Unit 101 FINANCIAL MANAGEMENT

The Wesfarmers Annual Report Analysis

SUBMISSION DATE: 21/10/2014

STUDENT NAME: Ahmed Mohamed Abd El Aziz Saleh
STUDENT ID: 872001
Location: Al Ain, UAE

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1. Executive Summary
Based on our review of the financial data form the annual report of the year 2011. Hereunder we will use
consolidated figures to calculate the following ratio for 2010 and 2011.

Short-term solvency or liquidity ratios

Efficiency ratios
Profitability ratios
Long-term solvency or financing ratios
Market-based investment and other ratios

Nevertheless in the below report we will conduct evaluation of the performance and financial standing of the
company based on the ratios calculated.
The below figure 1 is summary of the last five year financial history of Westfarmers in which we will focus on
2010 and 2011
http://www.wesfarmers.com.au/ accessed online 19/10/2014

Figure (1) Five year financial history

Full-year ended 30 June ($m)1

2014

2013

2012

2011

2010

Revenue

62,348

59,832

58,080

54,875

51,827

EBITDA

5,273

4,729

4,544

4,155

3,786

(1,123)

(1,071)

(995)

(923)

(917)

EBIT

4,150

3,658

3,549

3,232

2,869

Finance costs

(363)

(432)

(505)

(526)

(654)

(1,098)

(965)

(918)

(784)

(650)

2,689

2,261

2,126

1,922

1,565

SUMMARISED INCOME STATEMENT

Depreciation and amortisation

Income tax expense

NPAT

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Full-year ended 30 June ($m)1

2014

2013

2012

2011

2010

Profit from continuing operations2

1,605

2,128

n.a.

n.a.

n.a.

Profit from discontinued operations2

1,084

133

n.a.

n.a.

n.a.

Total assets

39,727

43,155

42,312

40,814

39,236

Total liabilities

13,740

17,133

16,685

15,485

14,542

Net assets

25,987

26,022

25,627

25,329

24,694

3,401

5,259

4,904

4,343

4,035

3,226

3,931

3,641

2,917

3,327

(1,216)

(1,672)

(2,351)

(1,846)

(1,626)

Investing cash flows

952

(1,760)

(2,169)

(1,876)

(1,696)

Financing cash flows

(3,444)

(1,965)

(1,242)

(1,784)

(2,115)

4,178

2,171

1,472

1,041

1,631

SUMMARISED BALANCE SHEET

Net debt

SUMMARISED CASH FLOW STATEMENT

Operating cash flows
Net capital expenditure

Free cash flow

DISTRIBUTIONS TO SHAREHOLDERS (CENTS

PER SHARE)

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Full-year ended 30 June ($m)1

2014

2013

2012

2011

2010

85

77

70

65

55

Final ordinary dividend per share

105

103

95

85

70

Full-year ordinary dividend per share

190

180

165

150

125

10

200

180

165

150

125

50

Earnings per share (cents per share)

234.6

195.9

184.2

166.7

135.7

Operating cash flow per share (cents per

share)3

281.0

339.7

314.6

252.1

287.5

Cash realisation ratio (%)4

92

118

117

103

129

Return on equity (R12, %)

10.5

8.9

8.4

7.7

6.4

Net tangible asset backing per share ($ per

share)

6.14

4.69

4.45

4.12

3.61

Interest cover (cash basis) (R12, times)

15.9

12.2

10.8

9.5

6.8

3.2

3.0

2.9

2.7

2.4

Interim ordinary dividend per share

Special dividend per share

Total dividend per share
Capital return paid per share

KEY PERFORMANCE METRICS

Fixed charges cover (R12, times)

http://www.wesfarmers.com.au/investors/shareholder-information/five-year-financial-history.html accessed online

on 19/10/2014

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Table of Contents
Unit 101 FINANCIAL MANAGEMENT ............................................................................................................................. 1
The Wesfarmers Annual Report ANALYSIS ....................................................................................................................... 1
1.

Executive Summary .................................................................................................................................................. 2

Figure (1) Five year financial history................................................................................................................................. 2

Table of Contents ............................................................................................................................................................. 5
Table of Figures ................................................................................................................................................................ 5
2.

Introduction .............................................................................................................................................................. 6
The company aims to achieve this by:.......................................................................................................................... 6
Our objective ................................................................................................................................................................ 6
Proud history, strong future ......................................................................................................................................... 6
Stock exchange listing................................................................................................................................................... 7
Wesfarmers Ltd. Business Description: ........................................................................................................................ 7

3.

Question 1 ................................................................................................................................................................ 7
Ratio analysis results for the years 2011 & 2010 ......................................................................................................... 7

4.

Question 2 .............................................................................................................................................................. 12

5.

Conclusion ................................................................................................................. Error! Bookmark not defined.

6.

References .............................................................................................................................................................. 16

Table of Figures
Figure (1) Five year financial history ................................................................................................................. 2

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2. Introduction
Wesfarmers is the largest conglomerate operating in Australia and New Zealand, with operations in
retail, insurance, and industrial products. Retail is the companys primary business and includes some of
Australias major outlets - Coles, Bunnings, Officeworks, Target and Kmart. Coles accounts for close to
50% of group sales and 42% of group operating earnings. As such, it is the major determinant in the
valuation of WES. The turnaround of Coles has been an operational success, however sales momentum
is easing with incremental gains harder to come by. Although the outlook for the Australian grocery
market is generally positive, underpinned by ~1.5% per annum population growth, a rapid industry-wide
(Aldi, Costco, Woolworths) roll-out of new stores may dilute returns. Wesfarmers has a strong position in
each of its segments and a track record of growing earnings and widening profit margins. However,
based on our intrinsic valuation, this record of success is more than accounted for in the current share
price.
Strength through diversity. From its origins in 1914 as a Western Australian farmers cooperative, Wesfarmers
has grown into one of Australias largest listed companies.
Headquartered in Western Australia, its diverse business operations cover: supermarkets; department stores;
home improvement and office supplies; coal mining; insurance; chemicals, energy and fertilisers; and industrial
and safety products. Wesfarmers is one of Australias largest employers and has a shareholder base of
approximately 500,000.

The company aims to achieve this by:

Satisfying the needs of customers through the provision of goods and services on a competitive and professional
basis;
Providing a safe and fulfilling working environment for employees, rewarding good performance and providing
opportunities for advancement;
Contributing to the growth and prosperity of the countries in which it operates by conducting existing operations
in an efficient manner and by seeking out opportunities for expansion;
Responding to the attitudes and expectations of the communities in which the company operates;
Placing a strong emphasis on protection of the environment; and
Acting with integrity and honesty in dealings both inside and outside the company.

Our objective
Wesfarmers remains committed to providing a satisfactory return to shareholders.

Proud history, strong future

Steeped in a foundation of distribution and retailing since its formation, today Wesfarmers is one of Australias
leading retailers and diversified industrial companies.

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Stock exchange listing

Wesfarmers is a company limited by shares that is incorporated and domiciled in Australia.
Australian Securities Exchange (ASX) listing codes:
Wesfarmers (WES)
Wesfarmers Partially Protected Shares (WESN)

Wesfarmers Ltd. Business Description:

Wesfarmers Limited (WES) is a diversified business operating supermarkets, department stores, home
improvement and office supplies, insurance, resources, chemicals, energy and fertilizers, and industrials & safety
products.
WES is headquartered in Western Australia, having operating revenue of 54.875 Billion $ (as per the financial
annual report for the year 2011).
http://markets.theaustralian.com.au Accessed online on 15/10/2014

3. Question 1
The below analysis is divided into two sections; the first section Financial results for the years 2011 & 2010 is
calculating the financial ratios shown below for the years 2011 & 2010:
1.11.21.31.4-

Short-term solvency or liquidity ratios

Efficiency Ratios
Profitability Ratios
Long-term solvency or financing ratios

The second section of the analysis Financial analysis report for the year 2011 presents the analysis of the
financial ratio calculation results extracted from the first section of the report by comparing the results for the
year 2011 with their corresponding results for the previous year 2010; this comparison is analyzing the company's
financial performance.

Ratio analysis results for the years 2011 & 2010

1.1- Short-term solvency or liquidity ratios
a) Current ratio
Formula =
Current ratio for year 2010 =
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= 1.23:1

 Current ratio for year 2011 =

= 1.17:1

b) Quick ratio
Formula =

Quick ratio for year 2010 =

= 0.6388:1

Quick ratio for year 2011 =

= 0.667:1

c) Cash Flow from Operations to current liabilities

Formula =
Cash Flow from Operations to current liabilities for year 2010 =

= 0.423$

Cash Flow from Operations to current liabilities for year 2011 =

= 0.3344$

1.2- Efficiency Ratios

d) Debtors Turn over
Formula =
Where n is the previous year and n+1 is the following year
Debtors Turn over for year 2010 =

= 28.32

Debtors Turn over for year 2011 =

= 28.02

e) Average days sales uncollected

Formula =
Average days sales uncollected for year 2010

= 12.88 days

Average days sales uncollected for year 2011

= 13.026 days

f) Inventory turnover
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Formula =
Inventory turnover for year 2010 =

Inventory turnover for year 2011 =

= 10.70
= 10.97

g) Inventory turnover in days

Formula =
Inventory turnover in days for year 2010 =
Inventory turnover in days for year 2011 =

= 34.11
= 33.27

1.3- Profitability Ratios

h) Net Profit Margin
Formula =
Net Profit Margin for year 2010 =

= 3.01%

Net Profit Margin for year 2011 =

= 3.5%

i) Interest cost as percentage of sales

Formula =
Interest cost as percentage of sales for year 2010

= 1.26%

Interest cost as percentage of sales for year 2011

= 0.95%

j) Asset turnover
Formula =
Asset turnover for year 2010 =
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= 1.32

 Asset turnover for year 2011 =

=1.37

k) Return on Assets
Formula =
Return on assets for year 2010 =

= 7.32%

Return on assets for year 2011 =

= 8.07%

l) Return on Ordinary Shareholders equity

Formula =
Return on Ordinary Shareholders equity for year 2010
=

= 6.4%

Return on Ordinary Shareholders equity for year 2011

=

= 7.7 %

1.4- Long-term solvency or financing ratios

m) Debt to equity
Formula =
Debt to equity for year 2010 =

= 0.588

Debt to equity for year 2011 =

= 0.611

n) Debt to total assets

Formula =
Debt to total assets for year 2010 =
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= 0.396

 Debt to total assets for year 2011 =

= 0.379

o) Interest coverage
Formula =
Interest coverage for year 2010 =

= 4.38

Interest coverage for year 2011 =

= 6.14

p) Cash Flow from operations to total liabilities

Formula =
Cash Flow from operations to total liabilities for year 2010 =
Cash Flow from operations to total liabilities for year 201 =
q) Price/Earnings (P/E)
Formula =
Price Earnings for year 2010 =

= 20.25

Price Earnings for year 2011 =

= 19.1

r) Dividend yield
Formula =
Dividend yield for year 2010 =

= 4.55%

Dividend yield for year 2011 =

= 4.71%

s) Dividend Cover
Formula =
Dividend cover for year 2010 =
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= 1.1849

= 0.228
= 0.188

 Dividend cover for year 2011 =

= 1.239

t) Net tangible asset backing

Formula =
Net tangible asset backing for year 2010 =

= 3.6

Net tangible asset backing for year 2011 =

= 4.1

4. Question 2
Evaluate the performance and financial standing of the company
based on the ratios calculated in
Question 1
Short-term solvency Analysis report
The current assets increased but the current liabilities increased as well, this increase in the current
liabilities has led to decrease in the current ratio, which is considered as bad indicator. The Current ratio
for the year 2010 was 1.23:1 and has become 1.17:1 for the year 2011 which means that the company was
having 1.23$ of current assets for every 1$ of current liability , and this value is decreased in 2011 to be
1.17$ of current assets for every 1$ of current liability

When applying the Quick ratio analysis by subtracting the Inventory from the current assets then dividing
the value by the current liabilities, the quick ratio for the year 2010 was 0.6388:1 and has increased to
become 0.667:1 for the year 2011 which is considered as good indicator. The increase in the quick ratio
while decrease in current ratio reflects that the increase in Inventory has affected the companys liquidity.

When performing Cash flow from operations to current liabilities for the years 2010 & 2011 , the
operating cash flow has decreased from 3,327(M)$ in the year 2010 to 2,917(M)$ , on the contrary the
current liabilities has increased from 7,852(M)$ for the year 2010 to 8,722(M)$ for the year 2011.
Accordingly the cash flow from operations to current liabilities ratio has decreased from 0.423$ for the
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year 2010 to 0.3344$ for the year 2011 which is considered as bad indicator affecting the companys
liquidity

Efficiency Ratios Report

Debtors turnover ratio analysis shows the efficiency of company sales with respect to the average of
account receivables .The debtors turnover ratio has decreased from 28.32 for the year 2010 to 28.03 for
the year 2011 which is considered as bad indicator. When analyzing, the Net sales has increased from
51,827(M) $ in the year 2010 to 54,875(M) $ in the year 2011, but the account receivables has decreased
from 1,893(M) $ in the year 2009 to 1,767(M) $ in the year 2010, then increased back to be 2,149(M) $ in
the year 2011
Based on the Debtors turnover ratio, the average days sales uncollected has slightly increased; where it is
the time taken to collect debtors accounts.
This period has increased from 12.88 days for the year 2010 to 13.06 days for the year 2011 which is
considered as bad indicator on the companys efficiency
This period will be decreased when the debtors turnover ratio will be increased.

Inventory turnover has slightly increased from 7.381 in the year 2010 to 7.57 in the year 2011 although
the average inventory has increased from 4661.5 (M) $ for the years (2009 & 2010) to be 4822.5(M) $ for
the years (2010 & 2011), this is because the cost of goods sold has increased from 34,411 (M) $ in the
year 2010 to 36,515 (M) $ in the year 2011. The increase in the Inventory turnover ratio is considered as
good indicator.

Due to the increase in the Inventory turnover ratio, the inventory turnover in days which reflects the
number of days required to convert inventory into sales has decreased from 49.45 days in the year 2010 to
48.21 days for the year 2011 which is considered as good indicator.

Profitability Ratios Report

The Net Profit Margin has increased from 3.01% for the year 2010 to 3.5% for the year 2011; which is
considered as good indicator because the profit produced by each dollar of sales after payment of interest
has increased from 3.01 cents in the year 2010 to 3.5 cents in the year 2011

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Interest cost as a percentage of sales has decreased from 1.26% for the year 2010 to 0.95% for the year
2011 which is considered as good indicator.

The asset turnover ratio has slightly increased from 1.32 in the year 2010 to 1.37 in the year 2011
although the average assets has increased from 39,149(M) $ for the years 2009&2010 to 40,025 (M) $ for
the years 2010&2011, but the increase in sales from 51,827 (M) $ in the year 2010 to 54,875(M) $ in the
year 2011 has compensated the increase in average total assets. Although this ratio shows slight increase
from the years 2010 to 2011 which is considered as good indicator, the increase in assets has to be well
monitored and controlled

Return on assets ratio has increased from 7.32% for the year 2010 to 8.07% for the year 2011 , which
means that for every 1$ of assets the number of cents earned has increased from 7.32 cents to 8.07 cents
which is considered as good indicator.
The Return on ordinary shareholders equity has increased from 6.39% for the year 2010 to 7.68% for the
year 2011 which reflects that the profitability of shareholders equity is increased by 1.25% which is
considered as good indicator.

Long-term solvency ratios Report

Debt to equity ratio analysis shows that the relation between debts to equity has increased from 0.588 for
the year 2010 to 0.611 for the year 2011.The increase in debt to equity is considered as bad indicator
affecting the companys long term solvency because it reflects that the business relies more on external
lenders

Debt to total assets ratio analysis shows that the proportion of total assets financed by debts has decreased
from 0.396 for the year 2010 to 0.379 for the year 2011.The decrease in debt to total assets is considered
as good indicator because it reflects that the business relies less on debts for buying assets

Interest coverage ratio analysis has increased from 4.38 for the year 2010 to 6.14 for the year 2011. The
ratio is above 1 for both years 2010 & 2011 which reflects that the company the income before interest
and tax of the business safe to pay off all interest expense. The increase in Interest coverage ratio from
4.38 for the year 2010 to 6.14 for the year 2011 which is considered as good indicator.
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When performing Cash flow from operations to total liabilities for the years 2010 & 2011 , the operating
cash flow has decreased from 3,327(M)$ in the year 2010 to 2,917(M) $ on the contrary the total
liabilities has increased from 14,542(M) $ for the year 2010 to 15,485 (M) $ for the year 2011.
Accordingly the cash flow from operations to total liabilities ratio has decreased from 0.228 for the year
2010 to 0.188 for the year 2011 which is considered bad indicator affecting the companys long term
solvency

Price/Earnings ratio analysis shows that the ratio has decreased from 20.25$ for year 2010 to 19.1$ for the
year 2011.The decrease in the P/E ratio reflects that the market does not have much confidence in the
future of the shares of the company which is considered as bad indicator

Dividend yield ratio analysis shows that the ratio has increased from 4.55% for the year 2010 to 4.71% for
the year 2011 where the increase is considered as a good indicator because the investors use this ratio to
perform trend analysis of the company, having dividend yield ratio increasing year after year, investors b
confident to invest in the company.

Dividend cover ratio analysis shows that the ratio has increased from 1.1849 for the year 2010 to 1.239 for
the year 2011, which means that the ability of the company to pay ordinary dividends to shareholders out
of profit earned has increased from 1.18 to 1.23 times which is considered as good indicator.

Net tangible assets backing ratio has increased from 3.6$ for the year 2010 to 4.1$ for the year 2011, this
reflects that the value per ordinary share based on net tangible assets has increased from 3.6$ for the year
2010 to 4.1$ for the year 2011with increase of 0.51$, which is considered as good indicator.
http://www.wesresources.com.au/sites/default/files/publications/2010%20Wesfarmers%20Annual%20Report.pd
f

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5. References

http://www.wesfarmers.com.au/ accessed online on 15/10/2014

Unit 101 Financial Management Study Material

Wesfarmers Annual Report 2010

(http://www.wesresources.com.au/sites/default/files/publications/2010%20Wesfarmers%20Ann
ual%20Report.pdf) accessed online on 15/10/2015

Wesfarmers Annual Report 2011 (with the support from Chiefly student)

Figure 1 - Five year financial history (http://www.wesfarmers.com.au/investors/shareholderinformation/five-year-financial-history.html) accessed online on 19/10/2014

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