Financial Reporting and Analysis for Financial Position and Conditions

Discuss about the Financial Reporting and Analysis for Financial Position and Conditions.

Introduction

The present study carries out comparative evaluation of the financial condition as well as financial position between two different Australian retail companies Wesfarmers Limited and Woolworths Limited (Woolworthslimited.com.au 2015). Here, both the Wesfarmers Limited and the Woolworths limited are publicly traded under the Australian Stock Exchange. In this present study, the comparative analysis has been carried out by taking into consideration the Wesfarmers Limited as the main company while the Woolworths Limited as the closest competitors for the given period 2014 and 2015 (Wesfarmers.com.au 2016).

The current study makes use of the ratio analysis and vertical analysis as the important tools for analysing the financial condition as well as the financial position of the two different corporations for two different years 2014 and 2015. In addition to this, the current segment also carries out critical analysis of risk management with detailed observation of the reports of the two different retail companies.

Company Background

Wesfarmers Limited is also a retail firm listed in the Australian exchange that largely functions in retail industry in both Australia and New Zealand. Besides this, the Wesfarmers markets chemical products and fertilizers and operates in different segments such as coal mining, manufacturing in addition to safety products (Wesfarmers.com.au 2016).

Ratio Analysis

Profitability Ratio

The profitability ratio assists in the carrying out the comparative study of the income statement accounts and indicates the capability of the firm in generation of greater amount of profits from different functions of the business (Horngren et al. 2012). The gross profit margin and the net profit margin can suitably reflect the financial condition as well as the financial position of the firm from the point of view of profitability of the firm (Brigham and Houston 2012).

Gross Profit Margin

Wesfarmers has a gross profit margin of 31% during both the period 2014 and 2015. On the other hand, the gross profit margin of Woolworths was recorded to be 27% (refer to appendix). This reflects the fact that Woolworths has comparatively better gross profit margin implying greater potential of the firm to make payments for different operational expends of the corporation (Brigham and Daves 2012).

Net Profit Margin

The net profit margin of Wesfarmers Limited is recorded to be 0.044 during the year 2014. On the other hand, the net profit margin of Woolworths Limited is registered to be 0.040 during the same period (refer to appendix). However, the profit margin of the Wesfarmers Limited is calculated to be 0.040 during 2015. On the other hand, Woolworths is registers the net profit margin of 0.035 during the same period.

Liquidity Ratio

 As rightly put forward by Arnold (2014), the liquidity ratio refers to different levels of cash in the business and indicates the potential of a firm to convert different assets into cash for making payments for different debt obligations as well as associated requirements.  

Current Ratio

 The current ratio of Wesfarmers Limited is recorded to be 1.13 during the year 2014 and 0.93 during the year 2015. On the other hand, Woolworths Limited is registers the current ratio to be 0.94 during 2014 and 0.83 in the year 2015 (refer to appendix). Therefore, Wesfarmers Limited has greater capability in repaying the debts as compared to Woolworths Limited (Brealey et al. 2012).

Quick Ratio

 The quick ratio of Wesfarmers Limited is recorded to be 0.48 during the year 2014 and 0.28 in the year 2015. Again, Woolworths Limited registers the quick ratio of 0.28 during 2014 and 0.27 in the year 2015 (refer to appendix). The ratio reflects that Wesfarmers Limited has a better profitability than the Woolworths Limited.

Efficiency ratio

Accounts Receivable Turnover Ratio

 The accounts receivable ratio of Wesfarmers Limited has increased from 37.99 to 42.55 during the year 2015. On the other hand, the accounts receivable ratio of Woolworths was registered to be 98.78 in 2014 that rose to 104.22 during 2015. The accounts receivable turnover ratio calculated for both the companies reflects the fact that Woolworths has greater level of efficiency than Wesfarmers Limited.

Asset Turnover Ratio

The Asset turnover ratio of Wesfarmers Limited was enumerated to be 1.51 in the year 2014 that increased to 1.53 in the year 2015 (refer to appendix). The increase in the ratio is not very significant. Again, the high ratio reflects a desirable situation. The asset turnover ratio for the company Woolworths declined from 2.51 registered during the year 2014 to 2.40 in the year 2015.

Solvency ratio

Solvency ratio reflects the capability of the firm in paying the debt requirements of the firm (Arnold 2014).

Debt to equity Ratio

Wesfarmers Limited registers the debt to equity ratio of 0.34 during the year 2014 and 0.38 during the year 2015. Again, the debt to equity ratio for Woolworths Limited is registered to be 0.57 during both 2014 and 2015 (refer to appendix). The debt to equity ratio of Wesfarmers Limited is comparatively lower than that of the Woolworths Limited. Therefore, corporations having greater debt to equity ratio such as the Woolworths Limited can be regarded to be more risky to creditors and at the same time investors (Brigham and Houston 2012).

Analysis of the income statement

The calculations for the vertical analysis of the financial declarations of the company Wesfarmers also helps in carrying out comparative analysis of the financial condition of both the Woolworths Limited and the Wesfarmers Limited. The analysis of the income statement of Wesfarmers Limited during the year 2014 and 2015 assists in the evaluation of the overall financial condition of the firm. The gross profit was approximately 31% of the revenue during 2014 that declined to approximately 30.5% of the revenue as recorded during the year 2015. However, the expenses towards the selling, general as well as administrative items were enumerated to be 58% of the overall during the year 2014. Furthermore, the operational expenditure of the company was enumerated during 2014 that again increased to 62% during 2015 (refer to appendix).

Analysis of the balance sheet

 The vertical analysis of the balance sheet of both the companies helps in understanding the comparative financial position of the firms in relation to each other over the specific period of time. The cash as well as the cash equivalents of the firm with respect to the current assets have declined for the Wesfarmers during the period 014 and 2015. However, the same has increased for Woolworths from approximately 12% to 17% during the same period (refer to appendix).

Analysis of risk management of both Wesfarmers Limited and the Wesfarmers Limited

The evaluation of the overall financial performance of both Wesfarmers Limited and Woolworths Limited helps in understanding the risk management profile of both the organizations (Healy and Wahlen 2012).. The financial analysis of the firm discloses the fact that the Woolworths Limited has a higher capital-gearing ratio where there is higher debt in relation to the equity. Therefore, the debt equity ratio reveals the process of using greater fraction of debt as compared to the equity (Forte and Forte Patrick 2012). However, the relatively higher debt-equity ratio of the Woolworths reflects the fact that the management of the corporation Woolworths is taking up high risk for funding different operations as well as projects. Therefore, the management of Woolworths can think about the declining the overall proportion of the debt in debt structure and consider restructuring the debt (Madura 2011). Furthermore, the financial evaluation of all the financial declarations of the firms during the two different years 2014 and 2015 discloses the fact that liquidity of both the Wesfarmers and Woolworths have worsened. For that reason, the management of both Wesfarmers and the Woolworths can consider improving both the liquidity condition to meet the debt requirements of the corporation  (Wesfarmers.com.au 2016).

Again, the team responsible for the risk management in both the companies can consider enhancement of the overall functioning of different internal controls to detect different potential risks (Horngren et al. 2013). The appropriate detection of the risk can help in the addressing the identified risks and to develop appropriate tools to resolve the threats to the business (Watts 2013). For that reason, the management can reconsider different facets of the internal as well as external audit in addition to independent assurance reports and many others (Ward 2012).    

Significant observations on management of risk by Wesfarmers Limited and Woolworths Limited

The administrative board of the company Woolworths has selected different process and at the same time has devised different strategies for the purpose of risk management as is exemplified in the “Australian/New Zealand Standard (AS/NZS ISO 31000:2009 Risk management – Principles and guidelines”. However, the Risk Management Framework lucidly exemplifies the whole procedure of risk management of both the companies.

Furthermore, different risk management methods are primarily reliable with the specified structure for risk management in the organization (Healy and Palepu 2012). However, different stratagems for management of the risks in the organizations comprises of the development as well as execution of effectual risk management policies with delegation of special responsibilities external and internal auditors, risk management team over and above the compliance committee.

The administration of the company Wesfarmers Limited is responsible for examining the overall risk profile of the entire group and development of a culture that is mindful about risk. Again, the risk steering group is also liable for putting forward diverse propositions for the transformations in the overall structure of risk management to make it certain that different risk management activities are suitably incorporated methodically handled on a enterprise basis. Additionally, diverse business divisions of both the companies Wesfarmers Limited and Woolworths Limited are answerable for the effectual identification, management, reporting and risk controlling within different areas of the company and enhancement of the culture that is mindful of the risk. Furthermore, the risk management team of both the Woolworths limited, the Wesfarmers Limited can manage the procedure of execution of the Enterprise Risk Management Program, and the business review that provides independent assurance regarding the effectiveness of both internal controls and the framework for risk management. Again, the company Wesfarmers adheres to section 11ZA and Section 11Y stipulated under the Energy Coordination Act 1994 and presents disclosures and reports to the authority of the economic regulation.

References

Arnold, G., 2014. Corporate financial management. Pearson Higher Ed.

Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.

Brigham, E.F. and Daves, P.R., 2012. Intermediate financial management. Nelson Education.

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

Forte, P.A., and Forte Patrick A, 2010. Financial management system. U.S. Patent 6,970,843.

Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

Healy, P.M. and Wahlen, J.M., 2012. A review of the earnings management literature and its implications for standard setting. Accounting horizons,13(4), pp.365-383.

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012.Financial Accounting. Pearson Higher Education AU.

Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed.

Madura, J., 2011. International financial management. Cengage Learning.

Ward, K., 2012. Strategic management accounting. Routledge.

Watts, R.L., 2013. Conservatism in accounting part I: Explanations and implications. Accounting horizons, 17(3), pp.207-221.

Wesfarmers.com.au. (2016). Reports. [online] Available at: http://www.wesfarmers.com.au/investor-centre/company-performance-news/reports [Accessed 9 Aug. 2016].

Woolworthslimited.com.au. (2015). Reports - Woolworths Limited. [online] Available at: http://www.woolworthslimited.com.au/page/Invest_In_Us/Reports/Reports [Accessed 9 Aug. 2016].