Wesfarmers is a cooperative that provides services and products in Australia. The Corporation was established in 1914 (Wesfarmers Limited 2011). The organisation became the largest producers of wheat in 1924. Wesfarmers Cooperative became a limited company in 1940. Wesfarmers products include fertilisers, coal exports, agricultural chemicals, and safety equipment (Wesfarmers Limited 2011).
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The aims of the organisation include customer’s satisfaction, safety, integrity, efficiency, environmental protection and corporate governance. This report provides a detailed analysis of the financial position of Wesfarmers Corporation. To evaluate the company’s stock value, we will study their financial position. Thus, the firm’s, financial performance support its financial growth and shareholder’s strength.
This paper will evaluate five financial performances of Wesfarmers Cooperative. The financial variables include short-term solvency, market-based investment, profitability ratios, efficiency ratios and long-term solvency. As a result, we will evaluate Wesfarmers performance for two financial years.
Using Wesfarmers Annual Report 2011, we computed five financial ratios of the organisation. Finally, the financial review will be from 2010 to 2011.
Table1: Short-term solvency ratio 2010 ($m) 2011 ($m) Average ($m)
|Cash flow from operations to liabilities||42%||33%||38%|
To calculate the solvency ratios of Wesfarmers Corporation, we will apply different financial formulas.
Current ratio = current assets/current liabilities
Thus, for 2010,
9674/7852 = 1.23
10218/8722 = 1.17
Quick ratio = quick assets/current liabilities
Thus, for 2010, = 1640 + 1767 + 1384 + 150 + 75/7852 = 0.64
For 2011, 5231/8722 = 0.60
Operating cash flow from operations to current liabilities = operating cash flow/current liabilities
Thus, for 2010,
3327/7852 = 42%
2917/8722 = 33%
Table 2: Efficiency ratios
2010 2011 Average
|Average days sales uncollected||14 days||14 days||14 days|
|Inventory turnover in days||122 days||146 days||134 days|
Debt turnover = net sales/average debtors
Average days sales uncollected = days in years debtor’s turnover
Inventory turnover = cost of goods sold/average inventory
Inventory turnover in days = days in the year/inventory turnover
Thus debtors turnover = 49865/ (1893 + 1767/2) = 27
Average days sales uncollected = 365/25 = 14 days
Inventory turnover = 9674/ (4665 + 4658/2) = 2
Inventory turnover days = 365/3 = 122 days
Table 3: Profitability ratios 2010 2011 Average
|Net profit margin||3.3%||3.7%||3.5|
|Interest cost as a percentage of sales||1.3%||1.5%||1.4|
|Return on asset||5.7%||5.53%||5.62|
|Return of ordinary shareholder’s equity||6.4%||7.7%||7.05|
Net profit margin = net profit/sales
Interest cost as a percentage of sales = interest expense/ sales
Asset turnover = sales/average total assets
Return on assets = net profit + after tax interest cost/average total assets
Return of ordinary shareholder’s equity = net profit – preference dividend/ average ordinary shareholder’s equity
Thus, for 2010, net profit margin = 1565/49865 = 3.3%
Interest cost as a percentage of sales = 650/49202 = 1.3%
Asset turnover = 49856/ (39236 +39062/2) = 1.3
Return on asset = 2215/39149 = 5.7%
Return of ordinary shareholder’s equity = 1565 – 0/ (24248 +24694/2) = 6.4%
Table 4: Long-term solvency ratios 2010 2011 Average
|Debt to equity||0.59||0.61||0.6|
|Debt to total assets||0.37||0.38||0.38|
|Cash flow from operations to total liabilities||22.9%||18.8%||20.5|
Debt to equity = total liabilities / total shareholder’s equity
Debt to total assets = total liabilities /total assets
Interest coverage = net profit + income tax + interest / Interest expense
Cash flow from operations to total liabilities = operating cash flow / total liabilities
Thus, for 2010,
Debt to equity = 14542/24694 = 0.59
Debt to total assets = 14542/39236 = 0.37
Interest coverage = (1565 + 650 + 149) /650 = 3.64
Cash flow from operations to total liabilities = 3327/14542 = 22.9%
Table 5: Market-based ratios 2010 2011 Average
|Net tangible asset backing||$0.87||$0.90||0.9|
Price/Earnings (P/E) = market price per share/earnings per share
Earnings yield = earnings per share/ market price value
Dividend yield = dividend per share /market price per share
Net tangible asset backing = net tangible asset/ number of ordinary shares issued
Thus, for 2010,
Price/ Earnings = 24.48/135 = 0.18
Earnings yield = 135/24.48 = 5.5%
Dividend yield = 135.7/24.48 = 5.54%
Net tangible asset backing = 24694 – 4328/23286 = $0.87
Short-term solvency ratios
Short-term solvency ratios describe a firm’s ability to offset debts and loans. Thus, a firm’s capacity to withstand financial distress is called short-term solvency (AccountingExplained.com 2013). The features of short-term solvency include cash flow from operations, quick ratio, and current ratio. In 2010, Wesfarmers current ratio was 1.2.
By implication, the firm’s current ratio describes the Wesfarmers ability to cover the short-term financial distress. As a result, the firm can offset 1.2 times its liabilities. However, the current ratio dropped in 2011. As a result, the firm’s obligation to repay short-term liabilities dropped from 1.23 to 1.17. Wesfarmers quick ratio was 0.64 in 2010.
Quick ratio describes a firm’s cash reserves and assets. As a result, the organisation can repay sixty four percent of its liabilities. However, the firm’s quick ratio dropped to 0.60 in 2011. Cash flow from operations to liabilities describes a firm’s ability to repay debt using operating cash flows (Anderson 2013).
Wesfarmers cash flow was 42 and 33 percent in 2010 and 2011 respectively. The ratio revealed that the firm can generate cash to pay short-term liabilities. As a result, investors will be willing to become shareholders.
Wesfarmers receivables can be measured by its efficiency ratio. Thus, efficiency ratio describes the firm’s turnover on assets and liabilities. Wesfarmers debtor’s turnover stood at 27 days in 2010 and 2011. By implication, the firm’s debt collection takes longer time.
However, its average sale uncollected was 14 days. Thus, the firm’s capacity to collect the debtor’s account was 14 days. However, its inventory turnover rose from 2 to 3 in 2011. By implication, the firm’s investments increased with inventories (The Brandow Company 2012). Wesfarmers turnover in days describes the number of days to sell its inventories. The firm’s turnover in days dropped from 122 to 146 in 2011.
Net profit margin describes a firm’s capacity to generate revenue after interest payment (Small Business Development Corporation 2012). Wesfarmers net profit margin increased from 3.3 percent in 2010 to 3.7 percent in 2011. As a result, the firm’s internal sales increased by 1 percent. The firm’s interest cost as a percentage of sales rose from 1.3 to 1.5 percent.
By implication, the firm’s cost of interest describes its stability and profitability. Wesfarmers asset turnover shows no sign of increase in 2011. The firm’s average industry was 1.31, which indicates its efficiency in asset turnover.
Return on assets marginally dropped from 5.7 to 5.53 in 2011. By implication, market trends, inflation, and depreciation influenced the firm’s return on assets. Wesfarmers return of ordinary shareholder’s equity rose from 6.4 to 7.7 percent. Thus, the firm’s operating performance was significant in 2011.
Long-term solvency ratios
Long-term solvency describes a firm’s obligation to offset loans (Mike-Bazley 2013). However, the repayment covers a longer period than short-term solvency. Wesfarmers debt to equity ratio rose from 0.59 to 0.61 in 2011. The ratio describes the connection between equity and debt financing (Peavier 2012). However, the firm’s debt to total assets did not increase in 2011. Wesfarmers average industry was 0.38 in 2011.
The ratio describes the portion of assets that cover debt financing. Wesfarmers interest coverage stood at 3.64 in 2010 and 2011. As a result, the firms total liabilities increased from 14,542 to 15, 485 million dollars in 2011. However, the firm’s cash flow from operations to total liabilities dropped from 22.9 to 18.8 percent. Thus, the firm’s asset utilisation and savings will improve its net assets.
The market value of an organisation is determined by its market-based ratios (Morningstar, Inc. 2013). Wesfarmers price per earnings rose from 0.18 to 0.19 in 2011. Thus, the stock price reveals the firm’s market value. Asset allocations are determined by the firm’s earnings yield. As a result, Wesfarmers earnings yield over a 12 year period dropped to 5.23 percent in 2011.
The firm’s dividend yield dropped from 5.54 to 5.23 in 2011. However, its net tangible asset backing rose from 0.87 to 0.90 in 2011. As a result, the firm’s net worth was 25,329 million dollars in 2011. The ratio reveals that Wesfarmers stock value will remain constant during the next fiscal year.
The paper analysed various financial ratios of Wesfarmers Corporation. The financial performance and standings described the firm’s liabilities, assets, equity, and market value. Sale of goods at Wesfarmers organisation rose from 49,865 to 52891 million in 2011. As a result, the firm’s market value increased from 27.48 to 31.85. The firm’s total assets and liabilities were 40,814 and 15,485 million dollars in 2011.
Wesfarmers net asset was increased to 25,329 million dollars in 2011. As a result, the firm’s financial performance increased marginally in 2011. Thus, investors can utilise the market indicators to forecast the strength of the organisation. Consequently, economic analysts can compare the firm’s value with its competitors using its financial performance.
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Peavier, R. 2012, Financial Ratio Analysis Tutorial 101. Web.
Small Business Development Corporation: balance sheets 2012. Web.
The Brandow Company: industry income-expense statements, 2012. Web.
Wesfarmers Limited: Wesfarmers annual report 2011. Web.