Wesfarmers : Financial Analysis

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  • Topic: Coles Group, Coles Supermarkets, Wesfarmers
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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
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 $39.6 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 12.82 % 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...
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