Financial Analysis Of Wesfarmers And Woolworths Limited In Australia

Company Profile

This assignment covers financial analysis of two companies of same industry listed in Australian stock market. The chosen companies are Wesfarmers limited and Woolworths limited of Australia covered under Food and staples Retailing industry. The chosen companies’ performance is evaluated and assessed through financial ratios and 2017 financial year is considered for the same. The data required for the analysis is extracted from the annual reports. The performance of each company is assessed and compared on the basis of 5 criteria’s such as short-term solvency ratios, long-term solvency ratios, profitability ratios, market value ratios and asset utilisation ratios and based on that fundamentally better company is analysed.

Company Profile

Wesfarmers Limited

The company is originated in the year 1914. The registered office is situated in Western Australia. It is the leading Australian listed company with code (ASX: WES) (ASX, 2018). The business activities are: fuel and alcohol outlets, superstores, convenience and department stores, hotels, home improvement and office deliveries and some industrial divisions with chemicals, energy and fertilizers businesses and industrial and safety product distribution. The company has approximately 220,000 number of employees providing pleasing environment at the workplace and also promotes opportunities for the employees. The company’s chief objective is to serve the shareholders better value (Wesfarmers, 2018). Considering 2017 financial year, the company’s reported a record level of performance in relation to operating cash flows and the earnings with the strong increase in return on equity. Wesfarmers created the culture that cheers improvement, vision and reward boldness.

Woolworths Limited

The company is originated in 1924. With 93 years in existence and 20 years of listed in Australian stock market (ASX: WOW) (ASX, 2018). The company is leading the Australian market. The chairman of the company is Gordon Cairns. The business activities are: Supermarkets, Liquor, hotels, and petrol divisions and also engaged in financial services offering credit cards, gift cards etc. Approximately company is having 202,000 employees across New Zealand and Australia. The main agenda of the company is to serve exceptional services and products to the customers (Woolworths Group, 2018). The company has the objective to deliver maximum returns to their shareholders. The main highlight of Woolworths group in 2017 financial year was an enhancement in customer scores in Australian food which has resulted in transactions force all over the year. The figure goes to total of $ 36.4 billion in 2017.

The performance of the above companies is compared on the basis of 5 categories of ratios such as short-term solvency ratios, long-term solvency ratios, profitability ratios, market value ratios and asset utilisation ratios and based on that fundamentally better company is analysed. 

Short-term solvency ratios (Liquidity Ratios)

The liquidity ratios are the indicators that whether the company has sufficient current assets to meet its current liabilities as when they become due. Generally, ratio more than 1 implies that short term debts are recovered entirely. In other words, short-term solvency position of a company is gauged. The most common liquidity ratios are current ratio, quick ratio and cash ratio.

Short-term Solvency Ratios (Liquidity Ratios)

1. Current Ratio:

Current ratio is one of the most common liquidity ratio used by the firm in order to determine the short-term solvency position. Higher ratio is always favourable because this shows that company can effortlessly make current due payments. This is calculated by dividing total current ratio to total current liabilities.

2. Cash Ratio:

It is also a liquidity ratio where current liabilities are recovered only from cash and cash equivalents. It is very restrictive ratio because no other current asset except cash are utilised to pay off current debt. The formula is: Cash and cash equivalents / total current liabilities.

3. Quick Ratio:

Quick assets are those current assets which can be converted into cash in a short term. Thus in this ratio, only quick assets are utilised to pay off current liabilities when they become due. Higher ratio is favourable because it indicates better solvency position. The formula is: Quick assets excludes inventories / current liabilities.

Following analysis is as follows:

Wesfarmers limited

Calculation of Liquidity ratios
Current ratio
Particulars	Amount ($m)
Total Current Assets	9667
Total Current Liabilities	10417
Current ratio [CA/CL]	0.93
Quick ratio
Particulars	Amount ($m)
Total Current Assets	9667
Inventories	6530
Total Current Liabilities	10417
Quick ratio [(CA-inventories)/CL]	0.30
Cash ratio
Particulars	Amount ($m)
Cash and cash equivalents	1013
Total Current Liabilities	10417
Quick ratio [(CA-inventories)/CL]	0.10

(Annual Report, 2017).

Woolworths Group Limited

Calculation of Liquidity ratios
Current ratio
Particulars	Amount ($m)
Total Current Assets	6994.2
Total Current Liabilities	8824.2
Current ratio [CA/CL]	0.79
Quick ratio
Particulars	Amount ($m)
Total Current Assets	6994.2
Inventories	4080.4
Total Current Liabilities	8824.2
Quick ratio [(CA-inventories)/CL]	0.33
Cash ratio
Particulars	Amount ($m)
Cash and cash equivalents	909.4
Total Current Liabilities	8824.2
Quick ratio [(CA-inventories)/CL]	0.10

(Annual Report, 2017).

Wesfarmers Limited and Woolworths Group Limited

Year – 2017

Particulars	Wesfarmers Limited	Woolworths Group Limited
Current ratio	0.93	0.79
Quick ratio	0.30	0.33
Cash ratio	0.10	0.10

(Refer: Ms-Excel).

Performance evaluation

According to the above liquidity ratio description, Higher ratio is always better for the short-term solvency position of the company. As per the above table, it has been inferred that in Financial year 2017 Wesfarmers can easily pay off their current obligations and hence Wesfarmers’ performance is better than Woolworths group.

Long-term solvency ratios (Financial leverage ratios)

Long-term solvency position is determined from the financial leverage ratios. In this category of ratio, the company’s ability to meet its long-term debt obligation is analysed. If the company has more debt than equity, then it depicts the riskier position. The most common ratios under this category are Interest coverage ratio and Debt ratio.

1. Interest coverage ratio:

This measures the company’s ability to pay interest obligations on timely manner. This ratio is mainly used by the creditors and the investors for the purpose of analysing risks and the profits in a company. Higher ratio is always favourable because it depicts more money left by the company after the interest payments. It is calculated by dividing Earnings before interest and taxes / Interest Expense.

2. Debt ratio:

It is a measurement of total liability to total assets in a percentage form. In simple words, company’s ability to pay off its debts with the assets. In this case, lower ratio is more favourable because it implies that the company has low debts as compared to assets. For calculation of debt ratio, total liabilities / total assets.

Following analysis is as follows:

Wesfarmers limited

Calculation of Financial Leverage ratios
Debt Ratio
Particulars	Amount ($m)
Total Liabilities	16174
Total Assets	40115
Debt ratio [Total Liabilities/Total assets]	40.32%
Interest Coverage ratio
Particulars	Amount ($m)
EBIT	4402
Interest Expenses	213
Interest Coverage ratio [EBIT/Interest Expenses]	20.67

(Annual Report, 2017).

Woolworths Group Limited

Calculation of Financial Leverage ratios
Debt Ratio
Particulars	Amount ($m)
Total Liabilities	13039.7
Total Assets	22915.8
Debt ratio [Total Liabilities/Total assets]	56.90%
Interest Coverage ratio
Particulars	Amount ($m)
EBIT	2326
Interest Expenses	231.5
Interest Coverage ratio [EBIT/Interest Expenses]	10.05

(Annual Report, 2017).

Wesfarmers Limited and Woolworths Group Limited

Year – 2017

Particulars	Wesfarmers Limited	Woolworths Group Limited
Debt ratio	40.32%	56.90%
Interest coverage ratio	20.67	10.05

(Refer: Ms-Excel).

Performance evaluation

According to the above financial leverage ratio description, Higher interest coverage ratio is always better because the company has enough money to pay off its interest payments. For Debt ratio, lower ratio is always favourable because it signifies that assets are more than the debts in a company. According to the above calculation, Wesfarmers’ debt ratio was 40.32% whereas Woolworths’ has debt ratio was 56.90% and in the case of interest coverage, Wesfarmers’ ratio was 20.67 and Woolworths’ ratio was 10.67. Hence in both categories of ratios Wesfarmers’ long-term solvency performance is more stable than the performance of Woolworths group.

Long-term Solvency Ratios (Financial Leverage Ratios)

Asset utilisation ratios (efficiency or turnover ratios)

Asset utilisation ratios are used to determine the usage of assets to produce profits by the company. These ratios calculate the efficiency of a company through business operations. These ratios are also called as turnover ratios and efficiency ratios. Some ratios under this category includes are asset turnover ratio and inventory turnover ratio.

1. Asset turnover ratio:

This ratio is used to determine productivity of a company of using the assets in generating revenue. This depicts that the higher ratio is always favourable because it implies that the company is very well used its assets. This is computed by dividing net revenue to average total assets.

2. Inventory turnover ratio:

This ratio is used to determine productivity of a company of using the inventories in a period. This measures how easily inventories are converted into cash. This is computed by dividing the cost of sales to average total inventories.

3. Fixed asset turnover ratio:

This ratio is calculated to decide the efficiency of a company of generating revenue from its fixed assets. This portrays that the higher ratio is favourable because it implies that the company is effectively used its fixed assets. This is work out by dividing net revenue to average total fixed assets.

Following analysis is as follows:

Wesfarmers limited

Calculation of Asset utilisation ratios
Asset turnover ratio
Particulars	Amount ($m)
Revenue	68444
Average total assets	40449
Asset turnover ratio [Revenue/Average total assets]	1.69
Inventory turnover ratio
Particulars	Amount ($m)
Cost of sales	22085
Average total inventories	6395
Inventory turnover ratio [Cost of sales/Average total inventories]	3.45
Fixed Asset turnover ratio
Particulars	Amount ($m)
Revenue	68444
Average total fixed assets	9526
Fixed Asset turnover ratio [Revenue/Average total fixed assets]	7.18
where:
Average total assets = (Closing numbers of 2016 + closing numbers of 2017)/2
Average total inventories = (Closing numbers of 2016 + closing numbers of 2017)/2
Average total fixed assets = (Closing numbers of 2016 + closing numbers of 2017)/2

(Annual Report, 2017).

Woolworths Group Limited

Calculation of Asset utilisation ratios
Asset turnover ratio
Particulars	Amount ($m)
Revenue	55668.6
Average total assets	23209
Asset turnover ratio [Revenue/Average total assets]	2.40
Inventory turnover ratio
Particulars	Amount ($m)
Cost of sales	39739.7
Average total inventories	4319.5
Inventory turnover ratio [Cost of sales/Average total inventories]	9.20
Fixed Asset turnover ratio
Particulars	Amount ($m)
Revenue	55668.6
Average total fixed assets	8350.2
Fixed Asset turnover ratio [Revenue/Average total fixed assets]	6.67
where:
Average total assets = (Closing numbers of 2016 + closing numbers of 2017)/2
Average total inventories = (Closing numbers of 2016 + closing numbers of 2017)/2
Average total fixed assets = (Closing numbers of 2016 + closing numbers of 2017)/2

(Annual Report, 2017).

Wesfarmers Limited and Woolworths Group Limited

Year – 2017

Particulars	Wesfarmers Limited	Woolworths Group Limited
Asset turnover ratio	1.69	2.40
Inventory turnover ratio	3.45	9.20
Fixed Asset turnover ratio	7.18	6.67

(Refer: Ms-Excel).

Performance evaluation

According to the above asset utilisation ratio description, Higher Asset turnover ratio is always better because the company is effectively utilising its assets to generate sales. For inventory turnover ratio, higher ratio is always favourable because it signifies how efficiently inventories are controlled by a company. Thus, according to the above table, it can be said that asset turnover ratio of Wesfarmers in 2017 was 1.69 whereas 2.40 was for Woolworths Group and in case of inventory turnover ratio, Wesfarmers has 3.45 whereas Woolworths Group has 9.20. Further added to this, fixed asset turnover ratio of Wesfarmers in 2017 was 7.18 whereas 6.67 was for Woolworths Group Thus, in all the three categories of efficiency ratios Woolworths’ is efficiently utilised its assets than Wesfarmers limited.

Profitability ratios are very important criterion for the assessment of the profitability position of the company. It analyses how the incomes are generated from the business operations. These ratios are very important for the investors because they analyses the profits earned by the company from their investments. Most common ratios are net profit ratio and return on assets.

1. Net profit ratio:

This category of ratio implies net profit earned by the company from per dollar of sales. It is expressed in percentage form. This ratio is very important for the investors because they gauge how efficiently company is earnings returns from sales. Higher ratio is always better than lower ratio because company is able to convert more revenue into profits during the year. It is computed by dividing net profit to total sales.

Performance Evaluation

2. Return on Assets:

This ratio measures the managing of assets to generate returns efficiently. In other words, it is profitability ratio which measures how effectively company earn a return on its assets. Higher ratio is always favourable to the shareholders because it shows that the company is managing to produce greater amount of incomes with the assets. It is calculated by dividing Net profit to total assets.

3. Return on Equity:

This ratio measures the returns earned by the company from the investments made by the shareholders. This is very important ratio from the stockholder’s point of view because they gauge how effectively company earns returns on their funds invested. High ratio implies the better stable position of the company. It is calculated by dividing Net profit to shareholder’s equity.

Following analysis is as follows:

Wesfarmers limited

Calculation of Profitability ratios
Net profit margin
Particulars	Amount ($m)
Net Profit	2873
Revenue	68444
Net Profit margin [Net Profit/Revenue]	4.20%
Return on Assets
Particulars	Amount ($m)
Net Profit	2873
Total assets	40115
Return on Assets [Net profit/Total Assets]	7.16%
Return on Equity
Particulars	Amount ($m)
Net Profit	2873
Shareholder’s Equity	22268
Return on Equity [Net profit/Shareholder’s equity]	12.90%

(Annual Report, 2017).

Woolworths Group Limited

Calculation of Profitability ratios
Net profit margin
Particulars	Amount ($m)
Net Profit	1593.4
Revenue	55668.6
Net Profit margin [Net Profit/Revenue]	2.86%
Return on Assets
Particulars	Amount ($m)
Net Profit	1593.4
Total assets	22915.8
Return on Assets [Net profit/Total Assets]	6.95%
Return on Equity
Particulars	Amount ($m)
Net Profit	1593.4
Shareholder’s Equity	5615
Return on Equity [Net profit/Shareholder’s equity]	28.38%

(Annual Report, 2017).

Wesfarmers Limited and Woolworths Group Limited

Year – 2017

Particulars	Wesfarmers Limited	Woolworths Group Limited
Net profit ratio	4.20%	2.86%
Return on Assets	7.16%	6.95%
Return on Equity	12.90%	28.38%

(Refer: Ms-Excel).

Performance evaluation

From the above interpretation of profitability ratios, it has been observed that higher ratio is always favourable of both net profit margin and return on assets because it represents positive position of the company. Thus, according to the above calculation, it can be said that Wesfarmers limited earned net profit ratio of 4.20% in 2017 year while Woolworths group earned net profit ratio of 2.86% in 2017 year. Further, Wesfarmers limited earned return on assets of 7.16% in 2017 financial year whereas 6.95% was earned by Woolworths Group Limited. Also added to this, return on equity earned by Wesfarmers limited was 12.90% whereas return on equity of Woolworths Group was 28.38%. As a result, Wesfarmers limited has better profitability position than Woolworths Group.

Market value ratios

These ratios are also called as market prospect ratio where stocks having over-priced, under-priced or fairly priced are identified. These helps in identification of financial status of a company. These ratios are very useful for investors for the purpose of analysing company’s stock. Most common ratios are Earnings per share and Dividend yield per share.

1. Earnings per share

This is ratio where earnings earned from per share of stocks. This ratio shows how gainful a company is on the basis of shareholders. It is given in the consolidated statement of income. Higher ratio is always favourable because it signifies that more profits are available for the distribution to their shareholders. The formula is: Earnings / number of shares outstanding.

2. Dividend Yield per share

This ratio is market prospect ratio where investors will earn returns from their investments if they willing to buy shares at the current market price. It is computed by dividing total dividends paid during the year to market price of a stock.

Following analysis is as follows:

Wesfarmers limited

Calculation of Market value ratios
Earnings per share
Particulars	Amount ($)
Earnings per share (cents)	254.7
Dividend Yield
Particulars	Amount ($)
Total Dividends	1361
Share price per share	44.42
Dividend Yield [Total Dividends/market price per share]	30.64

(Annual report, 2017).

Woolworths Group Limited

Calculation of Market value ratios
Earnings per share
Particulars	Amount ($)
Earnings per share (cents)	110.8
Dividend Yield
Particulars	Amount ($)
Total Dividends	859.6
Share price per share	27.3
Dividend Yield [Total Dividends/market price per share]	31.49

(Annual Report, 2017).

Wesfarmers Limited and Woolworths Group Limited

Year – 2017

Particulars	Wesfarmers Limited	Woolworths Group Limited
Earnings per share	254.7 cents	110.8 cents
Dividend Yield per share	$ 30.64	$ 31.49

(Refer: Ms-Excel).

Performance evaluation

From the above interpretation of market value ratios, it has been observed that higher ratio is always favourable of both Earnings per share and Dividend yield per share because it represents positive position of the company. Thus, according to the above calculation, it can be said that Wesfarmers limited earned earnings per share of 254.7 cents in 2017 year while Woolworths group earned earnings per share of 110.8 cents in 2017 year. Further, Wesfarmers limited earned dividend yield of $ 30.64 in 2017 financial year whereas $ 31.49 was earned by Woolworths group limited. As a result, Wesfarmers limited has better market value position than Woolworths Group.

Conclusion and Recommendation

From the above analysis of two companies based on liquidity ratios, asset utilisation ratios, profitability ratios, market value ratios it has been determined that in 2017 financial year Wesfarmers reported a record level of performance in relation to operating cash flows and the earnings with the strong increase in return on equity. Thus, Wesfarmers limited is financially robust in contrast to Woolworths Group limited based on these five aspects. Even though Woolworths performance is also effective but not better than the first.

As an investment manager it is evaluated that Wesfarmers’ varied business activities and strong balance sheet, the company remains expectant in its outlook and thus it is fundamentally healthier company and thus it is advised to the prospective overseas investors to invest in this company for sound returns.

References

Wesfarmers, 2017, 2017 Annual report, viewed on 18^th May 2018 from https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4.

Woolworths Group, 2017, Everyone Every day, viewed on 18^th May 2018 from https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf.

Woolworths Group, 2018, Strategy and objectives, viewed on 18^th May 2018 from https://www.woolworthsgroup.com.au/page/about-us/our-approach/strategy-and-objectives/.

Woolworths Group, 2017, Share Price, viewed on 18^th May 2018 from https://www.woolworthsgroup.com.au/page/investors/our-performance/share-price/.

Wesfarmers, 2018, Our history, viewed on 18^th May 2018 from https://www.wesfarmers.com.au/who-we-are/our-history.

Wesfarmers, 2017, Dividend Information, viewed on 18^th May 2018 from https://www.wesfarmers.com.au/investor-centre/your-shareholding/dividend-information.

Wesfarmers, 2017, Share Price, viewed on 18^th May 2018 from https://www.wesfarmers.com.au/investor-centre/your-shareholding/share-price.

ASX, 2018, WES, viewed on 18^th May 2018 from https://www.asx.com.au/asx/share-price-research/company/WES/details.

ASX, 2018, WOW, viewed on 18^th May 2018 from https://www.asx.com.au/asx/share-price-research/company/WOW/details.