Financial Analysis Of Wesfarmers Plc And Woolworth Company In The Retail Industry
Performing Strategy Analysis using Porter’s Five Forces framework
In this report, proper financial analysis has been taken into consideration to evaluate the financial performance of two companies. In this report two companies are picked from the retail industry. The names of these Companies are Wesfarmers plc and Woolworth Company. In this report, financial analysis tools such as ratio analysis and bottom up analysis are used to determine whether investment of $25,000 should be made in Wesfarmers plc or Woolworth Company (Wesfarmers plc, 2017)
This analysis is used to evaluate the competitive position of companies in market. It helps in assessing the strength, weakness of company’s possible threats, available opportunity and value of the company in market (Woolworth plc, 2017).
|
Type |
Woolworths |
Wesfarmers plc |
|
Strength |
It is having long term business sustainability and managed to provide quality services to its clients. The profitability of company has also increased by 20% (due to its increased operating expenses it is shown negative) since last five year which reflects the positive indicator for the future value of investor’s capital. Nonetheless, the online cyber computing system adopted by Woolworth will also increase the overall sales and capital employed. |
Company has been indulged in offering good amount of offers and discount to its clients. It has large number of stores and workforce over more than 2, 00,000. It has maintained effective financial leverage and increased profitability by 22% since last five years. |
|
Weakness |
It has faced several issues of corporate governance program and high penalties. It has increased its overall cost of production. In addition to this, it has low geographic presence. |
It has planned to expand its business out of Australia which may result to complex business structure. Company invested more than AUD $ 20 million capital to establish cyber communication channel to communicate with its several departments. It will increase the overall cost of its sales. |
|
Opportunity |
It has opportunity to expand its busienss outside Australia. Strong brand image will ease its entry into new diversified sectors. Increased return on capital employed could be used to diversify its busienss. |
It has employees and customers loyalty across busienss. It could be used to expand its business. By focusing on Enhance quality, service and experience benchmarks across stores, it could grab potential market share on international level. |
|
Threats |
The retail business sector has high amount of threats from the new rivals in market. |
. |
The industry analysis have been made in context with the both companies.
|
Five forces model |
As per the point of view of Woolworths |
As per the point of view of Wesfarmers |
|
Bargaining power of buyers |
The clients in Australia are more inclined towards the quality of services and customized products. However, with the excess number of competitors such as Tesco, Morrison plc, Wesfarmers and Aldi, the bargaining power of buyers is high. |
Wesfarmers plc has strong brand image in the market and has grabbed more than 12% market share in retail Australian sectors. Nonetheless, Tesco, Morrison plc, Aldi and Woolworths are offering best quality which may be additional advantage for the buyers to switch to them. Therefore, bargaining power is high. |
|
Bargaining power of Suppliers- |
Woolworth has established supply chain management and buys direct finished goods for the certain suppliers. It has low bargaining power of Suppliers due to availability of high suppliers in market. |
Wesfarmers has focused on setting effective vertical integration to start up manufacturing activities. It has low bargaining power of Suppliers due to availability of high suppliers in market and its vertical integration to start up manufacturing activities |
|
The threat of substitute’s product |
New entrants are coming up with the new designs of outlet and retails stores by using advance technologies. It may be the big threat for the Company. |
The main threat of substitute product is quite high due to the use the obsolete technologies in the process of Wesfarmers. It has to adopt advance technologies to maintain its busienss. |
|
The rivalry among competitors |
The rivalry among the existing competitor is intense then it will drive price of its service down and force company to increase the overall quality. Tesco, Morrison plc, Wesfarmers and Aldi are using advance system and quality services to attract potential clients |
It has strong rivalry with its competitors. However, clients are attracted towards the quality services. Wesfarmers needs to advance its technologies to give the strong competition to its rivals in the market. |
|
Threat of new entrants |
It has Low threat of entrants due to the high fixed cost investment of its busienss. However, with the increasing profitability, big organization may diversify their busienss in this sector. |
The threat of new entrants is low. |
It is considered that Woolworth Company has strong brand image and increased its overall turnover by more than 20% since last five year. In this fierce competition, it has managed to attract potential clients through its advance value chain activities and quality services. The main competitive advantage for Woolworths is based on advance value chain activities and quality services (Palepu, Healy, and Peek, 201).
It is evaluated that Wesfarmers is lacking with the advanced and sophisticated technologies in its business. However, it has developed competitive advantage by offering its services to clients at the least price in this retail stores busienss. Nonetheless, it has become hard for other competitors such as Tesco, Morrison and Aldi to beat the cost leadership competitive style of Wesfarmers plc.
The corporate strategies of these two companies are based on the managerial decisions which are given as below.
Woolworths- It has focused on using cyber computing system in its business to promote its online business functioning. It has focused on strengthen its search engine to grab potential clients through its dashboard mechanism around the globe.
Wesfarmers- It has planned to expand its busienss by undertaking the vertical integration to eliminate the bargain supplier’s power. It has planned to invest capital to establish its individual manufacturing plant under its separate brand.
This analysis helps in assessment of these two companies and their financial performance in the retail busienss industry.
Accounting analysis of the five components of the financial statement of Wesfarmers
This analysis helps in assessment of two factors of busienss.
Liquidity ratio
It shows companies’ ability to pay off its short term and long term debt with the help of its current assets.
Performing Accounting Analysis of the Two Selected Companies
The Woolworth Company has decreased its current ratio to .79 in 2017 which is .12 points lower as compared to last five year data. It shows that company reduced its capital blockage in its operating activities. In addition to this, The Woolworth Company has increased its quick ratio to .33 in 2017. It shows that company has blocked more funds in its inventories (Wesfarmers plc, 2017)
|
Description |
Formula |
Woolworths Plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
cash ratio |
cash equivalents + cash / current liabilities |
0.1236528 |
0.1221223 |
0.1453812 |
0.1054153 |
0.10301 |
|
Current ratio |
Current assets/current liabilities |
0.91 |
0.95 |
0.84 |
0.83 |
0.79 |
|
Quick Ratio |
Current assets-Inventory/current liabilities |
0.29 |
0.33 |
0.30 |
0.32 |
0.33 |
The Wesfarmers Company has decreased its current ratio by .10 points in 2017 which reflects the reduction of its investment in its current assets. It has decreased its quick ratio to .30 in 2017 due to the decrease in its sales (Weil, Schipper, and Francis, J., 2013).
|
Description |
Formula |
Wesfarmer Plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
cash ratio |
cash equivalents + cash / current liabilities |
0.1392603 |
0.2511848 |
0.073103 |
0.0586147 |
0.097244888 |
|
Current ratio |
Current assets/current liabilities |
1.11 |
1.13 |
0.93 |
0.93 |
0.93 |
|
Quick Ratio |
Current assets-Inventory/current liabilities |
0.58 |
0.48 |
0.37 |
0.33 |
0.30 |
It is observed that return on sales of company has gone down due to the sluggish market condition. It has decreased its return on sales to 2.8% from 3.9% as compared to last five years. In addition to this, return on assets of company has also decreased to 16% in 2017 which is 9% lower as compared to last five year data. The earning per share of company has decreased to .27 in 2017 which is not good indicator.
|
Description |
Formula |
Woolworths Plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Return on sales |
Net profit/revenues |
3.9% |
4.0% |
3.5% |
-2.1% |
2.8% |
|
Return on assets |
Net profit/Equity |
25.0% |
23.9% |
19.8% |
-14.6% |
16.1% |
|
Financial leverage |
EBIT / EBIT – Interest |
0.9396526 |
0.9599077 |
0.9673496 |
0.9744919 |
0.97865 |
|
Asset turnover |
total assets / total sales *365 |
138.4131 |
144.94725 |
151.93542 |
147.20005 |
150.251 |
|
Earnings per share |
Net income – pref div / shares outstanding |
0.5202672 |
0.5294753 |
0.4371562 |
-0.235149 |
0.2732 |
The return on sales of Wesfarmers plc has increased to 4.2% in 2017 which is .4% higher as compared to last five year data. The return on assets of company has increased to 12% in 2017 which is 3.3% higher compared to last five year data. The earning per share of company has also increased. It has strong profitability as compared to Woolworths.
|
Description |
Formula |
Wesfarmers Plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Return on equity |
Net profit/revenues |
3.8% |
4.5% |
3.9% |
0.6% |
4.2% |
|
Return on assets |
Net profit/Equity |
8.7% |
10.3% |
9.8% |
1.8% |
12.0% |
|
Financial leverage |
EBIT / EBIT – Interest |
1.1196345 |
1.092662 |
1.081882 |
1.0887608 |
1.059742023 |
|
Asset turnover |
total assets / total sales *365 |
265.07985 |
242.10434 |
237.45982 |
227.22242 |
215.2756745 |
|
Earnings per share |
Net income – pref div / shares outstanding |
0.0971888 |
0.1185731 |
0.1117012 |
0.0185768 |
0.129170039 |
Efficiency ratio
This ratio divulges the ability of company to manage its blocked funds in busienss.
The Asset turnove rof company has increased to 150 points in 2017 which is 12 points higher since last five year depicated data. The receivbale turnover has went down which is good indicator for the business. The inventory turnove of company has increased to 37 points in 2017 which shows that company has managed its inventory in effeicient manner (Morningstar, 2017).
|
Description |
Formula |
Woolworths plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Asset turnover |
total assets / total sales *365 |
138.4131 |
144.94725 |
151.93542 |
147.20005 |
150.251 |
|
Receivable turnover |
Receivables/ Total sales*365 |
11.45 |
9.30 |
8.41 |
6.74 |
6.53 |
|
Inventory turnover |
Inventory / cost of goods sold *365 |
35.77 |
38.51 |
40.10 |
38.98 |
37.47 |
|
Description |
Formula |
Wesfarmers plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Asset turnover |
total assets / total sales *365 |
265.1 |
242.1 |
237.5 |
227.2 |
215.3 |
|
Receivable turnover |
Receivables/ Total sales*365 |
19.80 |
14.55 |
13.22 |
14.57 |
14.86 |
|
Inventory turnover |
Inventory / cost of goods sold *365 |
46.50 |
47.02 |
46.61 |
50.19 |
51.41 |
It is analyzed that assets turnover of company has went down to 215 in 2017 which is 45 points lower as comapred to last five year data. In addition to this, receivable turnover ratio of comapmny has went down to 14.86 which refelcts that comapy has lower down its amount blockaged in its receivables. The inventory turnover of company has also increaased due to the increased demadn of its goods in retail stores (Morningstar, 2017).
Evaluating the Quality of Financial Statements of Two Companies
Solvency ratio
Woolwroths plc
This ratio refelcts company’s ability to cover its fixed interest coverage. Company has high finanical leverage and shows that due to its less earning it might face destruction of its bsuienss. After evaluting the below give table, it is assesed that company is not able to pay off its interest amoutn out of its earning (Morningstar, 2017).
|
Description |
Formula |
Woolworths plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Times interest earned |
EBIT / Interest expenses |
-15.57073 |
-23.94245 |
-29.62745 |
-38.20325 |
-45.82989691 |
|
Cash coverage ratio |
EBIT + non-cash expenses / interest expenses |
(6,383.00) |
(6,655.00) |
(7,554.00) |
(9,397.00) |
(8,890.00) |
|
Debt to Equity Ratio |
Debt/ Equity |
0.76 |
0.74 |
0.85 |
1.06 |
0.93 |
The debt ot equtiy ratio of company is also very high which refelcts that company has high finanical leverag and in case of its no profit siutiaon may face wind up procedure.
The time interest ratio refelcts company’s ability to cover its fixed interest coverage. Company has low finanical leverage and shows that it could easily cover its interest payment out of its earnign (Robb and Robinson, 2014).
|
Description |
Formula |
Wesfarmers plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Times interest earned |
EBIT / Interest expenses |
9.358796296 |
11.79190751 |
13.21269841 |
12.266234 |
17.73863636 |
|
Cash coverage ratio |
EBIT + non-cash expenses / interest expenses |
4,044.00 |
4,081.00 |
4,163.00 |
3,779.00 |
4,684.00 |
|
Debt to Equity Ratio |
Debt/ Equity |
0.37 |
0.32 |
0.39 |
0.45 |
0.44 |
The debt ot euqity of company is also stable and managing the optoimum debt to captial stucutre (Innocent, Mary, and Matthew, 2013).
Woolworths plc
The market psotion of Woolworth plc is strong due to its strong brand image. The PE ratio of company has increased by 105% which is good indicator as per the investors point of view.
|
Description |
Formula |
Woolworths plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Price / earnings ratio |
Market value per share / earnings per share |
45.86 |
46.95 |
59.16 |
(114.23) |
101.98 |
|
Dividend yield ratio |
dividend / current share price |
4.99 |
3.74 |
3.36 |
2.87 |
2.33 |
Wesfaremers plc
The market psotion of Wesfarmers is strong due to its strong brand image.However, Price earning ratio has decreased since last five year. On the other hand, market share price has increased by 25% as compared to last five year data (Delen, Kuzey, and Uyar,2013).
|
Description |
Formula |
Woolworths plc |
||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
||
|
Price / earnings ratio |
Market value per share / earnings per share |
245.50 |
209.66 |
231.51 |
1,445.89 |
215.68 |
|
Dividend yield ratio |
dividend / current share price |
4.99 |
3.74 |
3.36 |
2.87 |
2.33 |
The quality of the finanical statemetn of Wesfarmers and Woolworth is high and it is prepared by follwing proper AASB 101. These both companies have also implemented proper impairmetn test as per the IAS-136 to reflect the true and fari view of assets in its books of account (Cakici, Fabozzi and Tan, 2013).
After assessing financial performance of both companies and analysing the competitive advantage, it could be inferred that Wesfarmers plc is having strong financial position and also planning to expand its busienss. It will give good amount of return to its investors. It has strong financial track records and strategic planning to expand its business (Bielecki, and Rutkowski, 2013).
Investment amount= $ 25000
Share purchased= Investment amount/ Market price
25000/ A$ 41.80= 602.41 shares.
Note= Investor could buy only 602.41 share in Wesfarmers company.
Conclusion
After analysing all the details and financial performance of both companies, it could be inferred that Wesfarmers plc is having strong financial position. It will offer good amount of return to its investors. Therefore, investors should invest their money in Wesfarmers plc.
References
available at 28th, march 2018 on https://books.google.co.in/books?id=0RDxCSh_pJoC&dq=Weil,+R.L.,+Schipper,+K.+and+Francis,+J.,+2013.+Financial+accounting:+an+introduction+to+concepts,+methods+and+uses.+Cengage+Learning.&hl=en&sa=X&ved=0ahUKEwjS-aDSnMjZAhVHqI8KHdJeCaMQ6AEIKDAA
Bielecki, T.R. and Rutkowski, M., 2013. Credit risk: modeling, valuation and hedging. Springer Science & Business Media.
Cakici, N., Fabozzi, F.J. and Tan, S., 2013. Size, value, and momentum in emerging market stock returns. Emerging Markets Review, 16, pp.46-65.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Innocent, E.C., Mary, O.I. and Matthew, O.M., 2013. Financial ratio analysis as a determinant of profitability in Nigerian pharmaceutical industry. International journal of business and management, 8(8), p.107.
Morningstar, 2017, Wesfarmers plc, available at 28th, march 2018 on https://in.finance.yahoo.com/
Morningstar, 2017, Woolworths plc, available at 28th, march 2018 on https://in.finance.yahoo.com/
Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition. Cengage Learning.
Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Wesfarmers plc, 2017, annual report, available at 28th, march 2018 on https://www.wesfarmers.com.au/investor-centre/company-performance-news/reports
Woolworths plc, 2017, annual report, available at 28th, march 2018 on https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports