Wesfarmers : Financial Analysis
Wesfarmers : Financial Analysis Wesfarmers main focus is very simple but an effective objective of providing a satisfactory return to its shareholders. The beauty of this objective is that it is measurable, and they seek to achieve a return on equity, which ranks Wesfarmers in the top 20 percent of Australia’s listed companies and able to manage the portfolio of businesses which make up the group with strong financial focus (Australian Securities Exchange,2008). The ongoing success of Wesfarmers is based on shareholder focus, financial disciplines and goodwill and hence it has achieved significant financial growth in the preceding 6 years.
It is a “ diversified Australian group, provides home improvement products, building supplies, coal mining, gas, industrial and safety products, food, groceries, apparel, office products and insurance (Business Review, 2008). Wesfarmers key strategy is to grow through acquisitions. In line with the strategy, Wesfarmers made several acquisitions over the years which enhanced their financial position and stability. Over the years the group acquired Linde Gas, which is a major provider of gas to the Australian Industrial market.
In 2003 Wesfarmers finalized the acquisition of Lumley Australian and New Zealand insurance business which helped diversify Wesfarmers business operations and finally in 2007, Wesfarmers acquired the Coles group (Greenhalgh, 2008). Table 1: Major Acquisitions BusinessPriceEBIT ($m)EV/EBIT multiple OAMPS7255812. 5 Linde Gas5007313. 5 Coles Group19,3001,15016. 8 Source: www. wesfarmers. com. au The most common form of financial analysis is undertaken using ratios, using the data from financial statements and other related sources.
By analyzing and calculating the figures obtained from the Wesfarmers financial statements of the preceding 5-6 years we can develop an insight to the success and growth of the company (accounting text book). Over the years Wesfarmers has grown significantly both physically and financially. In 2003 the group achieved a result with net profits reaching $538 million, with an after tax net profit of 16 percent. Earnings per share before goodwill amortization were up by nine percent and shareholders received an increase in dividends by up to 14 percent.
The total operating revenue increased five percent a revenue of 7. 8 billion when compared to the previous year, and a 20 percent increase in net operating cash flow due to a strong focus on working capital and preceding years higher profit (Wesfarmers 2003). Over the last 4 years Wesfarmers net revenues kept rising dramatically from 7. 54 billion in 2005 to approximately 8. 71 billion in 2007. With the acquisition of Coles retail assets in 2007, the scale of Wesfarmers retail operations increased extensively with operations from over 3,200 stores throughout Australia and total sales of $39. billion in the year 2007. This substantially demonstrates the significant buying power with suppliers manufactures and obtains benefits associated with dedicated networks and shareholder goodwill (Wesfarmers, 2007). There was a significant rise in net profit margin 7. 65% in 2004 to 9. 85 % in 2006. However 2008 being a difficult year due to the global financial crisis there has been a drop in net profit margin. There has always been a constant increase in the Return on asset from 8. 60% in 2004 to 12. 2 % in 2006 and also large increase on the return on equity a tremendous increase to 26. 15% in 2006. This demonstrates the overall growth and performance over the years (FinAnalysis,2009). As organizations grow and expand successfully they are also faced with a lot of challenges. Given the recent acquisition of Coles, Wesfarmers financial policies and liquidity position has changed significantly. Until 2008 Wesfarmers has a strong control over their assets, and the ability of the company to meet short term obligations were high.
However off late their liquidity position is considered to be weak, considering the significant level of short term debt they have acquired, although a portion of it was paid off by the end of 2008, there is still a segment of it which is yet to be completely cleared off. However given the global financial and economic crisis, Financial experts have predicted that Wesfarmers debt levels are going to rise in the short to medium term of 2009 (Greenhalgh, 2008). This shows the ability of Wesfarmers to purchase assets using borrowed funds and thus lever up their total assets.
The short to medium term debt will have to be refinanced in the coming months to assist it reducing any further risks. Wesfarmers services a diverse customer base reflecting the broad range of industries in which the company operates, given this diverse operations of groups they have a large number of competitors including MITRE 10, BHP, RIO and Orica, Caltex etc ( FinAnalysis, 2009). However the major one of them all being Woolworths. Woolworths has established a clear lead in sales growth in recent years, and is estimated to hold approximately 27% of the market with Coles falling down to 23%.
Woolworths has clearly demonstrated a lead in terms of supermarket margins and supply chain automation resulting in heavy price discounting, and they have reported a solid growth in margins from 4. 7% in 2005 to 6. 2% in 2007(Woolworths, 2008). As Wesfarmers operate in various other industries and segments they have demonstrated a strong position in the market. General merchandising and apparel store Target has performed strongly compared to peers, reporting margins growing from 2. 1% in 2002 to 8. 8% in 2007.
However both Coles and Woolworths operate in a duopolistic market for large scale retailers, with other competitors finding it difficult to compete with these two massive players. Stakeholder analysis: “The Board of Wesfarmers Limited is a strong advocate of good corporate governance and is committed to providing a satisfactory return to its shareholders and fulfilling its corporate governance obligations and responsibilities in the best interest of the company and its stakeholders complying with the ASX corporate Governance Council’s Corporate Governance Principles and Recommendations” (Wesfarmers, 2008).
The stakeholders include employees, customers, suppliers and other contractors, government agencies, local communities, and also shareholders in the parent company. The company strives to expand and improve its sustainability efforts into the future by enhancing the physical environment in which they operate, provide a safe working environment for employees, customers and other stakeholders, treating all stakeholders with respect, investing in the communities for development and better standards of living and most of all, behaving in a legal and ethical manner (Hill et,al. 007, p. 34 & Wesfarmers, 2008). However there were a few discrepancies and criticism in the early 1990’s, regarding environment and longstanding pollutions issue from sites used for fertilizer production by Wesfarmers. The government and the public were concerned about leaching of heavy metals into the water table. Criticism also leveled at the company over its adequate stakeholder involvement in the issue (Sustainable Asset Management, 2003).
It was also known that a large number of stakeholder of the parent company were now pleased and supportive of the acquisition of Coles group. However eventually it was understood that shareholders supported the proposal and realized it was an opportunity for future growth, increased market share, and higher share prices and returns (Bolt, 2007). Over the years Wesfarmers made strong efforts and changes to advocate the best practice in Corporate Governance by fulfilling its obligations and responsibilities.
The board approved new terms of reference for the audit and compliance committee. The committee also has the responsibility to assess the effectiveness of the group’s compliance reporting programe to cover areas such as crisis management, legal liability, risk review, insurance, financial issues, environmental health and safely management (Wesfarmers, 2007). Wesfarmers also revised their disclosure process and policy and improved timely disclosure of relevant information to the market, this includes the conduct of investor and analyst briefing and communication with the media.
Stakeholders are involved in reviews and stakeholders surveys to tackle key areas such as supply chain, OH&S, resource consumption, product stewardship, feedbacks and complaints etc to comment on the company’s performance. The Australian Standards Technical Committee, Australian Water and other authorities have concluded that Wesfarmers has involved in ensuring environmental responsibility and safety (Wesfarmers, 2007). Succession planning is another issue which is constantly under review within the group.
Together with the mergers and acquisitions taken place over the years, Wesfarmers board ensured that these transitions were a smooth one, keeping abreast with the history and culture of the company. This evolution had diversified and strengthened the company together with the experience and knowledge and skill of highly committed directors (Wesfarmers, 2007). References Wesfarmers, 2008, ‘Corporate Governance’, retrieved on 27 December 2008, .
Bolt, C, 2007, ‘Wesfarmers makes improved offer for coles, The West Australian, retrieved on 27 December 2008, . Wesfarmers, 2008, ‘Submission on the federal government’s Green paper for a proposed carbon pollution reduction scheme’, retrieved on 27 December 2008, . Sustainable Asset Management, 2003, ‘Sustainability Leaders Australia Fund’, retrieved on 27 December 2008, . Wesfarmers, 2007, ‘Annual General Meeting – Chairman’s Address’, retrieved 29 December 2008, .