ACCT 20051/20077: Wesfarmers Limited Practical and Written - Executive Report Writing Assessment Answers

Practical and Written Assignment

Details

The assignment must be completed as an individual assignment. There is a specific writing style and required to write an executive report. Please do not repeat the question in your answer, and simply provide the answer.

Students are not allowed to either directly or indirectly contact the companies for which annual reports are used in this assignment. Students are also not allowed to contact analysts directly or indirectly to gather information and/or advice about this assignment. Students must base their analyses purely on the information that is provided on the company’s website and/or on the Australian Stock Exchange.

In all your calculations, show the absolute figures from the financial statements. Also support any arguments with absolute figures from the financial statements.

Retain a copy of your assignment for your records.

Don’t:

• Spend time unnecessarily paraphrasing any information provided in the course material and textbooks.
• Just simply identify and mention the issue. You need to elaborate on it, explain exactly what you mean and justify your arguments with the help of literature where appropriate.

Task

Assignment question

Your task is to compare and contrast the historical (for the last 2 years – 2014 and 2015) and expected future performance of Wesfarmers Limited(a listed company) and Woolworths Limited(a listed company) a competitor in the same industry, and present your findings in the form of an executive report which will cover quantitative performance elements in a logical cohesive format.Please use the figures provided in the most recent annual reports. You must use the ratios and formulae given in chapter 8 of the prescribed textbook. Show all the formulae and absolute figures used in calculating all the ratios as an appendix. You do not have to show any graphs to illustrate trends in the ratios. Show ALL your calculations. You will note marks are provided for correct figures. Partial marks can only be provided if you provide your workings and the marker can identify where you went wrong in the calculations.

The executive report based on quantitative analysis should include (butis notconstrainedto):

• An executive summery
• A brief introduction on each company including how they are placed within the industry.
• An initial analysis of trends in the items contained in the profit and loss statements, balance sheets and statements of cash flows; appropriate relevant ratios measuring Profitability (Return on Assets and Net Profit Margin), Liquidity (Current Ratio and Quick Ratio),Capital structure (Debt to Equity Ratioand Equity Ratio) and Market performance (Earnings per share and Dividend per share).
• A highlighting of the most important changes within these ratios and an identification of the reasons for these changes.A comparison of the quantitative analysis for the two companies on Profitability, Asset efficiency, Liquidity, Capital structurean identification of the reasons for any differences.
• Conclusions - You should include a conclusion in which you comment on the strengths and weaknesses of your overall analysis encompassing what your analysis has accomplished and what are its limitations.

Executive Summary

Present report studies the financial performance of Woolworths Limited and its competitor company Wesfarmers Ltd. Ratio analysis is performed for the financial years ended June 2015 and June 2014. The report starts with a brief discussion of both the companies and their standing in the industry. This is followed by ratio analysis and at last conclusion and recommendations are provided.

Introduction

Woolworths Ltd is a retail sector company mainly based at Australia and New Zealand. It is listed at various stock exchanges including Australian Stock Exchange(Woolworths, 2015). Woolworths Ltd has a diversified based of business which includes retail shops, liquor shops, hotels, gaming stations etc. Woolworths Ltd is largest food retailer, largest liquor seller and largest food retailer of Australia. First Woolworths store was opened in year 1924 and now it has thousands of retail stores in Australia and New Zealand.

Wesfarmers Ltd is also one of the largest retail sector company of Australia(ASX, 2016). It is also listed at Australian stock exchange. Wesfarmers Ltd was incorporated as Western Farmers Ltd, in the year 1914. This group has diversified its business by acquiring several other business divisions. Wesfarmers has a larger manpower and is the largest employer company of Australia.

Trend and Ratio analysis

Woolworths Ltd

Profitability of Woolworths has shown a deteriorating trend. NP margin was 4.03% in the year 2014, which declined to 3.51% in the year 2015. In the same way ROA ratio was 10.19% in the year 2014 which deteriorated to 8.44%. The net profit and sales has shown a decline and there is increase in the total assets, and all these factors has contributed to a deterioration of the profitability(Atrill, 2012).

Liquidity of Woolworths has shown a deteriorating ratio(Arnold, 2013). The current ratio was 0.95, which deteriorated to 0.84 in the year 2015. The quick ratio was 0.32, which deteriorated to 0.30 in the year 2015.

The debt to equity ratio has shown an improved as it moved from 0.17 in the year 2014 to 0.12 in the year 2015. A lower value of debt ratio indicates a lower debt gearing, which is good for the company. The equity ratio was 0.44 in the year 2014, which indicates that 44% of the total assets are financed by the equity.

There is a decline in the earnings per share, as EPS deteriorated to 1.71 cents in the year 2015. This is due to declining profits. However in order to make a momentum in the market Woolworths Ltd, declared dividends on the higher side. Management has declared the dividend from retained earnings also.

Wesfarmers Ltd

Profitability of Wesfarmers Ltd has shown an improving trend. The net profit margin was 2.51% in the year 2014, which improved to 3.91% in the year 2015. In the same way ROA ratio was 3.80% in the year 2014, which improved to 6.04% in the year 2015.

However, Wesfarmers has weakened on liquidity front as current ratio deteriorated to 0.93 in the year 2015 from value of 1.13 in the year 2014. In the same way quick ratio also deteriorated to 0.37 in the year 2015. Current ratio indicates the ability of the company to pay its liabilities out of current assets and quick ratio indicates the ability of the company to pay its current liabilities out of quick assets.

The debt to equity ratio was consistent in both years at 0.11. In the same way equity ratio was also consistent at 0.61 in the both year(Brigham & Ehhardt, 2014). However there was movement in both the equity and debt.

Despite an increase in the earnings, the EPS ratio has shown deterioration due to increase in the capital. This is also reflected as a deterioration in the dividends per share ratio.

Highlights

Woolworths has shown a deteriorating trend while Wesfarmers has shown an improving trend, as far as profitability is concerned. However the return on assets provided by Woolworths is better than Wesfarmers(Brigham & Ehhardt, 2014). Return on assets ratio is particularly important for the investors.

For liquidity, both the companies has shown a deteriorating trend. However Wesfarmers has performed better than Woolworths as far as liquidity is concerned(Grahman & Hazarika, 2011). A better liquidity position indicates a command on the working capital management, which both the companies fail to display.

The gearing ratio of Wesfarmers appears to be more consistent as compared to Woolworths. However the gearing of both the companies is under control. A lower gearing company is considered as less risky as equity component is on the higher side

EPS of Woolworths has shown a deteriorating trend due to decline in profits, while EPS of Wesfarmers has shown a deteriorating trend due to increase in no. of shares. Besides that EPS and DPS of Wesfarmers is on the higher side as compared to Woolworths(Andrew, 2009). However management of Woolworths has paid higher dividends as compared to its earnings in the year 2015, i.e. from the retained earnings.

Conclusion

Ratio analysis is a type of quantitative analysis, and it is based upon the historical data. There is no certainty that the past years trend shall be repeated in future. Besides that ratio analysis is based upon the accounting numbers which can be manipulated by the companies and thus ratio analysis may be impacted. Ratio analysis does not includes the qualitative factors and sometimes qualitative factors may be more important than the quantitative factors. However, the importance of ratio analysis cannot be denied and it is used as a popular analysis tool.

Recommendation

A comparison of both the companies indicates that Wesfarmers outperform Woolworths in every area except the profitability. However, it may be noted that profitability of Wesfarmers is showing an improving trend and this is a good sign. Thus it is recommended that investment should be made in Wesfarmers Ltd, due to its improving financial performance and strong balance sheet.