Financial Stability Analysis of Wesfarmers Limited

Question: Discuss about the Financial Stability Analysis of Wesfarmers Limited. Answer: Introduction The current study deals with detailed financial analysis of Wesfarmers Limited, giant retail corporation in Australia listed under the Australian Stock Exchange. In the present study, key ratio has been calculated for detailed scrutiny as well as understanding of various facets of profitability, efficiency, liquidity, solvency of the company Wesfarmers Limited. The current report elucidates in detail the background of the company Wesfarmers and analytically examines the financial statements of the company. Background of the company Wesfarmers is a well-known publicly traded Australian conglomerate that mainly functions in the retail industry of both Australia as well as New Zealand. Furthermore, the corporation Wesfarmers also functions in the business divisions of chemical products, coal mining, diverse fertilizer products in addition to different industrial as well as safety products. Wesfarmers is considered as the largest firm of Australian from the perspective of revenue and the business concern has outdone the performance of another retail giant, named Woolworths Limited as well as the mining corporation BHP Billiton (Wesfarmers.com.au, 2017). Analysis: Ratio Analysis of the financial statements of Wesfarmers Limited for the period 2014 and 2015: Profitability Ratio: As rightly indicated by Easton (2015), profitability ratio assists in carrying out comparison between different items of the income statement and at the same time helps in pointing out the potential of the firm to generate profits from daily business functionalities. Gross Margin Ratio: Gross margin ratio indicates the profitability condition of a particular corporation and requisite information can be acquired from the annual report of the firm for the financial period 2014 and 2015. Business concern having high gross margin ration indicates that the corporation will have greater amount of money for disbursement of diverse operating expenses, namely salaries and wages, rent as well as payments for utilities among many others (Pervan Kuvek, 2013). From the above table and graph, it can be hereby ascertained that Wesfarmers Limited has a gross margin ration of 31% both during the year 2014 as well as 2015. This shows that the profitability has remained at identical position with no significant change during this particular period of two years 2014 and 2015. However, the high gross margin ratio points out towards the fact that the company Wesfarmers will have higher amount of money to pay off its different operating expends such as the salaries and wages, rent, rates and taxes along with payments for utilities. Furthermore, this ratio also assists in enumerating profits from the sale of firms inventory and helps in calculating overall sales percentage for financing other business actions for analysis in the future. Net Profit Margin: Henderson et al., (2015) opines that the net profit margin assists in predicting a clearer picture of the profitability of a corporation as it is enumerated after adjustments of different non-operating expends incurred by a specific corporation. Table 2 of Appendix illustrates the net profit margin of Wesfarmers during the two financial year 2014 and 2015. During the year 2014, Wesfarmers has registered a net profit margin of 0.044 whereas during the year 2015, Wesfarmers has recorded a net profit margin of 0.040. This ratio indicates the overall sales percentage that is required to make up the specific net income of the firm. As such, it enumerates profits at diverse level of sales and measures the companys potential to manage the expenses in association to the sales (Weygandt et al., 2015). However, the net profit margin of Wesfarmers has decreased during the year 2015 although by an insignificant amount. This indicates an unfavourable financial condition for the company as higher the ratio it is better. Liquidity Ratio: As correctly indicated by Muscettola (2015), liquidity ratio assists in analytically evaluating the potential of a business concern in making payments for the current liabilities as and when they become current. In addition to this, the liquidity ratio also points out towards the cash in a corporation along with the capability of the corporation to transform diverse particularly assets into business cash for repayment of the liabilities in addition to other current obligations (Collier, 2016). Current Ratio: This particular ratio refers to the potential of a firm as regards their ability to repay the short term obligations (Kaplan Atkinson, 2015). However, the ideal standard of current ratio is 2:1 as this indicates adequate current assets for meeting the short term requirements of the corporation. Table 3 of Appendix represents the fact that Wesfarmers registered a current ratio of 1.13 in 2014 as well as 0.93 in 2015. The current ratio of the corporation Wesfarmers Limited has declined during the period 2015 as compared to the previous years figure indicating an undesirable financial condition for the firm. However, the management of the corporation needs to strive to augment the ability of the firm to pay off all its short term obligations in a most suitable way and get it closer to the benchmark ratio of 2:1 (Hoskin et al., 2014). Quick Ratio: This particular ratio refers to the capability of the business concern to convert its available assets into cash for repaying its current obligations or else liabilities (Petty et al., 2015). Table 4 of Appendix reflects the fact that the Wesfarmers recorded a quick ratio of 0.48 during the period 2014. However, the figure for the quick ratio decreased although insignificantly to 0.28 during the period 2015. A decline in the quick ratio witnessed during the period 2015 as compared to the year ago period indicates an unfavourable financial condition as higher ratio indicates a better liquidity condition of the firm. Efficiency Ratio: As rightly indicated by Besley Brigham (2013), the efficiency ratio is a key ratio that indicates the capability of a particular business concern to generate income from the resources or else assets available to the firm. Particularly, the efficiency of a .business concern can be assessed using the ratio of the accounts receivable turnover and the ratio of asset turnover (Adrian et al., 2015). Accounts Receivable Turnover: The accounts receivable ratio indicates the efficiency of a firm and can be calculated by dividing the average sales of the firm in credit by the mean accounts receivable (Lasher, 2013). Table 5 of Appendix replicates that Wesfarmers recorded an accounts receivable turnover ratio of 37.99 during the year 2014 and 42.44 during the period 2015. Therefore, the accounts receivable turnover ratio of the firm Wesfarmers has increased during the period 2015 as compared to the previous years figure. This essentially indicates a favourable financial condition as higher receivable turnover ratio also replicates higher frequency of the overall collection of the firms receivables (Needles et al., 2013). Asset Turnover Ratio: Asset turnover ratio indicates the efficiency or in other words capability of the firm to generate higher figure for sales out of the assets available to the business concern (Delen et al., 2013). Table 6 of Appendix shows that the asset turnover ratio for Wesfarmers is 1.51 as recorded during 2014 and 1.53 during 2015. This figures for this efficiency ratio reflects the fact that the asset turnover of the corporation has augmented during 2015 in comparison to previous years figure although trivially. Nevertheless, higher ratio reflects better financial condition of the business concern as this implies increase in efficiency of the firm to generate greater amount of sales from the available assets (Anwar et al., 2016). Solvency Ratio: Wahlen et al., (2014) mentions that the solvency ratio assists in enumerating the capability of a business concern to sustain business functionalities by means of carrying out comparisons of levels of debt of the firm with the equity as well as assets. Particularly, this ratio intends to identify diverse issues of a going concern along with the abilities of the firm to make payments for long term bills (Weil et al., 2013). Debt to Equity Ratio: Table 7 of Appendix indicates the fact that Wesfarmers has registered a debt to equity (D/E) ratio of 0.34 in 2014 and 0.38 in 2015. The decrease in the debt to equity (D/E) ratio of Wesfarmers during the year 2015 as compared to the year 2014 can be considered to be a favourable financial condition for the firm. This is so because lower debt to equity ratio represents a financially sound business where the company has lowered the levels of debt in comparison to its equity (Brigham Ehrhardt, 2013). Investment Ratio: The price during the year was 36. 57 as recorded during the year 2014 and the price was recorded to be 37.82. The earnings was recorded to be 2689 in the year 2014 and 2440 in the year 2015. Thus, the P/E was registered to be 0.013 in 2014 whereas the P/E was recorded to be 0.0155 in the year 2015. Conclusion: The ratio investigation of the financial statements of Wesfarmers Limited in 2014 and 2015 reveals the fact that net profit margin has decreased in 2015 as compared to the previous year 2014 slightly. Thus, the company needs to strive to generate higher revenue by maintaining the expenses of the company at a constant or else lower level simultaneously. The current ratio of the corporation Wesfarmers has also declined in 2015 as opposed to the figure of 2014. Therefore, the management of the corporation needs to enhance the capability of the firm to settle all its obligations for short period of time and strive to reach the benchmark current ratio of 2:1. In addition to this, the figure for the quick ratio also decreased although insignificantly during the period 2015. Consequently, the management needs to focus on generation of greater quick assets for the working capital requirements of the firm and stabilise the liquidity position of the firm. Furthermore, the company has registere d increase in the accounts receivable turnover ratio during the period 2015 as compared to the previous years figure that in essence indicates a favourable financial condition. The assets turnover ratio of the firm of the firm has also increased during the period 2015. Accordingly, it can be hereby inferred that the company records higher efficiency during the period 2015. In addition to this, the solvency of the firm has also improved as is evident from the lower levels of debt in comparison to equity of the firm. References Adrian, T., Covitz, D., Liang, N. (2015). Financial stability monitoring.Annual Review of Financial Economics,7, 357-395. Anwar, S. 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