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MBA403 | Financial Analysis Report – Wesfarmers

Analysis

Since being listed in the ASX in 1984, Wesfarmers has steadily grown to the company it is today. To determine its most recent performance, this report shall focus on its last 3 years of historical data.

The company’s key financial data is shown in the tables below in $m:

The Income Statement shows that any concern for sales dropping due to the pandemic are unfounded. Wesfarmers has recorded a 9.49% increase in its revenues against the previous year; more than twice the growth of the period before. According to recent figures from the Australian Bureau of Statistics, there was an increased expenditure on hardware, building, and gardening supplies during the lockdown (Powell 2020). With Bunnings comprising 55% of Wesfarmers’ income, it would seem that the company is at an advantage. However, the data also shows a considerable increase in expenditure, 12.29% higher than the previous year. This could be attributed to the costs associated with providing a Covid-safe environment for employees as well as customers, and to the losses the company reported they incurred from trading restrictions by New Zealand (Wesfarmers 2020). Despite the pandemic and the mandatory lockdowns, the company still gained a profit although the data shows that it is significantly lower than the previous year.

The company’s cash flow from operating activities show the increased demand for the company’s products as this reflects the earning from their main business.  The net cash flow from the company’s investing activities shows a higher amount than the previous years. Reasons for this could include sale of property or other investments. Wesfarmers closed the year with a considerable amount of Cash on hand. The company has implemented disciplined cost control measures since the pandemic and that initiative could be the reason, as well as the reduced dividend released for the year (Wesfarmers 2020).

Interpretation

To further examine the company’s performance, the following ratios were prepared:

Because this study aims to analyse Wesfarmers’ performance during a turbulent time, it would be helpful to see the company’s stability. The company’s Current Ratio is at 1.12, which is slightly lower than the previous year’s but is still a comfortable figure. This means that the company has enough liquid assets to cover its present liabilities. The company’s Debt Ratio on the other hand, at 63.25%, shows that the company is operating with a moderate amount of risk. Although the previous years’ figures were more ideal, 2020 seems to indicate that the company is more financed through debt and may be a negative sign; however, with the year-end cash and net profits, perhaps this is merely a result of Wesfarmers Managing Director Rob Scott’s conservative attitude towards company spending, in anticipation of more contingency risks ahead (Mitchell 2020). The company’s Inventory Turnover also shows that sales and cash flow have not been hampered by the pandemic. With an average of 76.44 days to dispose of inventory, versus the previous years’ performance of selling beyond a 100-day period, Wesfarmers’ pandemic performance is showing that the company is able to adjust and thrive despite the sudden challenges. The advantage of the company though, is that with their major earnings from retail operations, there is little to no risk of spoilage. It is important for shareholders to know the company’s efficiency through this ratio because it shows how Wesfarmers is able to function and adapt their operations through challenging and volatile situations.

Examining the company’s profitability is just as critical. Shareholders who intend to keep their shares for the long term would be benefitted to know the company’s profit margins and returns on their investments. For the last period, the ratio shows that Wesfarmers has seen an increase in its profit margin, from 8.76% for 2018 to 10.65% for 2019. This growth, however, saw a reversal in 2020 with a Return on Sales of 8.90%. This is brought about by the company’s reduced profit due to its increased expenses for the year. The company’s Return on Equity, on the other hand, shows a consistent rise through the three-year period, with 2020 showing a 16.80% return. This could indicate the company’s efficiency at using shareholder capital; however, this could also be consistent with the company’s borrowing, as reflected in the debt ratio.

One of the most important factors for shareholders is the company’s Dividend Yield, as this shows a shareholders return on their invested interest. The dividend yield is computed by dividing the company’s dividends per share over the share price. For the previous years, the company has released dividends consistently above $2 and has had share prices of about $35, resulting in fairly consistent figures (see Appendix). For 2020, the company has given a reduced dividend amount of $1.70. The share price has also considerably gone up to $44.83 per share. This caused the dividend yield to significantly go down to 3.79%. For shareholders who invest for dividends and long term income, this development is not ideal since a reduced yield means lower income.

The financial indicators have shown positive and negative performances of the company but these figures cannot accurately give a complete picture of the company’s strength or failures. It is important to look into how the company has treated its people, and its company decisions during these unforeseen times and analyse the non-financial aspects of Wesfarmers.

Leadership and Company Direction

Leadership is most tested during difficult times and the same goes for Wesfarmers. The company incurred costs of approximately $30 million for initiatives to provide a Covid-safe environment for employees and customers (Wesfarmers 2021). Despite increased sales volumes during the pandemic, Managing Director Rob Scott still believes that there are more risks to come. This belief is the reason why Wesfarmers has put on hold any new acquisitions and focuses instead on investing within the company. He believes the rise in sales could be attributed to the rise in spending from government Covid assistance, and that growth may not be sustainable (Mitchell 2020).

The Financial Statements and Ratios mentioned in this report are a demonstration of that proactive leadership; the financial data hardly shows a company at risk or going through a crisis.  Wesfarmers’ company objective, which is to deliver a satisfactory return to shareholders over the long term, is the guide of company decision making. They recognize that it is their commitment to their customers, care for their workers and community and their adherence to company core values that will make the company successful even amidst the pandemic (Wesfarmers 2021). This show of firm leadership should give shareholders an assurance of the company’s sustainability.  

Investments and Innovation

With lockdowns being implemented in the major cities of the country, Wesfarmers needed to find new ways to reach their market. Because of their efforts in monitoring consumer behaviour, Wesfarmers found a gem in newly-acquired online retail store Catch. During the pandemic, Catch showed a growth in its gross transaction earnings, increasing almost 50 per cent since acquisition. The company also prioritized the acceleration of their digital capabilities to keep up with the demand for online purchasing. With this investment, Wesfarmers was successfully able to accommodate the increasing number of customers for the Click and Deliver program, an initiative where customers can shop and pay online and expect the goods right in their doorsteps, eliminating the risks involved with shopping at the physical store.

The company also developed a program they call the Drive and Collect, where customers can shop from an online catalogue, and simply pick up the items safely from the Bunnings parking lot. These initiatives show that the company keeps itself up to date with changing customer demands, as well as show care for well-being of their many employees, customers, and partners.

Community

Despite minimizing company expenditure to prepare for contingencies, Wesfarmers maintained its commitment to the community. For 2020 alone, the company made $68 million in contributions to its community partners. Wesfarmers, through Bunnings, gave away $1.5 million worth of gift cards to support local fundraisers. The company also gave assistance to its Arts partners, which includes the Western Australian Symphony Orchestra, West Australian Ballet, West Australian Opera and Musica Viva Australia, to help the employees and artists while the stages were closed (Wesfarmers 2020).

Conclusion

Many companies have experienced great success and great failures all in a few years. Wesfarmers have been around for at least a hundred years; publicly trading for at least 30. The consistency of their growth is a testament to the company’s stability and calculated decision making. Many can argue that in this digital age of start-ups and cryptocurrency, to invest in a company like Wesfarmers where you get moderate dividends or none at all, is no longer appealing. For those investors however who prefer a steady income, long term operational sustainability and absence of high risks, Wesfarmers would seem a worthwhile investment.

Its growing income, regulated expenses, and stable profits show a company that is still continuing to grow. Its strong balance sheet shows the absence of too many unsold inventories or too high borrowings. The company’s cash flow shows that in this crisis, the company is more than surviving; it is earning. It has enough liquid assets to cover its liabilities, showing no sign of financial distress. The shareholder’s equity is also well managed, with a strong and rising return on equity.

This study has shown Wesfarmers’ performance during a critical period.  It is the recommendation of this study that shareholders hold on to their company shares. With the increasing company share price (see Appendix), some investors may be tempted to liquidate their shares and turn a profit, thinking that with the pandemic and impending recession, there will always be a risk that the company will face difficulty. However, even when unprepared for the crisis, the company is able to sustain its activities and show their resilience. Through the company’s able leadership, calculated investments and innovative solutions, one can see that Wesfarmers has done exceptionally well, which should help build the confidence of the shareholders that the company is able to ride out this crisis or any upcoming one. Its dedication to the community is a show of solidarity; a gesture that although may not be reflected in its financial data, holds value to many who have benefited.

For shareholders who have any doubts on Wesfarmers’ ability to sustain this growth, this analysis shows that the company is more than able, financially and by good governance, to carry on their decades-long momentum of expansion and profitability.

References

Ibisworld 2020, Wesfarmers limited, Ibisworld, retrieved 14 May 2021, <https://my.ibisworld.com/au/en/company-reports/69/company-details>.

Mitchell, S 2020, ‘Cautious Wesfarmers keeps powder dry’, Financial Review, 20 August, retrieved 14 May 14, 2021, <https://www.afr.com/companies/retail/wesfarmers-pays-special-coles-dividend-despite-huge-write-offs-20200817-p55mlx>.

Oo, S 2020, ‘Hardware and building supplies retailing in Australia’, Australia Industry (Anzsic) Report, retrieved 14 May 2021, <https://my.ibisworld.com/au/en/industry/g4231/competitive-landscape>.

Powell, D 2020, The Bunnings barometer: how the $13b ‘institution’ became Australia’s bellwether’, The Sydney Morning Herald, 8 August, retrieved 14 May 14, 2021, <https://www.smh.com.au/business/companies/the-bunnings-barometer-how-the-13b-institution-became-australia-s-bellwether-20200807-p55jfc.html>.

Wesfarmers 2020, 2020 Annual report, Wesfarmers Limited, retrieved 14 May 14, 2021, <https://www.wesfarmers.com.au/docs/default-source/reports/annual-report-2020.pdf?sfvrsn=8ccf0fbb_2>.

Wesfarmers 2021, Half-year report 2021, Wesfarmers Limited, retrieved 14 May 14, 2021, <https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2021-half-year-report-incorporating-appendix-4d.pdf?sfvrsn=bf520fbb_0>.