Financial Analysis Of Wesfarmers And Woolworths Pty Ltd In The Retail Sector Of Australia

Background of Wesfarmers Pty Ltd and Woolworths Pty Ltd

The financial analysis of business entities is undertaken for the purpose of examining the financial information necessary for taking important business decisions. The insights obtained from the examination of the financial statements of a business corporation helps in undertaking significant investment decisions. The insights obtained are useful for the end-users of the financial information such as investors, lenders, creditors and business owners to take significant investment decisions. In this context, this report is developed for carrying out financial analysis of performance of two ASX listed companies in Australia operating with same sector and is competitor of each other. The companies are selected on the basis of their same target consumers, producing similar products and services and are also similar in size. The companies selected for the evaluation purpose is Wesfarmers and Woolworths Pty Ltd operating in the retail sector of Australia. The financial analysis of the both the companies are carried out in the report with the use of fundamental analysis technique of ratio analysis. The financial statements of both the companies are analyzed with the application of basically five fundamental ratios that are, short-term solvency, long-term solvency, asset utilization, and profitability and market value ratios. The overall analysis is carried out for providing recommendation to the investors about the superior company among the two to be selected for investment purpose.

Woolworths and Wesfarmers Pty Ltd are selected for the evaluation purpose in the present report. The basis of the company’s selection is their leading position in the retail industry of Australia and thus they are entitled to provide larger returns to the shareholders. The companies selected are the major competitors of each other as both have attained a leading position as supermarket giant within the country. The companies compete with each other on the basis of target consumers as both provide their products and services across Australia and New Zealand. The companies also provide similar products and services such as food products and household products and are also similar in size.

Woolworths Pty Ltd

Woolworths is recognized as a leading Australian supermarket grocery company owing to its unique competency of providing fresh food to the people. The company at present is operating about 1000 stores across the country that consists of 968 supermarkets and 19 convenience stores. The company aims to create world-class experience for its consumers across all its retail stores. The core business areas of Woolworths include food, drinks and portfolio services (Annual Report: 2017: Woolworth). It has attained the position of most trusted and recognized brands within Australia and is estimated to serve approx 28 million customers across the nations of Australia and New Zealand. The major strategic objectives of the company include realizing sustainable sales in its food segments and promoting continuous involvement of its drinks businesses for its expansion. The company strategic vision is to become a lean retailer by developing end-to-end processes and systems (Woolworths Group, 2018).

Fundamental Analysis and Ratio Analysis

Wesfarmers Pty Ltd

Wesfarmers established in the year 1914 has evolved as a major ASX listed company with the retail sector of Australia. The diverse business operations of the company includes supermarkets, liquor, hotels, convenience stores, home improvement, department stores and industrial businesses in chemicals, energy, fertilizers, coal and safety products. It is also attributed to be one of the biggest private sector employers within Australia and have a shareholder base of about 530,000 (Annual Report 2017: Wesfarmers). The main objective of the company is to provide large returns to shareholders and it aims to achieve this by adequately meeting the customer needs and expectations through continually providing them high quality products and services. The strategic vision of the company is to carry out its operations in a sustainable manner and developing its diversified portfolio of businesses (The Wesfarmers Way, 2018).

The fundamental analysis can be regarded as the method of carrying out the evaluation of a security for measuring its intrinsic value. This is carried out by examination of the related economic, financial and other factors. The fundamental analysis in relation to the accounting and finance means evaluating the financial statements of businesses that refers to examining its business assets, liabilities and earnings. The major objective of the analysis is to gain a forecast in relation to future growth and profitability of a company.

Ratio analysis is regarded as cornerstone of fundamental analysis as it is used for carrying out an evaluation of the various financial aspects of a company with the use of its financial statement. It is used for gaining an examination of the operating and financial performance of a company with the use of the ratios such as efficiency, liquidity, profitability and solvency. The evaluation of the company performance on the basis of these ratios helps the investors to determine its potential of future growth on the basis of its financial strength.

Ratio Analysis has been divided into five major categories. They are as follows:

• Short term solvency (Liquidity ratios)
• Long term solvency (Financial Leverage ratios)
• Asset utilization (efficiency or turnover ratios)
• Profitability ratios
• Market value ratios

The short-term solvency ratios intend to examine the ability of an entity for measuring its short-term financial obligations. Thus, the analysis of short-term solvency ratios provides an evaluation of the ability of a company for avoiding the financial distress in the short-term. The short-tem solvency of both the companies is analyzed on the basis of current, quick and cash ratio as depicted (Firer, 2012).

Financial Data to calculate the Short term Solvency Ratios
Financial Items	Wesfarmers	Woolworth
2016	2017	2016	2017
Amount in $ million
Current Assets	$    9,684.00	$    9,667.00	$  7,427.00	$  6,994.20
Current Liabilities	$  10,424.00	$  10,417.00	$  8,992.70	$  8,824.20
Inventories	$    6,260.00	$    6,530.00	$  4,558.50	$  4,080.40
Quick Assets	$    3,424.00	$    3,137.00	$  2,868.50	$  2,913.80
Cash and Cash Equivalents	$        611.00	$    1,013.00	$     948.10	$     909.40

(Annual Report 2017: Wesfarmers) and (Annual Report: 2017: Woolworth)

Short Term Solvency Ratios (Liquidity Ratios)
Ratios	Wesfarmers	Woolworth
2016	2017	2016	2017
Current Ratio	0.93	0.93	0.83	0.79
Quick ratio	0.33	0.30	0.32	0.33
Cash Ratio	0.06	0.10	0.11	0.10

Short-term Solvency Ratios

Current Ratio: Current ratio can be described as a liquidity ratio used for measuring the ability of a company to meet its short as well as long-term financial obligations. The current ratio makes a comparison of the current assets possessed by a company in relation to the current liabilities.

Formula: Current Ratio=Current Assets/Current Liabilities

The current ratio of Wesfarmers in both the years 2016 and 2017 is calculated to be 0.93 and thus it indicates that current liabilities of the company is more that the current assets and there is a financial risk reflecting the inability of the company to meet its financial obligations in the short-term.   The current ratio of Woolworth for the year 2016 is 0.83 while that for the year 2017 is 0.79 and is less than 1 for both the years. This also indicates that current liabilities of the company is comparatively more that the current assets. Also, further the current ratio is decreasing from the year 2016 to 2017 which implies that the ability of the company to meet its financial obligations in the short-term is decreasing.

Quick Ratio: Quick Ratio: It depicts the ability of a company for meeting its short-term financial liabilities with the use of its most liquid assets. It is also known as acid-test ratio (Brigham and Houston, 2012).

Formula: = (Cash+ Marketable Securities+ Accounts Receivable)/Current Liabilities

The quick ratio of Wesfarmers for the year 2016 is 0.33 while that for the year 2017 is 0.30 and this reflects the inefficiency of the company to completely repay is current liabilities from its most liquid assets. Also, the quick ratio of the company is declining that indicates its declining liquidity position. The quick ratio of Woolworth for the year 2016 and 2017 is less than 1 indicating that there is presence of financial risk within the company to repay its short-term financial obligations. The quick ratio of Woolworth have however shown an increasing trend from 0.32 to 0.33 over the period of 2016-2017 and thus it can be said that the company has improved its capability for meeting its short-term financial obligations.

Cash Ratio: The ratio depicts the capability of a company to meet its liabilities in the short-term by analyzing its overall cash and cash equivalents (Deegan, 2013).

Formula: Cash Equivalents/ Current Liabilities

It is clearly depicted from the above table that the cash ratio of Wesfarmers has increased from 0.06 to 0.10 and this depicts that its ability to pay off its current liabilities from the cash resources have significantly improved. The cash ratio of Woolworth has slightly decreased from the year 2016 to 2017 from 0.11 to 0.10 reflecting a reduction in its ability to maintain the sufficient cash resources from debt obligations.

Long-term Solvency Ratios

The long-term solvency can be described as the ability of a company for measuring the ability to meet its debt and other obligations.  The solvency ratio measures the effectiveness of a cash flow maintained by the company for meeting its short-term and long-term liabilities (Brealey, Myers and Marcus, 2007).

Financial Data to calculate the Long term Solvency Ratios
Financial Items	Wesfarmers	Woolworth
2016	2017	2016	2017
Amount in $ million
Total non-current liabilities	$    7,410.00	$    5,757.00	$    5,727.60	$    4,215.50
Short term Interest-bearing loans and borrowings	$    1,632.00	$    1,347.00	$        490.70	$        253.50
Total Debt	$    9,042.00	$    7,104.00	$    6,218.30	$    4,469.00
Shareholders’ Equity	$  22,949.00	$  23,941.00	$    8,781.90	$    9,876.10
Interest expenses	$        308.00	$        264.00	$        245.60	$        193.60
EBIT	$    1,346.00	$    4,402.00	$    1,494.90	$    2,326.00
Total Assets	$  40,783.00	$  40,115.00	$  23,502.20	$  22,915.80

(Annual Report 2017: Wesfarmers) and (Annual Report: 2017: Woolworth)

Long Term Solvency Ratios Financial Leverage Ratios)
Ratios	Wesfarmers	Woolworth
2016	2017	2016	2017
Debt ratio	0.22	0.18	0.26	0.20
Debt to Equity Ratio	0.39	0.30	0.71	0.45
Times interest earned ratio	4.37	16.67	6.09	12.01

Debt ratio: It is a financial ratio used for measuring the leverage position of a company and is calculated with the use of following formulae:

Formula: Total debt/Total assets

The debt ratio of Wesfarmers is less than 0.5 as depicted from the above table. This indicates that the company is financing large part of its assets from equity in comparison to debt. Also, the debt ratio has decreased from the year 2016 to 2017 from 0.22 to 0.18 indicating that the use of debt in capital structure of the company has further declined.  Similarly, the debt ratio of Woolworth has declined from 0.26 to 0.20 in the year 2016 to 2017. Thus, it indicates that the company is utilizing less debt in comparison to equity in financing its assets.

Debt to Equity Ratio: It is a financial ratio used for depicting the relative proportion of equity provided by shareholders in comparison to debt used for financing the assets of a company (Brigham and Ehrhardt, 2013).

Formula: Total Debt/Shareholder’s equity

The debt-equity ratio of Wesfarmers for the year 2016 is 0.22 while that for the year 2017 is 0.18 which indicates that the company is decreasing the proportion of debt in its capital structure as compared to equity.  Also, the company is maintaining an optimal capital structure by incorporating debt in a significant proportion in its capital structure to gain the benefits of financial leverage. The debt-equity ratio of Woolworth has reduced from 0.26 to 0.20 over the financial years 2016-2017 and this also indicates less relying of company on debt to finance its business operations. However, the debt-to equity proportion of Woolworth can be regarded as more balanced in comparison to Wesfarmers as it has maintained it to near about 0.5 in both the years which indicates that debt and equity amount in the capital structure is in equal proportion.

Times interest earned: It depicts the ability of a company to meet effectively its interest obligations from the debt sources (Arnold, 2013).

Formula: EBIT/Interest expenses

As depicted in the above table, the times interest earned ratio for both the companies is improving over the financial year 2016-2017. Also, the higher value of ratio indicates that both the companies are highly efficient in meeting their interest obligations on time.  

Asset Utilization Ratios

Asset utilization ratios are referred to as efficiency ratios that analyze ability of the company to utilize its assets and liabilities to maintain the proper workflow in the organization. For example, efficiency ratios find the organization ability to use the assets to earn the revenue and how fast it converts the inventory into cost of goods sold (Baker and Nofsinger,  2010).

Financial Data to calculate the Asset Utilization Ratios
Financial Items	Wesfarmers	Woolworth
2016	2017	2016	2017
Amount in $ million
Revenue or Net Sales	$      65,981.00	$      68,444.00	$      53,663.70	$      55,668.60
Total Assets	$      40,783.00	$      40,115.00	$      23,502.20	$      22,915.80
Net receivable sales	$      65,981.00	$      68,444.00	$      53,663.70	$      55,668.60
Account Receivables	$        1,628.00	$        1,633.00	$            763.90	$            744.70
Inventory	$        6,260.00	$        6,530.00	$        4,558.50	$        4,080.40
Cost of goods Sold	$      45,525.00	$      46,359.00	$      42,677.00	$      39,740.00
Note: Instead of average figures it has been decided to figures for same year)

(Annual Report 2017: Wesfarmers) and (Annual Report: 2017: Woolworth)

Asset utilization (efficiency or turnover ratios)
Ratios	Wesfarmers	Woolworth
2016	2017	2016	2017
Asset Turnover Ratio	1.62	1.71	2.28	2.43
Account Receivable Turnover Ratio	40.53	41.91	70.25	74.75
Days sales outstanding (in days)	9.01	8.71	5.20	4.88
Inventory Turnover Ratio	7.27	7.10	9.36	9.74
Days inventory outstanding (in days)	50.19	51.41	38.99	37.48

Asset Turnover Ratio: This ratio is also known as total asset turnover ratio. This ratio measures the efficiency of the entity to earn the sales using the assets. In short it tells the efficiency level of management to apply the assets for promoting the sales. There is not any set value that represents the good asst turnover ratio as every industry has different business models (Weston and Brigham, 2015).

Formula: Sales revenue/Average total assets

The asset turnover ratio of Wesfarmers was 1.62 times in year 2016 and it got increased to 1.71 times in year 2017. It shows increase in efficiency level of management to utilize the assets of the company to produce the sales. On the other hand, Asset utilization ratio of Woolworth was 2.28 times in year 2016 and increased to 2.43 times in year 2017. On comparison it can be clearly said that Woolworth is much successful in utilizing its assets as compare to Wesfarmers.

Account Receivable Turnover Ratio: This ratio is very important as it provides with company ability to collect the debt or number of times company able to convert the average account receivables during the period. If number of cycles are more than it will be beneficial for the company as greater number of accounts receivable cycles means early cash collection from the debtors (Zimmerman and Yahya-Zadeh, 2011).

Formula: Credit Sales/Average account Receivables

The accounts receivable turnover ratio of Wesfarmers was 40.53 times in year 2016 and 41.91 times in year 2017. On the other hand, Woolworth account receivable turnover ratio was 70.25 times in year 2016 and increased to 74.75 times in year 2017. As accounts receivable turnover ratio of Woolworth is much more than Wesfarmers it can be clearly understood that efficiency of Woolworth is much stronger than the efficiency level of Wesfarmers.

Day’s sales outstanding (in days): Just like account receivable turnover ratio this ratio measures the efficiency of company to collect the receivables from debtors but it calculate in days. Lower the number of days it will highly beneficial for the company (Ross, Jaffe and Kakani, 2008).

Profitability Ratios

Formula: 365/Account receivable turnover ratio

On the basis of above chart it can be clearly understood that days sales outstanding ratio of Woolworth is much stronger than  the Wesfarmers as average waiting time of collection of receivables from the customers is 4 to 5 days while it was 8 to 9 days in case of Wesfarmers.

Inventory Turnover Ratio: This ratio tells number of times organization is able to convert its inventory into cost of goods sold. Every company want that it should convert it inventory maximum number of times to earn the maximum revenue.

Formula: Cost of goods sold/Average inventory

On the basis of above it is clearly seen that in both years Woolworth has utilized its inventory in much better way as compare to Wesfarmers. It is so because Woolworth has converted its inventory into cost of goods sold maximum number of times.

Day’s inventory outstanding (in days): This ratio shows average number of days inventory is held with the company. In other it provides average time taken (in days) by the management to convert its inventory in cost of goods sold. So lesser the days it will be more beneficial for the company (Madura, 2014).

Formula: 365/Inventory Turnover ratio

The above chart clearly depicts that Woolworth takes lesser number of days to realize the cost of goods sold using the inventory. So it can be said that Wesfarmers was not efficient enough to convert its inventory in cost of goods sold.

Profitability ratios measure the organization ability to earn the revenue through using the available resources. Profitability is marked with minimizing the cost of revenue and increasing the sales so that resultant gross profit increases by the time. Profitability also depends on how company manages its operating expenses, so that overall net profit of company increases by the time (Moles and Kidwekk, 2011).

Financial Data to calculate the Profitability Ratios
Financial Items	Wesfarmers	Woolworth
2016	2017	2016	2017
Amount in $ million
Revenue or Net Sales	$  65,981.00	$  68,444.00	$  53,663.70	$  55,668.60
Net Profit	$        407.00	$    2,873.00	$  (2,347.90)	$    1,593.40
Gross Profit	$ 19,987.00	$ 21,656.00	$ 15,599.00	$ 15,929.00
Total Assets	$  40,783.00	$  40,115.00	$  23,502.20	$  22,915.80
Shareholders’ Equity	$  22,949.00	$  23,941.00	$    8,781.90	$    9,876.10

(Annual Report 2017: Wesfarmers) and (Annual Report: 2017: Woolworth)

Profitability Ratios
Ratios	Wesfarmers	Woolworth
2016	2017	2016	2017
Net Profit Ratio	0.62%	4.20%	-4.38%	2.86%
Gross Profit Ratio	30.29%	31.64%	29.07%	28.61%
Return on Equity	1.77%	12.00%	-26.74%	16.13%
Return on Assets	1.00%	7.16%	-9.99%	6.95%

Net Profit Ratio: This ratio provides the percentage of after tax income earned by the company on its total sales revenue.

Formula: Net profit margin/Net Revenue

On the basis of above chart it can be said that net profit margin of Wesfarmers was good as compared to Woolworth in both years. In year 2016 Woolworth has suffered a loss of 4.38 % that shows its inability to regulate the expenses and earn a positive net profit for their shareholders.

Gross Profit Ratio: This ratio is provide a benchmark to measure the profitability of the company as it shows percentage of gross profit earned after meeting the cost of sold expenses.

Market Value Ratios

Formula: Gross Profit/Net revenue

Both the companies in consideration earns good percentage of gross profit on their sales but on comparison it was found that Wesfarmers has better gross profit margin as compared to Woolworth.

Return on Equity: This ratio provides how management uses its shareholders equity as  a resource for earning the net profit (Moles and Kidwekk, 2011).

Formula: Net profit/Shareholders Equity

In year 2016, return on equity was worst in case of Woolworth as it has suffered a major loss while Wesfarmers has able to manage return on equity at 1.77%. But in year 2017, Woolworth has managed to keep net profit positive and earn the return on equity of 16.13% which is slightly greater than the Wesfarmers. So it can be said that Woolworth has tried to utilize its equity in much useful way in comparison to Wesfarmers.

Return on Assets: This ratio provides how management apply the assets to earn the maximum net profit for their stakeholders.

Formula: Net Profit/Total Assets

The above chart clearly depicts that Wesfarmers has able to utilize its assets in better way as compared to Woolworth. Overall it can be said that Wesfarmers has much stronger profitability position as compared to Woolworth in both the years.

Market ratios tell the position of company in the market or its industry. For example, it tells earning per share earned by the company for their shareholder, dividend paid to the shareholder and overall dividend yield it produced for their shareholders (Weston and Brigham, 2015).

Financial Data to calculate Market Valuation Ratios
Financial Items	Wesfarmers	Woolworth
2016	2017	2016	2017
Amount in $ million
Weighted Average number of shares (in millions)	2246.00	2260.00	1264.00	1288.00
Profit/(Loss) attributable to equity holders of the parent entity	$        407.00	$    2,873.00	$  (1,234.80)	$    1,533.50
Market Price Per Share	$          14.98	$          15.38	$          15.53	$          19.51
Dividend Per Share	$             1.02	$             1.00	$            1.66	$            0.96

(Annual Report 2017: Wesfarmers) and (Annual Report: 2017: Woolworth)

Market Valuation Ratios
Ratios	Wesfarmers	Woolworth
2016	2017	2016	2017
Earnings per Share (EPS)	$             0.18	$             1.27	$          (0.98)	$            1.19
Price Earnings Ratio	82.67	12.10	-15.90	16.39
Dividend Yield	6.81%	6.50%	10.69%	4.92%

(Morning star, 2018: Wesfarmers) and (Morning star, 2018: Woolworth)

Earnings per Share (EPS)

Formula: Net Profit /Weighted average number of shares

EPS of Wesfarmers was greater than Woolworth in both the years that clearly indicates that strong market position of Wesfarmers as compared to Woolworth.

Price Earnings Ratio: This ratio is very important for the investors as it shows times the market value of company in comparison to its earnings per share.

Formula: Market price per share/earnings per share

Wesfarmers has managed to keep a good track of price to earnings ratio in last two years while Woolworth has failed to manage the positive price to earnings ratio in year 2016. In year 2017, Woolworth has higher price to earnings ratio but it is not sufficient to make investors have attraction to invest in Woolworth as compared to Wesfarmers.

Recommendation to Investors

Dividend Yield

It shows percentage of return received by the shareholders on their investment (Weston and Brigham, 2015).

Formula: Dividend per share/Market price per share

Wesfarmers has better dividend yield in year 2017 that means Wesfarmers are providing better return to their shareholders.

Conclusion 

The report concludes that Woolworth and Wesfarmers both have strong financial performance indicating that both the companies are ideal for investment purpose. It is analyzed on the basis of financial ratio that both the companies have maintained a similar liquidity position. However, Woolworths have maintained a more optimal debt-to equity proportion in comparison to Wesfarmers. There is also less financial risk in relation to the inability of the companies for meeting their debt obligations as both are having good interest earned ratio. The profitability of Wesfarmers is better as compared to Woolworth while it is having good efficiency to realize sales from its asset base as compared to Wesfarmers. It can be stated on the basis of market ratios that Wesfarmers efficiency is better to pay divided to its shareholders as it is constantly paying good return to its shareholders in comparison to Woolworth. On the basis of overall findings, it is recommend to investors to invest in Wesfarmers as it is having better profitability position and dividend paying capability in comparison to Woolworths. The investors are mainly interested in the profit earning capability and its constancy in paying good dividend while the debt position and efficiency capabilities are of less significance for the company. Therefore, investors will tend to invest in Wesfarmers on the basis of its profit realization and good divided paying abilities.

References

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