Financial analysis of Wesfarmers

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Table of Contents

Table of Contents ............................................................................................................. 1

1. Introduction ................................................................................................................... 2

2. Ratios Calculation.......................................................................................................... 4

1. Short-term Solvency or Liquidity Ratios .............................................................. 4

2. Efficiency Ratios .................................................................................................. 4

3. Profitability Ratios ................................................................................................ 4

4. Long-term Solvency or Financing Ratios.............................................................. 5

5. Market-based Investment and Other Ratios......................................................... 5

3. Evaluation ...................................................................................................................... 7

1. Short-term Solvency or Liquidity Ratios .............................................................. 7

2. Efficiency Ratios .................................................................................................. 7

3. Profitability Ratios ................................................................................................ 8

4. Long-term Solvency or Financing Ratios.............................................................. 9

5. Market-based Investment and Other Ratios....................................................... 10

4. References .................................................................................................................. 12

Introduction

In the following report I will be discussing briefly the history of Wesfarmers and its performance in calculating the financial ratios for 2010 and 2011. I will evaluate, compare and express my opinion on these ratios.

Wesfarmers was established in June 1914, at that time it was known as Western Australian Farmers' Cooperative. Its main objective was to supply the Western Australian community with goods and services. In its early stages it was involved in wool, wheat, grain, fruits and oil distribution.

The 1950s was the beginning of Western Australian Farmers' Cooperative developing stages when it formed Kleenheat Gas. Kleenheat was mainly a supplier for liquefied petroleum gas and appliances for Western Australian community. Now it’s one of the main suppliers for Australians’ major companies throughout the country.

1984 was a significant time for the company’s success, it has changed its name to Wesfarmers Limited and became a public company that was listed in the Australian Stock Exchange. In the same year it had taken over, fertilizer manufacturer and distributor CSBP & Farmers.

Wesfarmers Logo.png

Wesfarmers Logo

Source: Wesfarmers Annual Report 2011

In the 1990’s Wesfarmers have added a new field to the organization, it had invested in Bengalla Mine. From there Wesfarmers have grown to one of the biggest coal mining companies in Australia.

In 1991 Wesfarmers Insurance had consolidated with Federation Insurance to become Wesfarmers Federation Insurance, one of the largest insurance companies in Australia. It expanded further with merging with Lumley Insurance, OAMPS Limited and Crombie Lockwood Holdings.

In 1993 Wesfarmers have made a significant growth in the fertilizers field when it obtained Dalgety Farmers Limited. It have changed the name to Wesfarmers Dalgety and eventually later on become Wesfarmers Landmark.

In 1994 Wesfarmers had purchased Bunnings Limited, which owns home improvement retail stores and hardware products. In 2001 Wesfarmers have acquired Howard Smith's BBC and Hardwarehouse which have merged with Bunnings. After the acquisition Wesfarmers had set up its Industrial and Safety division which had become a leading maintenance, repair and products supplier in Australia and New Zealand.

Wesfarmers Energy division which was responsible for gas and power had acquired Linde Gas, which later on merged with the chemical and fertilizer division that formed Wesfarmers Chemicals.

Coles_hero-26-940-313-80-c.jpgColes Supermarket - Source: Wesfarmers, 2014

In 2007 Wesfarmers made its biggest investment when it attained Coles Group Limited. It had invested $22 billion to acquire Australia’s second largest retail stores. After this acquisition it had formed Coles, Kmart and Target. Today Coles runs over 750 supermarkets, more than 800 liquor stores, more than 90 hotels and more than 600 fuel and convenience stores.

“Wesfarmers has grown into one of Australia's largest listed companies and employers. Its diverse business operations cover: supermarkets, department stores, home improvement and office supplies; coal mining; chemicals, energy and fertilisers; and industrial and safety products” (Wesfarmers, 2011)

Evaluation

1. SHORT-TERM SOLVENCY OR LIQUIDITY RATIOS

Short-term solvency or liquidity ratios are simple formulas that can evaluate if the organization can pay its short-term financial obligations. In looking at the Current Ratios we can notice that Wesfarmers had slightly decreased its ratio from 1.232 in 2010 to 1.171 in 2011. This is due to the increase in current liabilities more than the current assets. With a current ratio of 1.171 in 2011 the company is considered safe and stable for investors and is able to pay its short-term liabilities in the worst situations.

Sometimes the current ratio is not sufficient precautious because incase of bankruptcy the company will be forced to sell its inventory at a lower price than the market rate or it might be difficult to get a buyer. Quick ratio is more accurate when calculating the company’s ability to liquefy its assets. Wesfarmers have had better quick ratio (0.638) in 2010 compared to (0.599) in 2011.The increased liabilities in 2011 had effected and decreased the ratio.

The cash flow from operations to current liabilities ratio calculates the money that Wesfarmers earns after the deduction of tax, interest, supplier and employee payment and other costs (Cash Flow from Operations) and how well it can cover the current liabilities. Wesfarmers has a low cash flow from operations to current liabilities ratio. In 2010 it was 0.423 and had significantly dropped to 0.334 in 2011. This is mainly due to the increase of supplier and employee payment despite the increased sales and lower borrowing cost.

2. EFFICIENCY RATIOS

Efficiency ratios are simple calculations that show how efficiently a company uses its assets and liabilities. Debtors’ turnover ratio is the number of times that a company can collect its accounts receivables in a year. When comparing the Debtors’ turnover ratio for Wesfarmers in 2011 which was 28.026 and in 2010 was 28.320 we can see that the ratio is almost the same. Although sales had increased to $54,874m in 2011 compared to $51,827m in 2010, but at the same time the receivables have increased. This is the reason why the debtors’ ratio didn’t decrease for 2011. Debtors’ turnover ratio indicates that Wesfarmers are very efficient in managing their debts.

Average days’ sales uncollected ratio shows the average number of days it takes to collect the account receivable. Wesfarmers average days’ sales uncollected ratio for 2011 was 13.0 days when compared to 12.9 for 2010. We can see that the ratio almost stayed the same for the 2 years. 13 days is considered to be a favorable ratio for Wesfarmers. This means that Wesfarmers are able to convert receivables to cash quickly.

Inventory turnover ratio shows the how many times the inventory was sold and replaced in a year. Wesfarmers had a ratio of 11.379 for 2011 and 11.118 for 2010. The increase in 2011 ratio is favorable for Wesfarmers. The ratio is considered to be healthy and implies that Wesfarmers have strong sales.

Inventory turnover in days is a formula that shows the number of days it will take the company to sell its inventory. When comparing Wesfarmers ratios between 2011 (32.08 Days) and 2010 (32.83 Days) we can see that there is a slight decrease, which implies that there is progress. The ratio is considered healthy and beneficial for Wesfarmers investors.

3. PROFITABILITY RATIOS

Profitability ratios are used to evaluate the company’s revenues versus expenses and costs. Net profit margin ratio measures how much does the company net profits from its sales. Wesfarmers in 2011 had a 3.5% and in 2010 had 3.02% net profit margin ratio. This shows that Wesfarmers had a significant increase in its net profit. However the ratio is considered low, this is due to the high cost of raw materials, inventory and employees cost.

Net Profit.png

Wesfarmers Net Profit for 2011 and 2010

Source: Wesfarmers Annual Report 2011

Interest cost as a percentage of sales ratio calculates what percentage of the sales is used to pay interest on the money borrowed. In 2011 Wesfarmers had a ratio of 0.77% and in 2010 the ratio was 0.95%. Wesfarmers had decreased its interest expenses in 2011 while it increased its sales, this made Wesfarmers ratio slightly decrease compared to 2010. The decrease in ratio is considered to be beneficial to Wesfarmers.

Asset Turnover Ratio shows how efficiently the company is using its assets to produce revenue. In 2011 Wesfarmers had a ratio of 1.371 which is higher than 1.323 for 2010. This indicates that Wesfarmers is more efficiently using its assets by generating more revenues in 2011.

Return on assets ratio shows how profitable a company’s assets in producing revenue. In 2011 Wesfarmers had a ratio of 7.818% which is higher than 6.917% for 2010. This increase shows that Wesfarmers is successfully generating more profits from its assets.

Return on ordinary shareholders’ Equity calculates the profit generated from the shareholders investments. Wesfarmers ratio has increased from 6.395% to 7.685% which is attractive for investors. This increase was mainly due to the significant increase in the net profit.

4. LONG-TERM SOLVENCY OR FINANCING RATIOS

Long-term solvency ratios are used to measure the company’s ability to pay its liabilities in long term. Debit to equity ratio calculates the amount from equity is used to finance the company’s assets. Wesfarmers ratio has slightly increased from 0.588 to 0.611. This unfavorable increase is due to the increase in the liabilities versus a slight increase in equity compared to 2010. Wesfarmers should decrease its liabilities to lower this ratio.

Debt to total assets ratio is a measure for the portion of assets that are being financed with debit. Wesfarmers has a considerably good ratio that slightly increased from 0.371 to 0.379. This unfavorable increase is a result of the increase in the liabilities compared to total assets. Wesfarmers should decrease its total liabilities to decrease its debit.

Interest coverage ratio is a measure for the company’s ability to pay interest on its debts. for Wesfarmers has increased from 5.492 to 7.397. This favorable ratio for Wesfarmers was a result of the increase in net profit and decrease in interest expenses.

Cash flow from operations to liabilities ratio calculates how well cash flow from operations can cover liabilities. Wesfarmers has decreased from 22.88% to 18.83%. This unfavorable ratio drop is due to the decrease in cash flow and increase in liabilities. Wesfarmers should consider reducing their spending in the future and should protect their cash flow.

Net Profit.png

Wesfarmers Operating Cash Flow for 2011 and 2010

Source: Wesfarmers Annual Report 2011

5. MARKET-BASED INVESTMENT AND OTHER RATIOS

Market based investment ratios are calculations that are used by investors to determine the value and successfulness of a stock. Price/Earnings ratio is the most popular investment ratio it compares the market share price to the earnings per share. Wesfarmers P/E ratio has decreased from 20.251 to 19.106. This is mainly due to the increase in the share price in comparison to the earnings. Although the ratio is considered attractive for investors, Wesfarmers ratios in 2010 were better than 2011.

Earnings per Share.png

Wesfarmers Earnings per Share for 2011 and 2010

Source: Wesfarmers Annual Report 2011

Dividend yield ratio calculates the return a company pays to shareholder. Wesfarmers has slightly increased from 4.20% to 4.25%. This is a result of the increase in the dividends and price of share. This is a positive indicator and an attractive ratio for investors.

Dividends per Share.png

Wesfarmers Dividends per Share for 2011 and 2010

Source: Wesfarmers Annual Report 2011

Dividend cover ratio calculates the number of times a company will be able to pay its dividends to the shareholders from its profits. Wesfarmers has slightly increased from 1.18 to 1.23. This is a result of the increase in earnings per share more than the increase in dividend per ordinary share. This increase is positive indicator for investors, although the ratio is considered low.

Net tangible asset backing is the amount that shareholders will receive in case the company was forced into liquidation. Wesfarmers has increased from $16,163.21 to $17,487.24. The increase in ratio is due to the increase in the net tangible assets and. The higher the rate the more the share is considered safe. The increase is favorable to Wesfarmers but, the amount is considered very low and risky in the case the company was faced with force liquidation.

References

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