Financial Statement Evaluation And Analysis Of Wesfarmers Limited

Company Overview

Discuss about the Behavioral Finance Investors Corporations and Markets.

This report has been prepared to measure the performance of an Australian company named by Wesfarmers limited. It emphasizes on the financial statement evaluation, profitability measurement, liquidity measurements, solvency measurements, industry evaluation, management approach, financing activities, competitors analysis etc to measure the position of the company. It evaluates that how well the company is performing and how well the comapny has structured all the process and the activities of the company in marketplace to manage and enhance the competitive position and market base.  

In this report, financial statement of last 3 years have been collected and measure to identify the changes into the current performance and position of the company as well as the ratio analysis study has been conducted on the business to measure the performance of the company. Further, industry evaluation and reports have been studied to identify the company’s position in the market and the total market share of the company.  

Wesfarmers limited is an Australian company which is operating its business in conglomerate industry. The company has diversified its business in retail industry, chemical industry, fertilisers, coal mining and various safety products.  The operations and the different activities of the company are handled by the company on the basis of its various subsidiary companies (Reuters, 2018). The company has entered into the international market to serve the services and the products of the company. The international presence has helped the company to grab more market share as well as the performance of the company has also been improved.

The company is among the largest Australian company in context with the employment. Currently, 2,20,000 people are working with the company. It has been founded in 1914 to provide the merchandise services (Home, 2018). The company is largest Australian company in context with the revenue generation.  

This section focuses on the financial statement analysis of the company. It explains that how much changes have been occurred into the financial performance of the company in last 3 years. Financial statement analysis is a process which is done by the professional sot analyzes and measures the financial statement of the company to make a better conclusion about the performance of the company (Kurth, 2013).  The financial statement includes income statement, balance sheet and cash flow statement. It involves specific techniques to measures the financial health and the future prospects of the company.

Income Statement Analysis

Initially, the study of financial statement analysis has been done on the income statement of the company to measure the changes into the turnover and the profitability level of the company. Income statement of last 3 years has been calculated to measure the financial and profitability health of the company.

The income statement analysis explains that the profitability level and the total turnover of Wesfarmers limited have been changed. The revenue of the company was $ 62,102 million in 2015 which explains about the great improvement in the year of 2017 which is $ 68,015. The total revenue form last 3 years has been enhanced by 9.52% in 2017. It explains that the new strategies and policies are quite helpful for the company.

In addition, the gross profit explains about 14.24% increment which is even higher than the total revenue of the company. It measures that the cost of sales of the company has been lower which has helped the business to enhance the total gross profit of the company. Further, the EBIT of the company also explains about great improvement in the total profits of the company. EBIT has been improved by 20.15% in last 3 years (Annual  report, 2017).

Lastly, the net profit of the business has been measured and it has been found that the performance of the company has been better and it explains about the 17.75% increment in the total profit of the company whereas the improvement in the total revenue was just 9.52%. It explains that the company has controlled on extra expenses (Kinsky, 2011). This analysis leads to a conclusion that the financial health of the company is quite better and in future, the performance of the company would be improved.

(Morningstar, 2018)

Further, the study of financial statement analysis has been done on the cash flow statement of the company to measure the changes into the total liquidity position and the cash position of the company (Krantz, 2016). Cash flow statement of last 3 years has been calculated to measure the changes into the operating activities, financial activities and the investment activities of the company.

The cash flow statement analysis explains that the cash flow position as well as free cash flow of Wesfarmers limited has been changed. The cash flow from the operating activities of the company was $ 3,791 million in 2015 which explains about the great improvement in the year of 2017 which is $ 4,226 million. The total operating cash flow from last 3 years has been enhanced by 11.47% in 2017. It explains that the main reason behind such increment is higher net revenue and lower cost of sales of the company (Annual report, 2017).

Cash Flow Analysis

In addition, the cash flow from investing activities explains about 97.21% increment from 2015. However, the current cash flow of the company is still explaining about higher cash outflow but it has been lowered from $ 1998 to $ 53. It measures that the company has reduced the investment in new property, plant and equipment which h has helped the company to manage the cash position (Horngren, 2009).

Further, the cash flow from investing activities of the company explains about reduction in the cash inflow position of the company. Cash flow from financing activities explains that the company has paid higher dividend amount as well as debt has been repurchased by the company which has impacted on the total cash flow from investing activities of the company and it explains about the lower cash inflow of the company than the cash outflow of the company.

Lastly, the net changes into the cash position of the business have been measured and it has been found that the cash inflow of the company has been better and it explains about the 129.65% increment in the total cash flow of the company. It explains that the company has controlled on various activities and the performance (Hopper, Northcott and Scapens, 2007). This analysis leads to a conclusion that the overall cash position and the financial health of the company is quite better and in future, the performance of the company would be improved.

Lastly, the study of financial statement analysis has been done on the balance sheet of the company to measure the changes into the total assets and liability position and the equity position of the company. Balance sheet of last 3 years has been calculated to measure the changes into the financial performance of the company (Hansen, Mowen and Guan, 2007).

The balance sheet statement analysis explains that the assets position as well as liability and equity position of Wesfarmers limited has been changed. The total current assets of the company have been enhanced by 6.31% in 2017. It explains that the company has raised the level of the current assets to manage the current operations and the activities of the business. The noncurrent assets of the company have been reduced by 2.75% due to the face that company has sold various PPE in current year.

In addition, the total assets explains about -0.71% increment from 2015. It explains that the current assets of the company have been improved but as well as total noncurrent assets have been reduced which has affected the total assets of the company.

Balance Sheet Analysis

Further, the current liabilities, noncurrent liabilities and total liabilities of the company explain about great increment (Hansen et al, 2010). The current liabilities of the company have been improved by 7.10% as well as the total noncurrent liabilities and the total liabilities of the company have been improved by -234% and 3.54%. It explains that the company has reduced the debt position and it has impacted on the total liabilities of the company.  

Lastly, the stockholder’s equity of the business has been measured and it has been found that the stockholders’ position of the company has been lowered and it explains about the -3.39% increment in the stockholder’s equity of the company. It explains that the company has controlled on various activities and the performance. This analysis leads to a conclusion that the overall financial position and the financial health have been changed. These changes have been done by the company to manage the capital structure and the financial position.  

(Morningstar, 2018)

The financial ratios study have been analyzed further to measure the profitability position, liquidity position, solvency position, market value ratio, asset efficiency ratios etc. Financial ratios are the part of financial analysis which collects the financial information of an organization and compares the information from past year of the company to measure the changes and the improvements in the financial performance of the company (Garrison et al, 2010). It explains that the ratio analysis is a process which is done by the professional to analyze and measures the financial statement of the company to make a better conclusion about the performance of the company.  The study of ratio analysis of the company is as follows:

Return on assets is a financial ratio which is used to measure the total profit of a business on the basis of the total available resources of the company. The return on assets is calculated on the basis of the net profit which has been generated by the company in a particular year dividend by the total assets of the company on that particular date. Net income could be derived from the annual report or the income statement of the company and the total assets could be derived from the balance sheet of the company. It is an indicator about the total profitability position f the company (Elton et al, 2009). It offers an idea about the company that how the company is using its assets to generate the profits.

Return on assets calculations have been done on the basis of the total assets and net income of the company. The return on assets of last 3 years has been calculated to measure the profitability level. On the basis of the below calculations, it has been found that the return on assets of the company has been improved from last 3 years. It briefs that the management of the company is utilizing the entire resources available to measure the profitability level of the company. It briefs about the better financial health of the company.

Inventory turnover day is a financial ratio which is used to measure the efficiency position of a business on the basis of the total inventory and the cost of sales of the company. Cost of revenue could be derived from the annual report or the income statement of the company and the total inventory could be derived from the balance sheet of the company. It is an indicator about the total efficiency position of the company (Bhimani et al, 2008). It offers an idea about the company that how the company is operating its business and how efficient the company is.

Inventory turnover calculations have been done on the basis of the total inventory and total cost of sales of the company. The inventory turnover of last 3 years has been calculated to measure the cash conversion level and efficiency level. On the basis of the below calculations, it has been found that the inventory turnover of the company has been improved from last 3 years. It briefs that the management of the company has decided to rattan more inventory at a time. It has enhanced the working capital of the company. It explains that the company is required to make few changes to make the efficiency position of the company better.

Quick ratio is a financial ratio which is used to measure the liquidity position of a business on the basis of the total current assets and the total current liabilities of the company. Total current assets and total current liabilities of the business could be derived from the balance sheet of the company. It is an indicator about the total risk position of the company. It offers an idea about the company that whether the company is enough capable to pay all its short term debt liabilities or not (DRURY, 2013).

Quick ratio calculations have been done on the basis of the total current liabilities and total current assets of the company. The quick ratio of last 3 years has been calculated to measure the risk level and the short term debt payment obligations of the company. On the basis of the below calculations, it has been found that the quick ratio of the company has been lowered in last 3 years. It briefs that the management of the company is required to make few changes to make the liquidity position of the company better.

The management must enhance the level of current assets in context with the current liabilities to manage the liquidity position and enhance the short term debt obligation level of the company.

(Morningstar, 2018)

Price earnings ratio is a financial ratio which is used to measure the market position of a business on the basis of the total earnings per share and the stock price of the company. Total earnings per share could be derived from the income statement of the company and the total sock price could be derived from the yahoo finance (2018). It is an indicator about the total market position of the company. It offers an idea about the company’s position in the market (Bhimani et al, 2008).

Price earnings ratio calculations have been done on the basis of the total stock price and total earnings per share of the company. The price earnings ratio of last 3 years has been calculated to measure the market position of the company. On the basis of the below calculations, it has been found that the price earnings ratio of the company has been changed in last 3 years (Yahoo Finance, 2018). It briefs that the performance of the company in the market is quite competitive.

The above study explains that the performance of the company has been better in last 3 years.

Further, the director’s report of the company has been investigated to measure that whether the company would be offer higher returns to the investors of the company or not. On the basis of that study, it has been measured that the financial performance of the company is quite competitive as well as the directors of the company explains that the various positive changes have taken place into the position of the company and the forecasting of the business also brief about better performance.

Corporate governance structure of Wesfarmers limited has been evaluated further and it has been found that the directors have clearly mentioned about the various roles and responsibilities of the management in the report which would help the company to enhance the market base and improve the activities of the company (Corporate governance, 2018).

In addition, it has been found that the company is focusing on the riskier projects as these projects would offer great returns to the company. The accounting process has been followed by the company on the basis of the AASB and IFRS (Baker and Nofsinger, 2010). The accounting functions and the information have been managed by the company on the basis of the international accounting rules.

The main operations of the business is to offer the retail industry products, chemical products, fertilisers, coal mining products and various safety products to the customers of the company. Company has diversified the business operations to enhance the business operations (Ackert and Deaves, 2009).

Investment and investment activities:

The investment opportunities of the company have been better due t better profitability level and the performance of the company.

The financial activities of the company are explaining about the better performance of the company and explain that the financial health is improved now and it would offer better results in near future.

Industry size and Major players:

The Australian retail industry is among the top 20 industries at international level. And Wesfarmers limited is the biggest company of the industry which explains about better position of the company. The main competitors of the industry are Woolworths limited.

The Wesfarmers limited is holding around 28% share of the Australian retail industry.

Conclusion:

On the basis of the study on financial statements, ratio analysis and the director’s report of Wesfarmers limited, it has been evaluated that the performance of the company has been better. The study explains that the investment into the company would offer huge return to the investors as the financial health of the company has been improved and the financial forecast of the company also explains about the better position of the company. Further, the director’s report explains that the company has improved all the issues and now it is performing well in the market.

References:

Ackert, L. and Deaves, R. 2009. Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage Learning.

Annual report. 2017. Wesfarmers limited. [online]. Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 (accessed 25/5/18).

Baker, H.K. and Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and Markets. John Wiley and Sons.

Bhimani, A., Horngren, C. T., Datar, S. M., and Foster, G. 2008. Management and cost accounting (Vol. 1). Pearson Education.

Corporate structure. 2018. Wesfarmers limited. [online]. Available at: https://www.wesfarmers.com.au/docs/default-source/corporate-governance/2017-corporate-governance-statement.pdf?sfvrsn=2 (accessed 25/5/18).

DRURY, C. M. 2013. Management and cost accounting. Springer.

Elton, E.J., Gruber, M.J., Brown, S.J., and Goetzmann, W.N. 2009. Modern Portfolio Theory and Investment Analysis. John Wiley and Sons.

Garrison, R. H., Noreen, E. W., Brewer, P. C., and McGowan, A. 2010. Managerial accounting. Issues in Accounting Education, 25(4), 792-793.

Hansen, D. R., Mowen, M. M., and Madison, T. 2010. Cornerstones of cost accounting. Issues in Accounting Education, 25(4), 790-791.

Hansen, D., Mowen, M., and Guan, L. 2007. Cost management: accounting and control. Cengage Learning.

Home. 2018. Wesfarmers limited. [online]. Available at: https://www.wesfarmers.com.au/ (accessed 25/5/18).

Hopper, T., Northcott, D., and Scapens, R. 2007. Issues in management accounting. Pearson education.

Horngren, C. T. 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Kinsky, R. 2011. Charting Made Simple: A Beginner’s Guide to Technical Analysis. John Wiley and Sons.

Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley and Sons.

Kurth, S. 2013. Critical Review about Implications of the Efficient Market Hypothesis. GRIN Verlag.

Morningstar. 2018. Wesfarmers limited. [online]. Available at: https://financials.morningstar.com/income-statement/is.html?t=WFAFY&region=usa&culture=en-US (accessed 25/5/18).

Reuters. 2018. Wesfarmers limited. [online]. Available at: https://www.reuters.com/finance/stocks/overview/WES.AX (accessed 25/5/18).

Yahoo Finance. 2018. Wesfarmers limited. [online]. Available at: https://finance.yahoo.com/quote/wes.ax?ltr=1 (accessed 25/5/18).

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