Company Overview
The analysis of the financial statements of the business entities is considered as one of the major tools for the potential investors and others users to know about the financial health of those companies. For this reason, it is the responsibility of the business entities to release all the required financial statements of their businesses through the annual report so that the potential investors and other users can gain the required financial information (Weygandt, Kimmel & Kieso, 2015). It can be observed that companies use to publish three major financial statements along with their associate financial notes; they are Profit or Loss Statement, Balance Sheet and Statement of Cash Flows. The main aim of this report is to analyze and evaluate the financial performance of two leading retail corporations of Australia; Wesfarmers Limited and Woolworths Limited. The report involves in providing brief descriptions of these two companies along with their position in the industry. After that, the report involves in the analysis of three major financial statements of business. The next parts show the calculation of the major rations of the business along with their interpretation.
Wesfarmers
Wesfarmers is considered as one of the leading conglomerates of Australia. The company was established in the year of 1914 and it is headquartered at Perth, Western Australia, Australia. The presence of Wesfarmers can be seen in many of the business areas like supermarkets, liquor, home improvements, office supplies, hotels and convenience stores and others (wesfarmers.com.au, 2018). With the help of strong revenue and profit margin, Wesfarmers has become able in positioning itself as one of the leading companies having the most market share (smh.com.au, 2018).
Woolworths
Woolworths is regarded as another major company having business operation in the Australian retail industry. The company was established in the year 1328 and it is headquartered at Bella Vista, New South Wales, Australia. Woolworths has its presence in many business areas like supermarket, petrol, liquor, general merchandise, home improvements, hotel and gambling. In the recent years, Woolworths is holding the second spot in terms of market share after Wesfarmers with the help of their strong performance in the retail market (woolworthsgroup.com.au, 2018). In terms of the sale of the retail foods, Woolworths have beaten Coles for the consecutive three years. This shows the strong performance of the company in the Australian retail sector (reuters.com, 2018).
Wesfarmers
It can be seen from the Income Statement of Wesfarmers that there is an increases in the revenue of the company in 2017 as compared to 2016; that is from $65981 million to $68444 million. It can also be seen that the company has been able in decreasing their total expenses in 2017 from 2016 (wesfarmers.com.au, 2018). The increase in revenue and decrease in total expenses contributed towards the massive increase in profit after income tax in 2017 as compared to 2016; that is from $407 million to $2873 million. All these positive aspects lead to the increase in Earnings per Share of the company in 2017 from 2016 (wesfarmers.com.au, 2018).
Financial Statement Analysis of Wesfarmers
The Balance Sheet of Wesfarmers shows that there is an increase in the total assets of the company in 2017 as compared to 2016; that is from $40783 million to $40115 million; and increase in both total current assets and total not-current assets is one major reason for this. On the other side, Wesfarmers has registered decrease in their total liabilities in 2017 from 2016; that is $23941 million from $22949 million (wesfarmers.com.au, 2018). The main reason for this decrease in total liabilities is the decrease in the current as well as non-current liabilities of Wesfarmers. In addition, the Balance Sheet of Wesfarmers shows increase in the total equity in 2017 from 2016; that is $23941 from $22949. All these indicate improved financial performance of Wesfarmers in 2017 (wesfarmers.com.au, 2018).
From the Cash Flow Statement, it can be observed that Wesfarmers has been able in generating cash inflow from operating activities and there has been major cash outflows from investing activities as well as financing activities (wesfarmers.com.au, 2018). It indicates that in 2017, Wesfarmers had some big expenditure for the payments of fixed assets, repayment of loans, payment of dividends and others. However, it can also be seen that there is an increase in the cash and cash equivalent at the end of 2017 as compared to 2016; that is $1013 million from $611 million (wesfarmers.com.au, 2018).
Woolworths
From the Consolidated Statement of Profit or Loss of Woolworths, it can be observed that there is an increase in the operating revenue in 2017 as compared to 2016; that is $55668.6 million from $53663.7 million. This increase in revenue led to the increase in the gross profit of the company in 2017 from 2016; that is $15928.9 million from $15125 (woolworthsgroup.com.au, 2018).1 million. This particular statement shows massive improvements in the net profit after tax as Woolworths has become able in registering profit in the year 2017 as compared to net loss in the year 2016; that is $1593.4 million from ($2347.9 million). The presence of this huge net profit after tax contributed towards the increased EPS in 2017 from 2016; that is 110.8 cents from 57.5 cents (woolworthsgroup.com.au, 2018).
The Consolidated Statement of Financial Position of Woolworths indicates that the company has registered decreased total assets in 2017 as compared to 2016; that is $22915.8 million from $23502.2 million. The main reason for this decrease is the decrease in both total current assets and total non-current assets of the company (woolworthsgroup.com.au, 2018). However, the positive aspect is that the company has become able in reducing their total liabilities in 2017 from 2016; that is $13039.7 million from $14720.3 million; and decrease in both current liabilities and non-current liabilities can be considered as the main reason for this decrease in total liabilities. It also needs to be mentioned that there is an increase in the total equity of the company in 2017 from 2016; that is $9876.1 million from $8781.9 million (woolworthsgroup.com.au, 2018).
Financial Statement Analysis of Woolworths
It can be seen from the Consolidated Statement of Cash Flows of Woolworths that only cash inflow can be seen from the operating activities while the investing as well as financing activities registered cash outflow. It can be seen that there is an increase in the cash inflow from operating activities (woolworthsgroup.com.au, 2018). The main reasons for the increase in the outflow from investing activities are the payment for property, plant and equipment, payment of intangible assets, payment for the purchase of investment and others. The main reasons behind the increase in cash outflow from financing activities are repayment of borrowings, payment of dividends, payment of dividend to non-controlling interests and others (woolworthsgroup.com.au, 2018).
Profitability
Net profit ratio shows what percentage of sales is left after the payment of all expenses (Ehiedu, 2014). It can be seen from Table 1 that there is increase in the net profit ratio of Wesfarmers in 2017 from 2016. Massive improvement in this ratio can be seen for Woolworths as the company has registered positive net profit ration in 2017 as compared to the negative ratio in 2016.
Return on Asset (ROA) ratio measures the net income produced by the companies with the help of their total assets (Delen, Kuzey & Uyar, 2013). Table 1 show that Wesfarmers has been able in using their assets more effectively in 2017 from 2016 as this ratio increased from 1% to 6.93%. Huge improvement can be seen in case of Woolworths as the company has registered increase ROA in 2017 as compared to 2016.
Efficiency
Accounts Receivable Turnover ratio helps in measuring the fact that how many times a business can collect their average accounts receivables in a year (Agha, 2014). It can be seen Table 2 that there is a decrease in the accounts receivable turnover ratio of Wesfarmers in 2017 as compared to 2016. However, opposite aspect can be seen in case of Woolworths as the company has become able in collecting the cash from the trade receivables in 2017 from 2016.
Asset Turnover ratio helps in measuring the ability of the companies in generating sales from the use of their assets by comparing net sales with average total assets (Muritala, 2018). It can be seen from Table 2 that there is a slight increase in this ratio for Wesfarmers in 2017 as compared to 2016. The same aspect can be seen in the case of Woolworths as the company has been able in increasing this ratio in 2017 from 2016. Thus, increased asset turnover ratio can be seen for both the companies.
Financial Ratio Analysis
Liquidity
Current ratio helps in measuring the ability of the companies in paying off their short-term liabilities with their current assets (Babalola & Abiola, 2013). Table 3 shows that there is not any increase or decrease in the current ration of Wesfarmers in 2017 as compared to 2016. On the other hand, Woolworths has registered decreased current ratio in 2017 as compared to 2016; and decrease in current asset can be considered as the reason for this.
Quick Ratio helps in measuring the ability of the companies in paying off their current obligation with quick assets like cash (Babalola & Abiola, 2013). As per Table 3, in the cases of both Wesfarmers as well as Woolworths, slight decrease and increase can be seen respectively in the quick ratio in 2017 as compared to 2016.
Gearing
Debt to equity ratio provides assistance in the comparison of the total debt of the companies to total liabilities (Amba, 2014). It can be observed from Table 4 that there is a decrease in this ratio for Wesfarmers in 2017 as compared to 2016 due to the decrease in the debt financing in the capital structure. The same aspect can be seen in case of Woolworths as decrease can be seen in this ratio in 2017 from 2016. However, for Woolworths, debt to equity ratio more than 1 shows the presence of more equity capital in the capital structure.
Debt ratio helps in measuring the company’s total liabilities as a percentage of total assets (Amba, 2014). Table 4 shows that there has been decrease in this ratio in 2017 as compared to 2016 for both Wesfarmers and Woolworths. In addition, debt ratio more than 1 shows that both the companies have the ability to pay their debts with their total assets.
Investment
Price earnings ratio shows how much market is willing to pay for a share based on its current earnings (Dort, Méon & Sekkat, 2014). Table 5 states that there is a decrease in price earnings ratio in 2017 as compared to 2016 in Wesfarmers. The same aspect can be seen in Woolworths as decrease in this ration is evident from Table 5.
Dividend Yield ratio helps in showing the earnings per share as a percentage of market value of the share (Dort, Méon & Sekkat, 2014). It can be seen from Table 5 that Wesfarmers has been able in hugely increasing the dividend yield ratio in 2017 as compared to 2016. Increase can also be seen in this ratio for Woolworths in 2017 from 2016 due to the increase in market value per share.
Conclusion
It can be observed from the above discussion that both Wesfarmers and Woolworths are the top two leading companies in the retail market of Australia. From the analysis of the financial statements, it can be seen that both the companies have improved their financial performance in 2017 as compared to 2016 as increase can be seen in certain financial aspects like revenue, gross profit, net profit after tax and EPS along with the decrease in total expenses. The analysis of both balance sheet and cash flow statements indicates towards the good financial performance of these companies in 2017 as compared to 2016. It can also be seen that the analysis and interpretation of the ratios largely helps in the analysis and evaluation of the financial performance of both Wesfarmers and Woolworths.
References
Agha, H. (2014). Impact of working capital management on Profitability. European Scientific Journal, ESJ, 10(1).
Amba, S. M. (2014). Corporate governance and firms’ financial performance. Journal of Academic and Business Ethics, 8(1).
Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), 132-137.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Dort, T., Méon, P. G., & Sekkat, K. (2014). Does investment spur growth everywhere? Not where institutions are weak. Kyklos, 67(4), 482-505.
Ehiedu, V. C. (2014). The impact of liquidity on profitability of some selected companies: the financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), 81-90.
Muritala, T. A. (2018). An empirical analysis of capital structure on firms’ performance in Nigeria. IJAME.
Reuters. (2018). Australia’s Woolworths beats Coles in food sales growth for third…. Retrieved 9 September 2018, from https://www.reuters.com/article/us-woolworths-results/australias-woolworths-beats-coles-in-food-sales-growth-for-third-straight-quarter-idUSKBN1D0034
Wesfarmers. (2018). 2016 Annual Report. Retrieved 9 September 2018, from https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4
Wesfarmers. (2018). 2017 Annual Report. Retrieved 9 September 2018, from https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4
Wesfarmers. (2018). Our businesses . Wesfarmers.com.au. Retrieved 9 September 2018, from https://www.wesfarmers.com.au/our-businesses/our-businesses
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.
Wilkins, G. (2014). Woolworths, Wesfarmers among world’s top-20 retailers. The Sydney Morning Herald. Retrieved 9 September 2018, from https://www.smh.com.au/business/woolworths-wesfarmers-among-worlds-top20-retailers-20140113-30quy.html
Woolworths Group. (2018). 2016 Annual Report. Retrieved 9 September 2018, from https://www.woolworthsgroup.com.au/icms_docs/185865_annual-report-2016.pdf
Woolworths Group. (2018). 2017 Annual Report. Retrieved 9 September 2018, from https://wow2017ar.qreports.com.au/xresources/pdf/wow17ar-full.pdf
Woolworths Group. (2018). About Us – Woolworths Group. Retrieved 9 September 2018, from https://www.woolworthsgroup.com.au/page/about-us
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