets of the Union of the West Australian Producers. During that time, the focus of the organisation was to provide merchandise and services to the rural communities of Western Australia. Moreover, in 1924, it went on to establish the first radio station in Western Australia and it has completed many other acquisitions until 1990. It has acquired full ownership of Bunnings in 1994 and in 2007; it purchased Coles for $20 billion (Wesfarmers.com.au 2018). The main products of the organisation include retail goods, fertilisers, chemicals, safety, industrial and coal mining products having an employee base of 223,000 in 2018. On 27^th October 2018, the shares of Wesfarmers Limited are traded at $45.60 per share.

Wesfarmers Limited has the intention of superior practicing towards ethical considerations of its business operations. The organisation wants to provide satisfactory return level to its shareholders. The current focus of the organisation is to enhance its reputation in ethical practice areas. It has set its mission of having the greatest ethical standards among the organisations functioning in the retail sector of Australia and New Zealand. For assuring effective returns to the shareholders, Wesfarmers Limited has developed disciplined, unique and highly focused working culture in the organisation. One of the significant goals of the organisation is to provide superior quality products to its customers. Therefore, it requires focusing on information delivery and product quality to the customers.

According to the mission statement of Google, the global information is to be organised and they could be accessed easily and useful to the users. It has already been evaluated that Wesfarmers aims to provide all product-related information to its customers in a timely manner. Along with this, Google intends to be socially beneficial and remain accountable to the people. Wesfarmers has been involved in providing job opportunities to the indigenous people living in the Australian rural communities and thus, its goals are aligned with the expansion plan of Google Australia.

Mission, vision and goals of Wesfarmers Limited

The strategic plan of Wesfarmers Limited is to provide a reasonable return to its shareholders consisting of certain strategies, which is illustrated as follows:

Figure 1: Strategic plan of Wesfarmers Limited

(Source: Wesfarmers.com.au 2018)

As per the Chairman’s report, the net profit after tax have declined over the years due to impairment expense and closure costs for Bunnings in UK and Ireland coupled by additional impairment in Target business. Moreover, there have been huge restructuring costs incurred in 2018 for ensuring long-term returns to the shareholders. Despite all these changes, the organisation has managed to maintain a stable financial health over the years; however, the Chairman does not feel any urgency to acquire new business. Moreover, the organisation has sound corporate governance policies and board mechanisms due to which proper business ethics and working culture are maintained within the organisation. According to the Chairman of Wesfarmers, the organisation always thrives to provide maximum value to its shareholders, customers, employees, suppliers and communities, as financial success could not be achieved in the absence of effective governance (Wesfarmers.com.au 2018). Therefore, it could be said that the strategic plan of the organisation is in line with its overall business performance.

As per the annual reports of Wesfarmers Limited, Ernst & Young is identified as the auditor of the organisation over the past five years. The auditor has complied with all the necessary guidelines mentioned in the Corporations Act 2001 while preparing the audit report. In addition, it has adhered to all the norms laid out in “Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants’’ so that auditor independence is maintained effectively (Wesfarmers.com.au 2018).

According to Ernst & Young, Wesfarmers Limited has prepared its remuneration report in such a manner that has followed the essential guidelines in accordance with “Section 307C of the Corporations Act 2001”. Along with this, Wesfarmers has prepared its financial statements and supporting notes by complying with the necessary Australian accounting standards and other regulations. Therefore, it is apparent that Ernst & Young has issued an unqualified audit opinion for Wesfarmers Limited, since all the disclosure criteria are met by the latter (Booth 2018).

The financial analysis of Wesfarmers Limited is performed by taking into consideration various factors, which are enumerated briefly as follows:

Figure 2: Trend in sales revenue of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

As per the above figure, it is clearly inherent that Wesfarmers Limited has experienced an increase in revenue by 3.77% in 2015 due to the fact that it has generated higher sales from Coles, Target, Kmart and HIOS in the year owing to increased market demand. The increase is inherent further to 5.66% in 2016 due to considerable increase in sales from its home improvement business subsidiary. However, the fall in the sales revenue of Coles in 2017 and rising competition from Woolworths has declined the overall sales revenue of Wesfarmers in the year by 1.62%. The scenario has changed in 2018 due to considerable rise in revenue from Bunnings business. Hence, in terms of sales trend, stability could be observed in the performance of Wesfarmers Limited over the past five years.

Strategic plan and performance of Wesfarmers Limited in the past three years

Table 1: Trend in cash flow of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

As per the above table, it could be observed that Wesfarmers Limited has earned $3,791 million from operating income in 2015, which has experienced fluctuating trend over the last five years. Even though the operating cash flows have increased by 17.51% in 2015 due to minimisation of operating expenses, decline could be observed by 11.24% in 2016. However, in 2017, operating cash flows have risen significantly by 25.59% in 2017, which have declined again by 3.45% in 2018. This trend is due to the increase in supplier payments of the organisation over the years (Buehlmaier and Whited 2018).

On the other hand, it could be seen that the investing cash flows have increased until 2016, after which a decline could be observed in 2017; however, the situation changed again in 2018. This is because until 2015, Wesfarmers has acquired certain small business due to which considerable investments were made (Brigham et al. 2016). However, the proceeds from fixed assets have lowered after 2015 due to which cash outflows have occurred until 2018.

In case of financing cash flows, the organisation has to incur huge amount of money in repaying its borrowings and payment of equity dividends. As a result, huge amount of cash outflows in relation to financing activities have occurred over the years for Wesfarmers Limited. Therefore, the cash balance has not increased over the years due to drainage of cash; the only exception is the year 2017 where the organisation has managed to minimise cash outflows and retain more cash at bank.

Table 2: Trend in balance sheet of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

The balance sheet statement is a financial report that provides a picture about the financial position of an organisation during an accounting period (Collier 2015). In case of current assets, decline could be observed over the years compared to current liabilities with the only exception observed in 2016-17. This implies decline in the financial strength of the organisation in clearing short-term liabilities as well as working capital requirements (Damodaran 2016). Moreover, the non-current assets of Wesfarmers have fallen from 2016 to 2018, which implies that it has disposed off its fixed assets over the years at lower prices. Even though current liabilities of the organisation have fallen in the past two years, it is higher than current assets. This has weakened the liquidity position of the organisation in the Australian retail industry. On the other hand, non-current liabilities have fallen in 2017 and 2018, which signify effective financial health of Wesfarmers in clearing its long-term debts. Therefore, declining current assets and increased current liabilities resulted in unfavourable situation for the organisation due to which market growth has been suppressed (Dokas, Giokas and Tsamis 2014). Even though there is increase in non-current assets, they could not be converted into cash when it is required for settling short-term debts. Finally, the net assets or equity of the organisation have fallen over the years implying declining share price of the organisation in the market (Fields 2016). 

Auditors and audit opinion of Wesfarmers Limited

Table 3: Trend in profit and loss of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

According to the above table, Wesfarmers is able to increase its revenue more in comparison to the cost of sales. This implies that the organisation has managed to make delayed payments to its suppliers owing to favourable brand image in the Australian supermarket. As a result, increase in gross profit could be observed over the years (Holm 2018). However, fluctuating trend could be observed over the years due to fluctuations in employee benefits expense. Due to this, similar trend could be witnessed in case of operating profit and net profit; however, the position is deemed to be stable over the five-year period, as the organisation has not suffered losses in any of the years.

Table 4: Profitability ratios of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

Figure 2: Profitability ratios of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

In accordance with the above table and figure, it could be seen that the net margin of the organisation has fluctuated over the years owing to fluctuating operational expenses. This ratio helps in analysing the earnings made by an organisation after deduction of all relevant costs and expenses (Islam 2014). Moreover, the increasing competition from Woolworths Group Limited and the changing preferences of the customers are the other reasons due to which Wesfarmers has not been able to maintain steady net margin over the past five years.

Return on equity is a profitability ratio that determines the percentage of profit earned from the amounts collected from the shareholders (Kim 2016). In case of Wesfarmers, the ratio has fallen significantly in 2016, after which a considerable increase could be observed in 2017 followed by a slight decline in 2018. This is considered to be a favourable trend in the last two years, as the investors want to see a higher ratio, since it implies that their funds are used appropriately within the organisation. Moreover, this ratio implies that Wesfarmers has maintained positive earnings trend over the years (Kim and Schmidgall 2017).

Return on assets ratio implies the effectiveness of an organisation in converting money utilised for purchasing assets into net income (Lev and Gu 2016). For Wesfarmers, the ratio has followed a similar trend like return on assets, which signifies that the organisation is effective in managing its assets for generating sufficient net income. Hence, in terms of profitability, Wesfarmers has managed to maintain a stable position in the retail sector of Australia.

Figure 3: Liquidity ratios of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

From the above table and figure, it is evident that the current ratio of Wesfarmers Limited has fallen from 1.13 in 2014 to 0.93 in 2015 and the same number is maintained until 2017 followed by a decline to 0.87 in 2018. This ratio evaluates the capability of an organisation in settling its short-term dues with short-term assets and the ideal ratio is considered to be 2 (Miller-Nobles, Mattison and Matsumura 2016). This clearly highlights the fact that the organisation is suffering from liquidity problems, as the customers are making delayed payments resulting in cash shortage.

Financial analysis of Wesfarmers Limited for the past five years

On the other hand, quick ratio is another measure of liquidity that excludes prepayments and inventories while assessing the liquidity position of an organisation (Noreen, Brewer and Garrison 2014). In this case, decline could be observed over the two years, as the supply is more than the market demand and hence, there is over-stocking of inventory. In terms of liquidity, it could be said that Wesfarmers is not in a favourable position in the Australian supermarket.

Table 6: Asset turnover ratios of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

Figure 4: Asset turnover ratios of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

The above table and figure clearly indicates that the total asset turnover ratio has increased each year for Wesfarmers Limited. This ratio assists in measuring the efficiency of an organisation in generating sales by using its asset base (Omar et al. 2014). The increasing trend behind this ratio is that Wesfarmers does not have any production or management-related issues due to which adequate sales could be generated from its asset base. The trend is similar in case of fixed asset turnover ratio as well for Wesfarmers Limited. A higher ratio is always favourable, as increasing sales are generated with the help of small amount of assets (Rehman et al. 2015). The sales have increased, as Wesfarmers has disposed off a portion of its equipment and it has initiated outsourcing its operations by minimising investment in equipment.

Working capital turnover ratio is a financial ratio that analyses the effectiveness of an organisation in using its working capital (Salas and Campos 2016). In case of Wesfarmers, the ratio is not found to be favourable, as the short-term assets have fallen considerably over the years compared to current liabilities. Hence, in terms of asset turnover, healthy position is observed in case of Wesfarmers, the only problem lies in its shortage of working capital.

Table 7: Leverage ratios of Wesfarmers Limited for the years 2014-2018

(Source: Wesfarmers.com.au 2018)

Leverage ratio helps in depicting the portion of company financing coming from creditors and investors (Tinkelman 2015). For Wesfarmers, the ratio has increased until 2016, after which decline could be observed in both 2017 and 2018. However, it is still below the ideal standard of 1, as lower ratio implies a financially stable business (Vogel 2014). In this case, it is clearly seen that Wesfarmers has focused on raising more funds through debt, as it is a cheaper source of financing. However, it has started to raise funds from equity shareholders in recent years in order to avoid drainage of cash in repaying bank loans.

Interest cover ratio is a leverage ratio involved in measuring the ability of an organisation in making interest payments on debt within time (Wahlen, Baginski and Bradshaw 2014). For Wesfarmers, the ratio has declined significantly in 2016; however, it has increased again massively in 2017 and the similar trend is followed in 2018 as well. In this context, it is noteworthy to mention that the ratio has remained well above the ideal standard of 1, which is deemed to be favourable for the organisation (Zimmerman 2016). Therefore, in terms of leverage, Wesfarmers is placed in a better position in the Australian retail industry.

Conclusion and recommendations:

The above discussion makes it evident that Wesfarmers Limited is the leading Australian retailer having the objective of providing maximum returns to its shareholders. Accordingly, it has set its mission, vision and goals that completely align with the expansion plan of Google Australia. Moreover, it has been analysed from its audit report that the organisation has disclosed its financial reports by complying with all the necessary guidelines and standards prevalent in Australia. Moreover, the organisation is found to be financially stable in the Australian retail sector; the only shortcoming is observed in its liquidity position. This could be improved by tightening the debtor policy and minimisation of inventory based on the existing market demand. Therefore, by considering all these aspects, Wesfarmers Limited could prove to be a suitable expansion plan for Google Australia, since the former has the potential of generating adequate returns in future.

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