Financial Analysis Assignment Evaluating Economic Implications of Wesfarmers Limited

Question

Task: For this financial analysis assignment, select a company that is currently listed on the ASX.
Write a Financial Analysis Report that interprets the company’s most recent annual report. This report will need to be written for a stakeholder (external investor or internal manager).

Research additional information beyond the annual report about the company’s performance. Use the group financial results if the annual report presents financial results for the group and parent company.
Justify the selection of financial and non-financial performance indicators that are relevant for evaluating the company’s financial performance.

Answer

Executive summary
The financial analysis assignment report is prepared on Wesfarmers Limited, a well-known conglomerate across Australia to analyse the investment attractiveness of the organisation. In the pandemic-struck situation, its financial performance has suffered. Simultaneously, there are certain positive signs like the business experienced a fillip in its online sales enhancing its revenue. There are financial concerns like profitability affecting the investment decision but financials like the P/E ratio showed that the organisation has the immense potentiality to encase the market. So it is highly recommended to the investors to subscribe to the Wesfarmers stock as it has the potentiality to deliver in the future keeping aside the aspect of declining profitability in the current business scenario.

Introduction
The report would shed on the financial and economic implications of the Perth based Australian conglomerate, Wesfarmers Limited. The organisation is known for a range of businesses like retailing, chemicals, mining, fertilizers, and industrial and safety products. In 2016, Wesfarmers earning $66 billion in revenue became the biggest Australian company and is the biggest private employer having staff numbering 220,000(wesfarmers, 2020). The purpose of the report is to run the financial and non-financial analysis to suggest improvement in the organisational performance and whether the company stocks are worth buying.

Analysis
The analysis portion lay forth the investment attractiveness of the organisation in terms of profitability, liquidity, efficiency, and investment capability enabling the potential investor to make a suitable investment decision.

Return on equity –

Source: (Wesfarmers.com.au, 2020)

From the graph above, it is clear that the ROE reduced from 55.26% in 2019 to 17.57% in 2020 because its net income reduced drastically owing to the pandemic situation prevalent in the market. It gives the impression that Wesfarmersis losing its capability to deliver suitable profitability to the investors(Warren & Jones, 2018).

Net profit margin –
The net profit margin shows that the figure dropped from 19.73% in 2019 to 5.50% in 2020. The decline in the figure is due to the expenses incurred by Wesfarmers in the current year leading to reduced organisational profitability(Maynard, 2017).

Source: (Wesfarmers.com.au, 2020)

Days inventory turnover –

Source: (Wesfarmers.com.au, 2020)

The efficiency aspect of Wesfarmers is shown through the day’s inventory turnover which was 60.98 days in 2019 reducing to 50.95 days in 2020. It implies that the business has been able to dispose of its inventories well than the previous year due to the development of the retailing segment on account of the pandemic scenario(Vishny & Zingales, 2017).

Quick ratio –

Source: (Wesfarmers.com.au, 2020)

Quick ratio determines the organisational liquidity and the above figure shows that Wesfarmers increased its liquidity from 0.40 in 2019 to 0.58 in 2020. It indicates that the business has increased its resources to save itself from the risk of bankruptcy and in a comfortable position to pay the obligations timely(Malmendier, 2018).

P/E ratio –

Source: (Wesfarmers.com.au, 2020)

Price-earnings or P/E ratio shows the potentiality of the business to garner superior profitability in the upcoming future(Warren & Jones, 2018). The P/E ratio of Wesfarmers increased from 7.13 in 2019 to 29.78 in 2020 indicating that the conglomerate has the huge potentiality to deliver to its investors.

Interpretation
The financial performance of Wesfarmers points out that in the recent year, say 2020 has not been favourable for its profitability and the blame is definitely on the ongoing pandemic situation. The resultant decline in profitability as shown through the ROE, net profit margin but the situation wascontrolled to a great extent owing to its retailing business(Vishny & Zingales, 2017). The pandemic scenario tended forambiguity among the buyers making them flock to the retail stores and hoard essentials. This particular phenomenon helped the retail stores of Wesfarmers to have record sales and this could be better understood by its improved turnover ratio. The financial performance of Wesfarmers could not be adjudged in the context of the COVID scenario as these are abnormal times but still, its potentiality could be understood by its skyrocketing P/E ratio.

Besides the financial interpretation, the non-financial interpretation ought to be understood. Wesfarmers Limited has strived to adjust to the changing business conditions by adopting the online marketing strategy as it was unable to operate the physical stores due to the lockdown restrictions. Data shows that Wesfarmers recorded an 89% increase in its online sales indicating the success of its online marketing implications as the buyers were staying indoors(Reuters, 2020). The targeted segment has access to smartphones and internet connections at home leading them to place orders online and helped Wesfarmers achieved the wonderful feat. Therefore, Wesfarmers is striving to attain sustainability in the uncertain market as the market is gradually shifting towards the online business model. The conglomerate is grabbing the business opportunity and paving for a favourable business situation to continue its spree despite the cease of its physical operations.

Wesfarmers has the practice of setting aside a small fraction of its compensation as salary and the non-salary benefits are linked to the overall performance of the organisation. The same practice is also relevant for the top executives of the company showing an eagerness among the staff to work for the betterment to get a good deal in non-salary benefits. For June 2020, the total compensation was $7.76 million having a salary worth $2.33 million against company earnings at $1.62 billion(AFR, 2020). So the organisation strives to provide a good deal to the staff by motivating them to elevate their performance and get effective business deals. Considering the ongoing pandemic crisis, Wesfarmers is exerting a health and safety practice across its stores for its staff and the visitors.This is to avert the crisis and carry on the business posing as an effective sustainability effort.

Conclusion
The report clearly states that Wesfarmers could increase its sales revenue owing to online sales strategy amidst the lockdown scenario. This strategy has been able to sustain the difficult times for the company and the company strives to continue the practice in the upcoming future as well.For an investor, it is important to go through the financials to make an investment decision.The improving P/E ratio owing to the rise in its online sales strategy seems to be favourable for the conglomerate. Therefore, it is highly recommended for the investors to invest in Wesfarmers stock owing to the high P/E ratio as it would enable the investor to extract a higher return in the upcoming future. Accordingly, certain recommendations are provided to strengthen the business performance of Wesfarmers enabling the investors to make a suitable business decision –
• The business ought to improve its liquidity to avoid the risk of bankruptcy.
• The online sales strategy needs to be focused on for a better outcome and to leave an impression in the market.
• The expenses are rising and since it is adopting the digital strategy, measures ought to be taken to reduce the expenses for improved profitability.

Bibliography
AFR. (2020, November 26). WES News, Analysis, Announcements & Results | Wesfarmers Limited | AFR. Retrieved from afr.com: https://www.afr.com/company/asx/wes

Malmendier, U. (2018). Behavioral corporate finance. In Handbook of Behavioral Economics: Applications and Foundations 1 (pp. 277-379). London: North-Holland.

Maynard, J. (2017). Financial accounting, reporting, and analysis. London: Oxford University Press.

Reuters. (2020, June 09). UPDATE 1-Virus-driven lockdown bumps Wesfarmers online sales up 89%. Retrieved from reuters.com: https://in.reuters.com/article/wesfarmers-outlook/update-1-virus-driven-lockdown-bumps-wesfarmers-online-sales-up-89-idINL4N2DL3TV

Vishny, R., & Zingales, L. (2017). Corporate Finance. Financial analysis assignmentJournal of Political Economy, 125(6), 1805-1812.

Warren, C., & Jones, J. (2018). Corporate financial accounting. London: Cengage Learning.

wesfarmers. (2020, November 10). Our businesses. Retrieved August 04, 2020, from Wesfarmers.com.au: https://www.wesfarmers.com.au/our-businesses/our-businesses

Wesfarmers.com.au. (2020, November 26). Reports. Retrieved from Wesfarmers.com.au: https://www.wesfarmers.com.au/investor-centre/company-performance-news/reports

Appendix