Wesfarmers

Wesfarmers Introduction 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).Advertising We will write a custom essay sample on Wesfarmers specifically for you for only $16.05 $11/page Learn More The aims of the organisation include customer’s satisfaction, safety, integrity, efficiency, environmental protection and corporate governance. This report provides a detailed analysis of the financial position of Wesfarmers Corporation. To evaluate the companys stock value, we will study their financial position. Thus, the firm’s, financial performance support its financial growth and shareholders strength. This paper will evalua te five financial performances of Wesfarmers Cooperative. The financial variables include short-term solvency, market-based investment, profitability ratios, efficiency ratios and long-term solvency. As a result, we will evaluate Wesfarmers performance for two financial years. Using Wesfarmers Annual Report 2011, we computed five financial ratios of the organisation. Finally, the financial review will be from 2010 to 2011. Ratios Table1: Short-term solvency ratio 2010 ($m) 2011 ($m) Average ($m) Current ratio 1.23 1.17 1.2 Quick ratio 0.64 0.60 0.62 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 liabilitiesAdvertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Thus, for 2010, 9674/7852 = 1.23 For 2011, 10218/8722 = 1.17 Quick rati o = quick assets/current liabilities Thus, for 2010, = 1640 + 1767 + 1384 + 150 + 75/7852 = 0.64 For 2011, 5231/8722 = 0.60Advertising We will write a custom essay sample on Wesfarmers specifically for you for only $16.05 $11/page Learn More Operating cash flow from operations to current liabilities = operating cash flow/current liabilities Thus, for 2010, 3327/7852 = 42% For 2011, 2917/8722 = 33% Table 2: Efficiency ratios 2010 2011 AverageAdvertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Debit turnover 27 27 27 Average days sales uncollected 14 days 14 days 14 days Inventory turnover 2 3 2.5 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 Asset turnover 1.3 1.32 1.31 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/a verage 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 Interest coverage 3.64 3.64 3.64 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 ca sh 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 Price/Earnings (P/E) 0.18 0.19 0.2 Earnings yield 5.5% 5.23 5.34 Dividend yield 5.54% 5.23 5.3 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 Evaluation Short-term solvency ratios Short-term solvency ratios describe a firms ability to offset debts and loans. Th us, a firms 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 firms 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 firms cash reserves and assets. As a result, the organisation can repay sixty four percent of its liabilities. However, the firms 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 201 0 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. Efficiency ratios Wesfarmers receivables can be measured by its efficiency ratio. Thus, efficiency ratio describes the firms 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 firms capacity to collect the debtors 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 firms turnover in days dropped from 122 to 146 in 2011. Profitability ratios Net profit margin describes a firm’s capacity to generate revenue after inter est 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 firms 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 firms cost of interest describes its stability and profitability. Wesfarmers asset turnover shows no sign of increase in 2011. The firms 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 firms return on assets. Wesfarmers return of ordinary shareholders equity rose from 6.4 to 7.7 percent. Thus, the firms operating performance was significant in 2011. Long-term solvency ratios Long-term solvency describes a firms obligation to offset loans (Mike-Bazley 2013). However, the repayment covers a longer period than sho rt-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 firms cash flow from operations to total liabilities dropped from 22.9 to 18.8 percent. Thus, the firms asset utilisation and savings will improve its net assets. Market-based ratios 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 firms earnings yie ld. 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. Conclusions 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 firms market value increased from 27.48 to 31.85. The firms 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 201 1. Thus, investors can utilise the market indicators to forecast the strength of the organisation. Consequently, economic analysts can compare the firms value with its competitors using its financial performance. References AccountingExplained.com: financial accounting 2013, http://accountingexplained.com/financial/. Anderson, R 2013, Financial Management Study Guide. 5th edn, Chifley Business, South Melbourne. Mike-Bazley, H 2013, Contemporary Accounting. 8th edn, Cengage Learning: South Melbourne Australia. Morningstar, Inc.: morningstars take 2013, http://quotes.morningstar.com/stock/ocldy/s?t=OCLDY. Peavier, R 2012, Financial Ratio Analysis Tutorial 101, http://bizfinance.about.com/od/yourfinancialposition/ss/financial-ratio-analysis-tutorial- 101. htm. Small Business Development Corporation: balance sheets 2012, smallbusiness.wa.gov.au/understanding-balance-sheets/. The Brandow Company: industry income-expense statements, 2012, bizstats.com/corporation-industry-financials/manuf acturing-31/chemicalmanufacturing- 325/other-chemical-product-and-preparations-325905/show. Wesfarmers Limited: Wesfarmers annual report 2011, wesresources.com.au/sites/default/files/publications/2011%20Annual%20Report_Main%20Body%20pages%201_65.pdf.