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ACC10707 Accounting And Finance For Business
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ACC10707 Accounting And Finance For Business
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Course Code: ACC10707
University: Southern Cross University
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: Australia
Question:
You are required to calculate key financial ratios for an ASX listed company and its competitor and interpret this information in the context of your allocated competitor company over time. You will be allocated two ASX listed companies to study for this assessment. You must do your allocated companies in the order they are allocated to you. You can look up your allocated companies under ‘You/Competitor’ in MyGrades in week 1.
Imagine you work for the FIRST of these companies. The second is one of your company’s competitor. Your boss has asked you to calculate and assess the company’s key (your boss’s opinion) ratios relative to that of its competitor and provide recommendations for improvement if required.
The key ratios you need to calculate for your company and your competitor are net profit margin, asset turnover, current ratio, quick ratio and debt ratio. Your boss also wants you to calculate the cash cycles. All workings for ratios and the cash cycles are required.
You focus your analysis on the companies’ 2015, 2016 and 2017 ratios mentioned above firstly in terms of their trend changes and also in comparison to your competitors ratios.
In making your assessment consider potential differences between your company and its competitor that could explain divergent results. Where relevant, these should be noted. (For example, although the companies may compete in some of the same markets, they may also have different areas of business).
Marks for this task are in accord with the separately provided marking guide.
In essence students should carefully study chapter 8 of the textbook and then calculate ratios and the cash cycle for their company and its competitor. Next describe the meaningfulness of these calculations firstly theoretically (text book chapter 8) and then actually and relate the findings to their company and in contrast to their competitor company. Wherever possible industry or accepted standards might assist your contrast as well. Then outline possible company improvements highlighted by the ratios and cash cycle and any weaknesses in using ratios.
Note also as follows –
The Cash Cycle can be a little confusing and some text books use different methodologies for calculating the three elements of the Cash Cycle. For your convenience the formulas are a) Inventory being Current Inventory.
Answer:
Introduction
The two companies that have been compared are Wesfarmers Limited and Woolworths Limited. While both these companies have a diversified portfolio but essentially both these companies are essentially in the organised retail industry. These two companies form a virtual duopoly in the supermarket industry and thus dominate the market. Even though the two companies have a number of comparable divisions, but Wesfarmers is a more diversified group with interests spanning in industrials, chemicals, fertilisers and energy. The objective of the given report is to perform a comparative analysis of the two companies based on the ratios computed using 2015, 2016 and 2017.
Ratio Analysis
A comparison of the various ratios of the two companies is carried out below
Net profit margin
It provides an indication of the profitability of the company’s operations. It is apparent that for two years namely 2015 and 2017, the net profit margin is higher for Wesfarmers in comparison with Woolworths. However, for 2016, Woolworths has a higher profit margin in comparison with Wesfarmers. The lower net profit margin for Wesfarmers is primarily on account of non-cash impairment charges on Target to the extent of $1,249 million and also on Curragh to the extent of $595 million. Besides, Wesfarmers also incurred $ 102 million in restructuring cost which has led to lower profitability in 2016 (Wesfarmers, 2017). Thus, if the above impairment charges and one-time expenses are excluded, it is apparent that Wesfarmers has high profitability in comparison with Woolworths. To some extent this can be explained by the composition of two groups. For Woolworths, more than 55% of the revenues and profits are obtained are supermarkets division which is not the case for Wesfarmers (Woolworths, 2017). Besides, the margins in some of the businesses such as industrials, chemicals which Wesfarmers is in, the margins are higher than supermarkets (Wesfarmers, 2017).
Asset Turnover
This ratio captures the efficiency with which the company is able to derive sales from the given assets (Arnold, 2015). For the given period, it is apparent that the asset turnover ratio is better for Woolworths in comparison to Wesfarmers. This may be attributed to the presence of Wesfarmers in certain capital intensive businesses such as fertilisers, energy, chemicals where the manufacturing facilities would tend to enhance the asset base of the company and thus lower the asset turnover (Beck et. al., 2017). These segments are not present for Woolworths and hence the discrepancy. A positive aspect for Wesfarmers is that there is a constant improvement in the asset turnover during the given period which is not the case for Woolworths since there is no significant improvement.
Current Ratio
This is an indicator of the short term liquidity of the company. The current ratio of Wesfarmers for all the three years is slightly better in comparison to Woolworths. An additional aspect is that the current ratio of Wesfarmers has remained constant during the period of consideration while that of Woolworths has constantly deteriorated. As a result, it is imperative that going forward Woolworths needs to be careful about the short term liquidity so that it does not become a serious issue (Arnold, 2015). At the moment, despite the fall in current ratio, it does not pose threat or liquidity crisis for Woolworths.
Quick Ratio
This ratio is an indicator of short term liquidity and has special relevance for the retail industry owing to the large amounts of inventory that these companies have. The quick ratio for the two companies is comparable and there does not seem any significant difference between the two companies on this parameter. Also, short term liquidity does not seem a concern for either of the two companies based on this ratio computed for the given period.
Debt to Assets Ratio
This ratio provides an indication of the solvency of the company. It is apparent that the debt to asset ratio is superior for Wesfarmers in comparison to Woolworths for all the three years. A contributing reason to this observation can be the higher total assets for Wesfarmers owing to high amount of non-current assets owing to chemical, energy and fertiliser business. The movement in the debt to asset ratio is similar for both the companies. Also, the ratios do not pose any threat to long term solvency of the respective companies.
Cash Cycle
The cash cycle is an indicator of the efficiency of the firm since lower cash cycle would lower the working capital requirement of the firm and reduce the finance costs (Arnold, 2015). During the given period, the cash cycle of Wesfarmers varies at 7 to 8 days. For Woolworths, the cash cycle is negative for the entire period. However, there is only a marginal difference between the two companies which may be explained on account of differences in business. For businesses such as chemical, fertiliser, the inventory requirement is higher and also the collection period (Wesfarmers, 2015). This may be responsible for the observed difference.
Recommendations And Limitations
Based on the above analysis, it may be recommended that most of the difference between the two companies is on account of the more diversified business portfolio that is possessed by Wesfarmers. As a result, the percentage contribution of supermarket segment to consolidated financial statements is lesser in comparison with Woolworths. However, in general Wesfarmers has emerged as a superior company especially in terms of profitability and liquidity. Going forward, it is imperative that Woolworths is cautious with regards to short term liabilities as there is constant deterioration in the current ratio.
However, it needs to be understood that the ratio analysis has limitations. One of the primary ones is that it is based on past data which may not be true for the future (Beck et. al. 2017). This is relevant here considering the restructuring of portfolio by Woolworths during the period which impacted the business performance especially in 2016 (Woolworths, 2015; 2017). Also, the ratio analysis is based on the underlying accuracy of the financial numbers along with comparative accounting norms used by the companies. As a result, the observations are indicative and not conclusive in nature especially with regards to future performance.
References
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times Management.
Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N. (2017) Fundamentals of corporate finance London: Pearson Higher Education.
Woolworths (2017) Annual Report 2017, [Online] Available at https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed August 21, 2018]
Woolworths (2015) Annual Report 2015, [Online] Available at https://www.woolworthsgroup.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed August 21, 2018]
Wesfarmers (2017) Annual Report 2017, [Online] Available at https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed August 21, 2018]
Wesfarmers (2015) Annual Report 2015, [Online] Available at https://www.wesfarmers.com.au/docs/default-source/reports/2015-annual-report.pdf?sfvrsn=4 [Accessed August 21, 2018]
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