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Financial Ratios of Both Wesfarmers and Woolworth

Companies for Assessment 2 for ACC10707 Session 3, 2018.

You will be allocated two companies from this list on MySCU in Mygrades by end week 1. You cannot choose your own companies.

You must complete the assessment task requirements on the companies in the order they are allocated to you in MyGrades. 

APEAP Eagers Limited
 AHGAutomotive Holdings Group Limited


WESWesfarmers Limited
WOWWoolworths



SFHSpecialty Fashion Group Limited
NBLNoni B Limited


BLDBoral Limited
CSRCSR Limited


Answer

ASSESSMENT 2

BUSINESS ANALYSIS AND INTERPRETATION


Executive summary

This report has evaluated and analysed the financial ratios of both Wesfarmers and Woolworth. The report has identified the issues in effective ratio. Wesfarmers has high net profit margin compared to Woolworths. However, in 2016, Woolworths is facing net loss in the financial year of 2016 and so the NPM has decreased by -4%. In relation to the cash cycle period it can be said that Woolworth has gained competitive advantage over Wesfarmers. Moreover, Wesfarmers fails in collecting their debts in the fast manner. Similarly, the company has not been able to pay their debts in a less amount of time. Therefore, Wesfarmers can face business risks in the upcoming years. Finally relevant recommendation has been provided to Woolworth for improving its financial performance.

1.0 Introduction

Evaluating the financial performance of competitors is essential for understanding the current financial position of a company. The present report has evaluated Wesfarmers Ltd and its competitor Woolworths and calculated relevant ratios. Wesfarmers is a large conglomerate company of Australia which is situated in Perth (Wesfarmers, 2018). On the other hand, Woolworths is an Australian supermarket which has been situated in Bella Vista (Woolworths, 2018). After analysing the relevant ratio of these companies, the report has identified the issues in effective ratio. The report has also compared the financial aspect of both companies. Finally, relevant solution has been provided for improving the financial performance of weak company.

2.0 Finding and analysis

2.1 Ratio analysis

Net Profit Margin

Net Profit Margin

Figure 1: Net Profit Margin

(Source: Wesfarmers, 2018; Woolworths, 2018)

In relation to Figure 1, it can be said that Wesfarmers has high net profit margin compared to Woolworths. In 2016, Woolworths has faced high net loss in their business and so the NPM has decreased by -4% (Woolworths, 2018). In 2017, Woolworths has faced high NPM and maintain a constant growth. Nonetheless, compared to Wesfarmers, Woolworths’ net profit growth is slow. Wesfarmers has recognised high NPM of 4% in 2017 and it has remained the same in 2018 (Wesfarmers, 2018).

Assets turnover

Assets turnover

Figure 2: Assets Turnover

(Source: Wesfarmers, 2018; Woolworths, 2018)

The assets turnover calculation is showing that Wesfarmers has maintained assets effectiveness compared to Woolworths. However, the assets turnover of Wesfarmers has continuously decreased over the years. Assets turnover of Woolworths has expanded in 2018 compared to 2017. As a result, the assets effectiveness of Wesfarmers can decrease in upcoming years and Woolworth can gain competitive advantage.

Liquidity ratios

Liquidity ratios

Figure 3: Current and Quick Ratio

(Source: Wesfarmers, 2018; Woolworths, 2018)

The liquidity ratios are showing that both companies have maintained high assets liquidity in 2016. However, current and quick ratios of both companies have rapidly decreased over the years. As a result, Wesfarmers and Woolworths can face difficulties to meet their long-term and short-term debts. This has increased the possibility of insolvency for both companies in the upcoming years. Finally, it has been understood that compared to Woolworths, Wesfarmers has high assets liquidity.

Debt-to-assets ratio

Debt-to-assets ratio

Figure 4: Debt-to-assets ratio

(Source: Wesfarmers, 2018; Woolworths, 2018)

In 2018, the debt-to-assets ratio of Wesfarmers has decreased compared to 2017. Nevertheless, compared to Woolworths the financial debts of Wesfarmers are high in 2018. Due to high debts, Wesfarmers can reduce their cash assets in the recent financial year. Woolworths has a low debt-to-assets ratio of 0.011 in 2017 and from that it has been increased to 0.026 in 2018. The rapid growth of debt-to-assets ratio can increase financial difficulties for Woolworths in future and the company can fail in sustaining their position in the competitive market. 

Cash Cycle

Cash Cycle


Figure 5: Cash Cycle

(Source: Wesfarmers, 2018; Woolworths, 2018)

The cash cycle period is clearly showing that Woolworths has maintained proper day inventory, days debtor and days creditor compared to Wesfarmers. Wesfarmers has failed to collect their debts in the fast manner. Similarly, the company has not been able to pay their debts in a less amount of time. Therefore, Wesfarmers can face business risks in the upcoming years. Finally, Woolworths has faced difficulties in collecting their debts in a fast manner. Nonetheless, this company has paid their debts in a less amount of time. Henceforth, the market risks of Woolworths are less in future years.

2.2 Issues involved in effective ratio

After analysing the effective ratio it has been understood that the Wesfarmers has failed to maintain inventory effectiveness compared to Woolworths. In the recent time the cost of goods sold of Wesfarmers has increased in the business. Therefore, the company can face financial crisis in upcoming years and they can reduce their sales growth. Finally, it has been understood Wesfarmers did not collected and paid their debts in a less time period. Due to the difficulties of collecting debts Wesfarmers cash assets growth has decreased in 2018. Additionally, the business organisation has reduced their market reputation in the current financial year.

On the contrary, it has been understood that Woolworths has maintained appropriate inventory effectiveness compared to Wesfarmers. Therefore, Woolworths has maintained proper sales growth per year. In addition to that, it has been understood that Woolworths has paid their debts in a less amount. This has given assistance to Woolworths in expanding their market reputation in future. However, the main issues of Woolworths are the assets effectiveness has decreased in the current year. As opined by Uechi et al. (2015), low assets can reduce the management effectiveness per year and the company can fail sustain their market position in upcoming years. Finally, due to low assets turnover the business organisation can fail to maintain high organisational performance per year.

3.0 Recommendation

After calculating all financial ratios it has been understood that Woolworths has failed to maintain proper financial performance compared to Wesfarmers. Therefore, following recommendations can be provided for Woolworths for improving their financial performance in the upcoming years.

Low number of debts: The CEO of Woolworths can evaluate their current financial report and identify their market debts. In case the market debts are high in the current year, then CEO can undertake proper solution that can assist in reducing the number of borrowing in the business market. As a result, the cash assets of the company can increase in the future year. Similarly, the business organisation can reduce their debt-to-assets ratio. As influenced by the opinions of Petruzzo et al. (2015), low market assets can assist in improving assets liquidity per year. Therefore, the company can gain competitive advantage over the rivals.

Improve productions and quality: Woolworths’ sales revenue in 2016 has been low so the company faced high net loss. Due to poor quality product the company has failed to increase their profitability margin in the current year. The CEO of Woolworths can provide a proper business strategy that can help in improving production and product quality. On that basis, Woolworths can collect high net profit in the upcoming years.

Improve employee performance: Woolworths can introduce advance training facilities for the employees. Based on the training the employees can understand function of new business tools and techniques. Therefore, the company can reduce wastage of raw materials and operating expenses can decrease. Hence, the management operation will improve and the company can gain competitive advantage over its rivals. As influenced by the opinions of Flammer (2015), an appropriate business performance can assist in attracting high number of investors in the company. Therefore, the source of capital can increase and the organisation can avoid market risks.

4.0 Conclusion

It can be concluded that Wesfarmers has maintained dominance over Woolworths. Wesfarmers has high net profit margin compared to Woolworths. However, in 2016, Woolworths has faced high net loss in their business and so the NPM has decreased by -4%. Nevertheless, current and quick ratios of both companies have rapidly decreased over the years. As a result, Wesfarmers and Woolworths can face difficulties to meet their long-term and short-term debts. Finally, it has been understood that Wesfarmers has failed to maintain inventory effectiveness compared to Woolworths. However, Woolworths has faced difficulties in maintaining assets effectiveness.

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