Analysis Of Cash Flow And Financial Performance Of Wesfarmers Limited And Woolworths Limited

Method used in presenting the statement of cash flows for each company

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

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.

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.
• 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

Woolworth: Indirect Method  

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 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).

Examination of cash flow from operating activities, investing activities and financing activities

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

Return on total assets

Earnings before interest and tax / total assets X 100

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.

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.

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 cash flow information including ratios like Cash Adequacy Ratio and Cash Flow Ratio (Liquidity)

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

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.

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).

Conclusions and recommendations about both companies’ short-term credit risk, cash resources, and survival ability

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 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).

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.

This analysis divulges that Woolworth has lower trade receivable which will eventually reduce its credit risk. However, the profitability of the Wesfarmers is higher. It shows that in terms of profitability and increased revenue Wesfarmers will have higher cash generation from its sales revenue (Bloomberg, 2018).

Conclusion 

From the above report, conclusions has been drawn that financial position and financial performance of both the companies are not stable and not up to the mark as compared to industry standards. Both the companies have used direct method for making cash flow statement and adequate disclosures are made in notes of financial statements during the year. On the other hand, liquidity position of both Wesfarmers Limited and Woolworth Limited is not adequate since they has less than 1 time current ratio and quick ratio has shown adverse result during 2016 and 2017. Woolworth Limited in 2016 has been in loss and Wesfarmers Limited has gained little better results in 2016. Overall, it can be concluded that Wesfarmers Limited is better business organisation as compared to Woolworth Limited in last 2 years of analysis.

References 

Bloomberg, (2018), ‘BHP Billiton plc retrieved from, https://www.bloomberg.com/news/articles/2017-12-20/glencore-apollo-said-to-bid-for-rio-s-1-5-billion-coal-assets?utm_source=yahoo&utm_medium=bd&utm_campaign=headline&cmpId=yhoo.headline&yptr=yahoo,

Bloomberg, 2018, ‘Wesfarmers plc, retrieved from https://www.bloomberg.com/gadfly/articles/2017-11-20/rio-tinto-s-buying-again-expect-an-unhappy-ending-for-lithium?utm_source=yahoo&utm_medium=bd&utm_campaign=headline&cmpId=yhoo.headline&yptr=yahoo,

Financial times, 2018, ‘Tech stocks drop on broad sell of’, https://www.ft.com/content/3646ef2d-9bbb-3aa8-8008-853fa0363c5c

Yahoo Finance, 2018, ‘BHP Billiton, retrieved from  https://au.finance.yahoo.com/news/could-iron-ore-price-hit-033537230.html

Yahoo Finance, 2018, ‘Woolworths, retrieved from https://finance.yahoo.com/news/november-insights-healthcare-stocks-visioneering-055829291.html,

Yahoo Finance, 2018, ‘Wesfarmers Capital Spending Target, ’18 View Solid

Yahoo Finance, 2018, ‘Woolworths, retrieved from https://au.finance.yahoo.com/news/iron-ore-price-rebounds-remains-221520387.html,

Wesfarmers plc, 2018, Annual report, retrieved from https://www.wesfarmers.com.au/investor-centre/company-performance-news/reports,

Woolworths, 2018, Annual report, retrieved from https://www.woolworths.com.au/investor-centre/company-performance-news/reports,

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