Principles of Financial Markets Woolworth and Wesfarmers

Question: Discuss about the Principles of Financial Markets for Woolworth and Wesfarmers. Answer: Introduction: This report carries out the fundamental analysis of Woolworth and Wesfarmers. In this report, the fundamental analyses of these two organizations is done using top down analysis and bottom up analysis is carried out. In top down analysis, the analysis of economic environment that affect sthe organization, industrial factors and the firm internal factors will be discussed. Along with this, in bottom up analysis, the various ratios such as liquidity ratio, profitability ratio, efficiency ratio, capital structure ratio, and market performance ratio of Woolworth and Wesfarmers will be discussed. Industry profile: Retail industry Retail industry is also changing as per the advance in technologies and changing social environment. Today fast moving consumer goods have a great demand in the market due to change in the lifestyle of consumers. People prefer packed food and ready to use products. These factors are flourishing the retail industry. Retail industry is one of the most growing industries in the global market (Grugulis andBozkurt, 2011). There are immense numbers of opportunities in the retail industry. In Australia, there are various retail sector giants are present such as Woolworth, Wesfarmers and Dick Smith Electronics. Retail industry has a major role in the growth of countries GDP. Company profile: Woolworth limited Woolworth limited is the Australian based multinational retail organization. Woolworth founded in 1924. This is one of the largest retail sector organizations in the Australia (Woolworth, 2016). The founders name of Woolworth is George creed, Percy Christmas, Stanley Chatterton, Ernest Williams and Cecil Scott Waine. The current chief executive officer of the organization is Bradford Banducci. The total revenue of the organization in 2015 16 is $59 billion Australian dollars. Headquarter of Woolworth limited is situated at New South Wales, Australia. There are various numbers of subsidiary organizations of Woolworth in market such as Woolworths online, Woolworths supermarkets, and Thomas dux grocer (Woolworth, 2016). The organization is listed on the Australian stock exchange. The total numbers of employees working across the various countries in Woolworth are 198,300. The organization has more than 850 stores. Mission statement Woolworth's aim is to be at the heart of the community and the best loved retailer for kids, home, and family leisure (Woolworth, 2016) Wesfarmers Wesfarmers is the multinational retail giant, which originated from Australia. Headquarter of Wesfarmers is situated at Perth, Australia. Organization has full command on the market. The organization founded in 1914 (Wesfarmers, 2016). The managing director of Wesfarmers is Richard Goyder. The total revenue of the organization in 2015 2016 is 65.98 billion AUD. More than 200000 workers are working in Wesfarmers. For the investment purpose, Wesfarmers is one of the most lucrative organizations for investors because of its earnings per share. Wesfarmers has number one rank in Australia in terms of revenue generation. The share of Wesfarmers is listed on ASX (Australian Stock Exchange). Mission statement create values and satisfy needs and desires of consumers by delivering quality products (Wesfarmers, 2016) Top down analysis of Woolworth limited and Wesfarmers Top down analysis is the macro analysis of the organization it includes economic analysis, analysis of industry, and analysis of organization (Bracker, 2011). The economic analysis includes the external factors of the economy that affects the organization. These factors are like gross domestic product growth, inflation rate, current value of currency and monetary policy of government. Australian economy is $1.62 trillion economy. The retail sector has a great role in the GDP of Australian economy. The current growth rate of Australian GDP is 3.1% (Australian bureau of statistics, 2012). So, there is good demand in the Australian market as per the GDP and this thing is good for both Woolworth and Wesfarmers have a great opportunity in market because approx 6% share of retail sector are there in the total GDP of Australia. Inflation in Australia is under control, the current inflation rate of the Australia is only 1% that is very good for economies health (Reaserve bank of Australia, 2016). Due to this, purchasing power of the customer in the domestic market will be good and this will generate the demand of retail sector product. Both Woolworth and Wesfarmers will enjoy profit due to this. The current value of Australian dollar is .7698 in comparison to USD. So there is great chance for Woolworth and Wesfarmers to expand their business in European countries where the purchasing power of consumers is good because of the higher value of currency. Industry analysis includes various things such as demand and supply conditions, life cycle of industry, risk that is prevailing in the industry and competitive advantage. The Australian economic condition is good. The growth of GDP is also good in the Australia in which retail sector has significant role (Coleman, 2016). Woolworth and Wesfarmers, both are retail sector organization. The demand and supply of products of Woolworth and Wesfarmers is also good due to controlled inflation in Australia. Woolworth and Wesfarmers both are the leading retail sector organizations. Both the organizations are giving competition to each other in the market. There are also some other competitors of these organizations are present in the market such as Treasury wine estates, Bega cheese limited, Costa group and Tassal group. Nevertheless, Woolworth and Wesfarmers are well-established organizations (Vogel, 2014). They have a brand image in the market. They cover large amount of retail market. Therefore, Woolworth and Wesfarmers have competitive advantage in the market over other competitors. The major risk factors that will affect Woolworth and Wesfarmers are, turmoil in customer taste and preference. Enterprise analysis is the analysis of the internal environment of the organization. In this the strategy of management and feasibility of goals and objective will be analyze. Woolworth ltd main objectives and goals are get leadership in market over other competitors, focus on the profit generation. These goals are seems to be achievable because of the effective strategy of the organization (Woolworth, 2016). The strategy of organization is to adopt the technology and do developments in the business after the learnings from customer feedback. Wesfarmers objective is to create the values and increase the returns of the shareholders (Wesfarmers, 2016). To achieve those objectives organization has various strategies such as robust financial control over various operational activities, do innovation timely as per the need of market and maintain flexibility in the operation where anyone can share their ideas and implement those ides if they found suitable for the organization. Bottom up analysis Bottom up analysis of Woolworth and Wesfarmers are as follows: Calculation of Liquidity ratio Name of ratio Woolworth (2016) $ m Wesfarmers (2016)$ m Industry average liquidity ratio: current ratio = Current assets / current liabilities 0.825892112 0.929009977 1.9 Current Assets 7427 9684 Current Liabilities 8992.7 10,424 Quick ratio = current assets - inventories/ current liabilities 0.318980951 0.328472755 0.315 Current Assets 7427 9684 Current Liabilities 8992.7 10,424 Inventory 4558.5 6,260 Cash ratio= cash + cash equivalents / current liabilities 0.10542996 0.058614735 cash cash equivalent 948.1 611 current liabilities 8992.7 10,424 Source: Annual report, (2016) Calculation of profitability ratio Name of ratio Woolworth (2016) $ m Wesfarmers (2016) $ m Industry average Profitability ratio: Gross profit margin = gross profit/ revenue * 100 26.83488915 22.58212236 2.9 Gross profit 15,638 14,794 revenue 58,276 65,512 Net profit margin= net profit / revenue * 100 1.423898305 0.616844243 46.92% Net profit 840.1 407 revenue 59,000 65,981 Operating profit margin ratio = Operating profit / revenue * 100 2.754502321 0.973007381 76.33% Operating profit 1605.2 642 revenue 58,276 65,981 return on shareholder fund = Net income / shareholder fund * 100 9.917833447 1.773933505 Net income 840.1 407.1 shareholder fund 8470.6 22949 Return on assets = net profit before tax / total asset * 100 3.333742 4.416607807 4.68% net profit before tax 1359.6 1038 total asset 40783 23502.2 Source: Morningstar, (2016) Calculation of Efficiency ratio Name of ratio Woolworth (2016) $ m Wesfarmers (2016) $ m Industry average Efficiency Ratio: Inventory turnover ratio = average inventory / cost of sales * 365 35.06242888 44.63828707 18.465 average inventory 4558.5 6,260 cost of sale 47,454 51,187 Trade payable turnover = average trade payable / cost of sale * 365 58.9196485 46.28548264 47.9days average trade payable 7660.2 6,491 cost of sale 47,454 51,187 Trade receivable turnover = average trade receivable / cost of sale * 365 4.294253382 17.56295544 42.9 days average trade receivable 558.3 2463 cost of sale 47,454 51,187 Sale revenue to capital employed = sales revenue / capital employed 4.016403046 2.15791034 sales revenue 58,276 65,512 capital employed 14509.5 30359 Source: ADVFN, (2016) Calculation of Capital structure ratio Name of ratio Woolworth (2016) $ m Wesfarmers (2016) $ m Industry average Capital structure ratio: Equity ratio = total equity / total assets * 100 36.04173226 56.27099527 10.5 Total equity 8,470.60 22,949 total assets 23,502.20 40,783 Debt to equity ratio = total liabilities / total equity * 100 177.4561424 77.71144712 55.9 Total liabilities 15031.6 17,834 Total equity 8,470.60 22,949 Gearing ratio = long term debt / capital employed * 100 26.65839622 18.67979841 27 Long term debt 3868 5671 Capital employed 14509.5 30359 Source: Investing, (2016) Calculation of Market performance ratio Name of ratio Woolworth (2016) $ m Wesfarmers (2016) $ m Industry average Market Performance ratio: Earnings per share= net income available to shareholder/weighted average share outstanding*100 -97.7056962 36.24220837 net income available to shareholder -1235 407 weighted average share outstanding 1264 1123 Price earnings ratio= MPS/EPS*100 -21.38053441 110.6444717 27.65 Market price per share 20.89 40.1 Earnings per share -97.7056962 36.24220837 Source: ADVFN, (2016) Ratio analysis Liquidity ratio Liquidity ratio is used to determine the capability of the company for paying its debt (Lasher, 2013). Under liquidity ratio; there are three types of the ratios are to be calculated such as current ratio, quick or acid test ratio and cash ratio. Current ratio: Current ratio is one of the types of liquidity ratio which is used to determine the capability of the company in paying its long term as well as short term obligations. If the current ratio of the company is less than 1than the liabilities of the company is more as compare to its total assets. Current ratio of Woolworth ltd is 0.83 and Wesfarmers ltd is 0.93 in June 2016 (Kenyon, 2016). The current ratio of both the companies is less than 1. It means that both the companies are not financially sound, but the condition of Wesfarmers ltd is good as compare to Woolworth ltd because the current ratio of Wesfarmers is high as compare to Woolworth. Quick ratio: Quick ratio shows the capability of company in meeting out its short term responsibilities. Quick ratio of Woolworth is 0.32 and quick ratio of Wesfarmers is 0.33 in 2016. The Quick ratio of both the companies is less than 1, which means that both the companies will depend upon their assets for making payment to their current liabilities. The Quick ratio of Wesfarmers is more than Woolworth because which the condition of Wesfarmers is good as compare to Woolworth. Cash ratio: Cash ratio is the ratio which determines the payment of current liabilities of the company through cash and cash equivalent. The cash ratio of Woolworth is 0.11 and cash ratio of Wesfarmers is 0.059 in June 2016. In this the cash ratio of both the companies is less than 1, which means that current liabilities of both the companies is more than there available cash cash equivalent. This situation is not so good for both the companies but if we compare cash ratio of both the companies than the position of Woolworth ltd. is much better than Wesfarmers ltd. Profitability ratio Profitability ratio shows the capability of the business in creating profits from its workings (Nelson, 2012). Under profitability ratio there are many types of the ratio are calculated for judging the profitability of the company. The ratios are: Gross profit margin: Gross profit margin of Woolworth is 26.83 and Wesfarmers is 22.58 in 2016. If the Gross profit margin ratio is good than company is able to meet the future liabilities (Madura, 2011). Here Woolworth has more profit margin ratio than Wesfarmers. Therefore Woolworth can perform their regular activities smoothly such as manufacturing process and meet its future responsibilities more effectively in comparison to Wesfarmers. Net profit margin: Net profit margin ratio of Woolworth is 1.42 and Wesfarmers is 0.61 in 2016. If the net profit margin of the company is high than the company can control its cost effectively. Here Woolworth has more net profit margin than Wesfarmers due to which Woolworth can control its cost effectively and the investors of the Woolworth can be more profitable than the investors of Wesfarmers. Operating profit margin ratio: High Operating profit margin ratio shows that the financial position of the company is good and it has earning more from its operations. Operating profit margin ratio of Woolworth is 2.75 and Wesfarmers is 0.97 in 2016 (Morningstar, 2016). In this analysis, the operating profit margin ratio of Woolworth is high than Wesfarmers in 2016. This shows that Woolworth can cut shorts its running expenses and earns more than Wesfarmers. Return on shareholders fund: If the return on shareholders fund is high than it grabs more attention of the investors towards the company and each investors search this kind of organization to invest (Chandra, 2011). This means that, high return on shareholders fund is better than the low return. The return on shareholders fund of Woolworth is 9.91 and Wesfarmers is 1.77 in 2016. From this analysis it can be said that Woolworth can tempt more investors than the Wesfarmers. Return on assets: Return on assets of Woolworth is 3.33 and Wesfarmers is 4.41 in 2016. High ratio of return on assets is more effective for investors and for the company. High ratio shows that the company is earning more through the use of its assets. From this analysis the ratio of Wesfarmers is high as compare to Woolworth, which means that the position of Wesfarmers is quiet good as compare to Woolworth. Efficiency ratio Efficiency ratio Efficiency ratio define the efficiency of the organization (Warren et al, 2013). In this ratio it is find out that weather the organization are utilizing there resources such as balancing assets and liability in the proper manner or not. Efficiency ratios are: Inventory Turnover ratio: Inventory turnover ratio shows how well company can maintain or controls its inventory. High inventory ratio shows that company has made reasonable investment on its inventory and low ratio shows that company has made excessive investment on its inventory. High inventory turnover ratio is better for the company. The inventory ratio of Woolworth is 35.06 and Wesfarmers is 44.63 (Investing, 2016). From this analysis it can be said that Woolworth has better control over its inventory than Wesfarmers. Average payment period: The Average payment period of Woolworth is 58 days and Wesfarmers is 46 days. The short average payment period is good for the company in compare to long period. The shorter period states that the company requires less credit for its operations and makes the due payments early. In this situation Wesfarmers has shorter period of payment which shows that Wesfarmers has made all its dues on time compare to Woolworth. Average collection period: the average collection period implies that the company collects its dues within the time frame. The average collection period of Woolworth is 4 days and Wesfarmers is 17 days in 2016. The shorter period of collection benefited company than the longer period. The average collection period of Woolworth is much less than Wesfarmers, which states that Woolworth received payments from its debtors in less time compare to Wesfarmers. Sale revenue to capital employed: sale revenue ratio of Woolworth is 4.01 and Wesfarmers is 2.51 in 2016 (ADVFN, 2016). Sale revenue ratio shows the capability of the company in generating revenue from its assets. High sale revenue ratio is more effective than the low sale revenue ratio. The sales revenue of Woolworth is more than the Wesfarmers, which means that Woolworth is more capable of generating sales as compare to Wesfarmers. Capital structure ratio capital structure ratio provides the information about the financial structure of the organization. This ratio examines the various financial statement and find out the solvency and liquidity of the organization (Haqqani and Zehra, 2015). capital structure ratio includes equity ratio, debt equity ratio and gearing ratio. Equity ratio the equity ratio of Woolworth is 36.4 whereas the Wesfarmers is 56.27. As per the equity ratio the present condition of the Wesfarmers is good then Woolworth because of higher equity ratio then Woolworth. There are various significances of higher equity ratio for the organizations such as it shows how healthy organization is and attract the new creditors to invest money in the organization, Wesfarmers will enjoy these significances more in compression to Woolworth, which have low equity ratio. Debt equity ratio the debt equity ratio of Woolworth is higher than Wesfarmers. Woolworth debt equity ratio is 177.45 and the Wesfarmers is 77.71. This ratio is use to find out the financial risk of the organization (Feld et al, 2013). Here the debt equity ratio of Woolworth is higher in comparison to Wesfarmers that shows that Woolworth has higher financial risk. Gearing ratio Gearing ratio is the part of capital structure ratio. The gearing ratio of Woolworth is 26.65 and Wesfarmers is 18.67. This ratio shows the proportion of fixed cost and the equity capital. If organization have high gearing ratio then it is good for organization because it shows organization has low cost. Here the Woolworth has high capital gearing ratio in comparison to Wesfarmers. It shows that Woolworth financial condition is good in comparison to Wesfarmers. Market performance ratio Market performance ratio shows market performance of the organization (Lasher, 2013). It provides the information about the earning of shareholders on the investments. It includes earning per share ratio and price earnings ratio. Earnings per share ratio The earning per share of Woolworth is -97.70 and Wesfarmers is 36.24. Therefore, the earnings of shareholders are negative for Woolworth, which is not good for company. Whereas the Wesfarmers earning per share is good investors get good returns. Price earnings ratio The price earnings ratio of Woolworth is -21.38 and Wesfarmers is 110.64. This data is not good for Woolworth but favorable for Wesfarmers. Due to attracting results, investor will do investments in Wesfarmers. Recommendation Woolworth and Wesfarmers have to maintain flexibility in their system and do changes on the basis of change in economic conditions of the country such as increase in inflation rate and changes in currency value. Liquidity position of Wesfarmers is high compare to Woolworth. So Woolworth needs to focus on maintaining liquidity in the company. The profitability and efficiency position of Wesfarmers is not good as compare to Woolworth. To maintain profitability and efficiency position, Wesfarmers needs to control its cost, inventory and do optimum utilization of its assets. Conclusion: From the above report, it can be concluded that the Woolworth and Wesfarmers have a good brand image in the market and the demand in retail sector is also good because of growth of GDP in Australia. However, there is significant competition in the retail sector of Australia and Wesfarmers have edge over others because of their sound strategy planning and implementation. On the basis of ratio analysis, it is concluded that the financial position of Wesfarmers is better than Woolworth. References: ADVFN, (2016) Wesfarmers Financial Data [Online]. Available at: https://au.advfn.com/stock-market/ASX/WES/financials (Accessed: 9 September 2016). Australian bureau of statistics (2012) VALUE OF GOODS AND SERVICES PRODUCED BY AUSTRALIAN INDUSTRY [online]. Available at: https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20Features~Value%20of%20goods%20and%20services%20produced%20by%20Australian%20Industry~240 (Accessed on 09 September 2016). 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