Current Financial Performance and Economic Outlook
The assessment aims in evaluating the financial performance of Wesfarmers for the two fiscal years. Moreover, adequate ratios are used in detecting the current financial performance of the organization and how it could be an adequate business investment. Wesfarmers is considered to be one of the highest levels of income generating organization, which operates in retail sector of Australia. The organization has been operating since 1914, where it started its operation in Australia and now is operating in different countries. The organization has grown immensely, where it has become an Australian conglomerate. The company has been operating in retail, fertilizers, safety products, chemicals, coal mining, and industrial products. The wide variety of industry that has been maintained by the organization has provided them the name of conglomerate, the ones who operation in different sector or industries from the parent company. However, the main operation of Wesfarmers is in retail sector, which has provided the organization with higher revenue and profit. Moreover, Wesfarmers is also considered to be one of the biggest employers, where it currently employees 220,000 persons within its vicinity (Wesfarmers.com.au, 2018).
Financial statements, Current Financial performance, economic outlook
The financial performance of Wesfarmers is relatively increased in 2017 as compared to 2016, as your organization has generated higher revenues and profit during the fiscal year. The increment in financial performance was relatively detected from the growth of net profits, which increased from 407 million in 2016 to 2,873 million in 2017. This drastic growth in net profit was mainly achieved by the reduction in administrative expenses of the organization. The overall revenues of the organization increased nominally, while the profit was raised by exponential numbers. This was only achieved with the production in impairment expenses, which declined from the levels of 2,172 million in 2016 to 49 million in 2017 (Wesfarmers.com.au, 2018).This improvement in the financial performance of Wesfarmers indicate a positive attribute for the organization. The current financial performance of Wesfarmers has relatively improved, as the organization has generated higher returns during the fiscal year. the current economic outlook of Australia is a relatively positive, as maximum of the Australian industries are generating profits. The GDP of Australia is relatively increasing due to the presence of low unemployment and higher income generated by its citizens. The economic growth in Australia has allowed multinational companies to increase their revenues and generate higher profits.
Profitability and Market ratios
|
(see appendix for calculations) |
2017 |
2016 |
Industry average |
|
Return on assets |
7.10% |
1.00% |
3.77% |
|
Return on equity |
12.25% |
1.77% |
9.14% |
|
Net profit margin |
4.20% |
0.62% |
1.97% |
|
Gross profit margin |
32.27% |
31.00% |
31.90% |
|
Expense ratio/Cost to Income ratio |
82% |
95% |
60% |
|
Cash return on sales |
6.17% |
5.10% |
5% |
|
Earnings per share |
$2.547 per share |
$0.362 per share |
$1.34 |
|
Price earnings ratio |
16 times |
111 times |
67.38 times |
|
Earnings yield |
6.35% |
0.90% |
1.2% |
|
Dividends per share |
$2.23 |
$1.86 |
$1.07 |
Profitability and Market Ratios
The profitability and market ratio of Wesfarmers can be identified from the above table, which indicates the positive attributes of the organization that has been achieved during the fiscal year of 2017. From the evaluation of the profitability ratios the organization has obtained higher revenue during the fiscal year of 2017 as compared to 2016. the return on Assets of the organization has improved from the levels of 1% in 2016 to 7.10% in 2017. This was mainly achieved due to the exponential increment in net income of Wesfarmers during the financial year of 2017. Moreover, the return on Assets of the organization is higher than the industry average, which depict the financial progress that has been obtained by Wesfarmers (Kanapickiene & Grundiene, 2015). The return on equity of Wesfarmers has also increased from the levels of 1.77% to 12.25%, which was only possible due to the high net income generated by the organization. The industry average for return on equity is at the levels of 9.14%, which is relatively lower than the actual values of the organization.
In the similar instance, net profit margin ratio and gross profit margin ratio of Wesfarmers has adequately increased during the fiscal year of 2017. However, the growth in gross profit margin is seen at the levels of 1.27%, as the ratio increased from the levels of 31% to 32.27% in 2017. This mainly indicated that the growth in revenues and reduction in cost of sales was not high during the fiscal year. Moreover, the industry average for gross profit margin is mainly at the levels of 31.90%, which is slightly higher than the values that is generated by Wesfarmers. On the other hand, the net profit margin of Wesfarmers has increased exponentially from the levels of 0.62% in 2016 to 4.20% in 2017, which was achieved due to the reduction in operating expenses such as impairment cost. The industry average for net profit margin is at the levels of 1.97%, while the values of Wesfarmers is at the levels of 4.2%, which indicates the positive attributes of the organization in generating higher net income from its operations.
Expense ratio and cash return on sales ratio of Wesfarmers is adequately depicted in the above table, where both the ratios are higher than the industry average. The expense ratio has declined from the levels of 95% to 82% in 2017, which portrays a positive attribute of the organization for reducing is expenses during the fiscal year. Moreover, the increment in cash returns on sales from the levels of 5.10% to 6.17% in 2017 depicts the incremental condition of Wesfarmers operations. The relative improvement in the expense ratio needs to be conducted by Wesfarmers for reducing its expenses and maximizing the level of profits, which could be generated from operations. Furthermore, continuous increment in cash return on sales needs to be conducted by the organization for increasing its cash position during the fiscal year (Atoom, Malkawi & Al Share, 2017).
Expense Ratios and Cash Return on Sales Ratio
The evaluation of earnings per share and price on in ratio relatively supports the market ratios of Wesfarmers during the fiscal year of 2017. The increment in earnings per share from the levels of 0.362 to 2.547 indicates the high revenues that has been generated by the company during the financial year. The current earnings per share of Wesfarmers is relatively higher than the industry average which depicts its positive financial condition. The price earnings ratio of Wesfarmers has declined exponentially during the fiscal year of 2017 from the levels of 111 times to mere 16 times. This indicates an investment opportunity for the investors, as the industry average is relatively higher than the actual valuation of Wesfarmers.
In the same instance, both the earnings yield and dividend per share of Wesfarmers has relatively improved during the fiscal year of 2017, due to the high income that has been generated by the company. The increment in earnings yield is due to the high EPS, which was obtained by the rising net income of the organization, while its share price remained more or less same. The combination of the market ratio directly portrays the rising financial health of Wesfarmers, where the organization can generate higher revenues from investment in form of dividends (Rey & Santelli, 2017).
|
(see appendix for calculations) |
2017 |
2016 |
Industry average |
|
Asset turnover |
1.69 Times |
1.62 times |
1.29 times |
|
Cash return on assets |
0.10 Times |
0.08 times |
0.12 times |
|
Fixed Asset turnover |
2.25 Times |
2.12 times |
3.1 times |
The efficiency ratio of Wesfarmers is detected in the above table, where the performance of the organization has improved in some areas. The high growth achieved by Wesfarmers during the fiscal year of 2017 led to the increment in asset turnover from the levels of 1.62 to 1.69, which was a relatively higher than the industry average. This directly indicated the overall efficiency of the management to generate higher returns from investment while reducing any kind of excessive expenditure from the operations. However, the evaluation of cash return on assets indicates an increment in its values from the levels of 0.08 times to 0.10 times, which is lower than the industry average. On the other hand, fixed asset turnover ratio of the company has improved nominally from the levels of 2.12 times in 2016 to 2.25 times in 2017.This was only achieved due to the rising revenues obtained by the organization, while the industry average is higher than the actual values of Wesfarmers. This relatively indicates that the efficiency of the management has improved during 2017, as asset turnover ratio of the organization has increased adequately (Giordani et al., 2014).
|
(see appendix for calculations) |
2017 |
2016 |
Industry average |
|
Current ratio |
0.93:1 |
0.93:1 |
1.43:1 |
|
Quick ratio |
0.30:1 |
0.33:1 |
1.05:1 |
|
Receivables turnover |
122 Days |
98 Days |
14 Days |
|
Average collection period |
9 Days |
14 Days |
11 Days |
Earnings Yield and Dividend Per Share
The liquidity ratio of Wesfarmers is a relatively depicted from the above calculation which indicates its low financial position. The low financial condition of Wesfarmers the relatively detected from the low values of current ratio and quick ratio. The current ratio of the organization has remained same, which is at the levels of 0.93, while the quick ratio has declined from 0.33 to 0.30 in 2017. This decline in quick ratio is due to the high inventories that has been accumulated by the organization during the fiscal year. The decline in both total current assets and current liabilities of the organization is relatively nominal, which did not reflect major changes in the current ratio. On the other hand, the excessive increment in inventory has reduced the current ratio of Wesfarmers. both the current ratio and quick ratio of the organization is not up to the industry average, which depicts the low financial condition of the organization to support its short-term obligations. The company is considered to be highly risky, as adequate current ratio and quick ratio levels are not being maintained for supporting its future obligations.
Moreover, the accounts receivable turnover of the organization has increased exponentially from 98 days to 122 days in 2017, while the industry average is at the levels of 14 days. This indicates that the company is providing higher no credit x to the customers which is blocking essential resources of the organization. On the other hand, the average collection period of the organization has declined from the levels of 14 days to 9 days, while the industry average is 11 days. This mainly indicates that the collection period of Wesfarmers has improved, which improves the cash position of the organization (Le & Viviani, 2018).
|
(see appendix for calculations) |
2017 |
2016 |
Industry average |
|
Debt to equity ratio |
20.09% |
30.95% |
64.46% |
|
Debt ratio |
12% |
17% |
45% |
|
Equity ratio |
60% |
56% |
55% |
|
Cash debt coverage |
25% |
19% |
21% |
|
Interest cover ratio |
16.67times |
4.37times |
17.22 Times |
The gearing ratio of Wesfarmers indicate the positive attributes of the organization, as both its income and debt has declined over the period of 2 years. The debt to equity ratio of the company has declined from the levels of 30.95% in 2016 to 20.09 % in 2017. This decline was mainly possible due to the increment in equity and decline in net debt accumulated by Wesfarmers in 2017. The substantial decline in debt of the company from the levels of 7,103 million in 2016 to 4,809 million in 2017 led to the improvement in its gearing ratio. Moreover, the debt to equity ratio is a relatively lower than the industry average, which is a positive indication for the organization, as low debt reduces its finance cost. Furthermore, the debt ratio has declined from the levels of 17% to 12% due to the production in the net debt accumulation of the organization. The industry average is relatively at the levels of 45%, which is higher than the actual values of Wesfarmers. Likewise, the equity ratio of the company has improved nominally from the levels of 56% in 2016 to 60% in 2017. This increment is relatively higher than the values of industry average, which indicates the positive attributes of the organization and depicts positive financial position (Phung, Nguyen & Nguyen, 2017).
Efficiency Ratio
The cash debt coverage of the company has increased from the levels of 19% to 25% in 2017, due to the rising values of operating cash and declining values of total liabilities. The changes in value of operating cash and total liabilities has allowed the organization to improve its current cash to debt coverage ratio, which depicts the positive financial position of Wesfarmers. In the same scenario, the interest coverage ratio of Wesfarmers has increased exponentially from the levels of 4.37 times in 2016 to 16.67 times in 2017, which indicates the additional loan that could be taken by the organization. The increment in interest coverage ratio is due to the rising EBIT of Wesfarmers, which was achieved by reducing the impairment caused during the fiscal year of 2017. However, the interest coverage ratio of Wesfarmers is not up to the industry standards, which indicates that the company needs to increase their current EBIT or reduce the finance cost.
From the valuation of the above ratios the current financial projection of Wesfarmers is considered to be positive, as the organization is reducing its operating expenses and maximizing the level of income that could be generated from its operations. Seeing the current progress that has been achieved by Wesfarmers there is a future possibility for the company to achieve success and generate higher revenues. However, the evaluation did not indicate the likelihood of a merger or acquisition that will be conducted by Wesfarmers during the next fiscal year. There are many ways in which the company needs to improve its current operation to succeed and continue the profit generating streak. The accumulation of current assets would be effective for the organization to improve its capability for supporting the financial obligations in near future.
Furthermore, organization needs to have ethical consideration, when they become insolvent, as they are not able to support their financial obligations without selling the assets that was being used by and its operations. The current financial performance of West farmers is adequate, where the debt condition is nominal and does not lead to any kind of insolvency in near future, unless the organization increases the exposure in debt. The current political competitive environment of Australia is a relatively high, as the Retail Industry is going through volatility after the introduction of online shopping in the country. The Retail Industry that has changed there is scope and operations from hard core sales to online sale has a relatively survived the changing market.
Liquidity Ratio
The changes in employee pay, preference of customers and political decisions can be considered as one of the external factors that means to be considered by investors while evaluating the performance of the organization. From the evaluation of the financial ratios, investment in Wesfarmers can be considered viable. The company has generated higher revenue in 2017, which indicates its positive attributes to provide a higher return from investment. Wesfarmers has provided higher dividends, while the price earnings ratio is low, which indicates that the share value will increase eventually. Hence, investment can be conducted in Wesfarmers, as it will increase returns in future.
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Wesfarmers.com.au. (2018). Wesfarmers.com.au. Retrieved 16 August 2018, from https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0
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