Principals of Financial Markets

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Principals of Financial Markets 1

Table of Contents
Introduction................................................................................................................................3

Overview of the company:.........................................................................................................4

Wesfarmers Limited:..............................................................................................................4

Woolworth’s group Limited:..................................................................................................4

Top-down analysis:................................................................................................................5

Bottom-UP analysis:..............................................................................................................8

The Current Probability Ratio:...............................................................................................9

Calculation of Efficiency Ratio:...........................................................................................10

Market performance ratio calculation..................................................................................13

Ration analysis of both companies:......................................................................................14

Liquidity Ratio:................................................................................................................14

Profitability Ratio.................................................................................................................14

Efficiency Ratio:..................................................................................................................15

Market performance ratio:....................................................................................................16

References:...............................................................................................................................18
Principals of Financial Markets 2

Executive Summary

Wesfarmers and the Woolworth both the companies are at the top of the retail market. Both
the companies are the competitors of each other. Both are doing great in the field of the retail
sector. In this project, it will be discussed about the various factors that make the companies
different from each other. The project will be done and analyze by the two theories that are
top-down analysis and bottom-up analysis by which it could understand how the companies
are doing business in the field of the retail sector.

The companies need to focus on the strategies and the objectives and goals of the companies.
It will help the companies to achieve more in the future and will acquire more profit. As right
now it can be seen that the Wesfarmers having an edge over the Woolworths. So Woolworths
needs to focus on maintaining liquidity within the company.
Principals of Financial Markets 3

Introduction

In this report, there will be a discussion on the fundamental analysis of the two companies
who are the current Australian market giant "Wesfarmers Limited and Woolworth's Group
Limited". The main part will be the top-down analysis and the bottom-up analysis of these
two giants companies. In the top-down analysis, how the companies are affected by the
economic environment, apart from that, what are the internal factors that are affecting the
company, and the various ration like liquidity ratio of the company as well as the
profitability and efficiency ratio will be discussed. Apart from that what is the capital
structure and the market performance of the two companies will be discussed to find the
bottom-up analysis.
Principals of Financial Markets 4

Overview of the company:

Wesfarmers Limited:

The Wesfarmers Limited is one of the biggest food and staples retailing company in
Australia. The company is based in Australia, and the headquarter of the company is in the
Perth, Australia. The company was founded in the year 1914 as a cooperative company. The
chairperson of the company is Michael Chaney AO. The total revenue of the company in the
year 2016-17 is 68.44 billion AUD. From this revenue 8.7 billion AUD has been distributed
among the employees for their salaries and wages, 2.1 billion UAD has been given to the
government as taxes and royalties, 2.5 billion AUD has been given to the shareholders and
the company has reinvested around 1.6 billion in the business. The total employees who are
currently working with the company are around 220 thousand. Wesfarmers is one of the most
attractive companies for the investment and it is the biggest companies in Australia in term of
revenue generation. Moreover, the company is also listed on the Australian Stock Exchange.

The mission statement of Wesfarmers: "creating values and satisfying the needs and the
desire of the customers by providing quality products"

Woolworth's Group Limited:

Woolworth's group limited is also an Australian company, which deals in the field of food
and staples retailing. It is one of the competitor companies of the Wesfarmers. The company
has been founded by Mr. George creed, Ernest Williams, Percy Christmas, and Cecil Scott
Wayne in the year 1924. The CEO of the company is Brand Banducci. The company has
generated total revenue of 55.5 billion AUD. The company headquarters is in the New South
Wales, Australia. The total employees who are associated with the company are around 202
thousand.

The mission statement of the company: "the aim of the company is to be at the heart of the
Australian community and to become the best retailer for the kids, homes, and family".
Principals of Financial Markets 5

Top-down analysis:

Top-down analysis is one the analysis that is used by the trader to uses technical analysis as a
part of the trading strategy. It is a microanalysis of the organization, which includes economic
analysis of the country, analysis of the industries and the organizational analysis. In the
economic analysis includes the external factors of the economy that can affect the
organization. In this part, the factors like the GDP (gross domestic product), the current value
of the Australian money, and the inflation will be discussed.

The Australian economy is in the 12th position in terms of the GDP. The Australian economy
is 1,323 trillion dollar economy [ CITATION Wor17 \l 16393 ]. The food and the retail sector
are supporting the Australian GDP, which is a huge number for Australia. Apart from that,
the growth rate of the Australian GDP is 3.4% [ CITATION Aus17 \l 16393 ], therefore, it
can be understood that as per the GDP there is a huge demand in the Australian market,
which is good for both of the companies. The GDP shows that there is a huge opportunity in
the current market. As the total share of the retail, market in term of sales is on an average
3.2%.

Figure1: Australian GDP

Source: [ CITATION Wor17 \l 16393 ]

Principals of Financial Markets 6

Figure: retail sector Australia

Source: [ CITATION Aus171 \l 16393 ]

The inflation rate in Australia is around 1.3 % which can be considered as an under control
and good for the economy[ CITATION Mea17 \l 16393 ]. The per capita income of the
Australian people has been grown substantially from 49,868.68 dollars to 53,799.938 dollars,
which is significantly higher than 2016 that means the consumers or the people of Australia
have no more purchasing power in the domestic market and it will generate the demand in the
retail sector. As both the companies have to work in the food and retail sector will be cashing
the chance to enjoy more profit. As these two companies are operating their businesses all
over the world, therefore the companies have a chance to get more profit as these companies
are taking US dollars as a currency of exchange. Moreover, right now the current value of the
Australian dollar is one AUD = 0.781 USD[ CITATION His17 \l 16393 ].
Principals of Financial Markets 7

Figure 3: Per capita Income Australia 2017

Source: [ CITATION GDP17 \l 16393 ]

While analyzing the industries the demand and the supply conditions have to be included, the
competitive advantages and the life cycle of the industries is been included also. The growth
of the Australian economy is good. Moreover, the future growth looks also stable in terms of
development, which will give a boost to the retail sector. As the retail sector is also
contributing to the GDP. The Woolworths and the Wesfarmers are both retail-based company
so the performance of these two companies will be predicted well than the last year. As the
inflation rate is under control both of the company can supply goods for the demands that
arise.

As these two companies are from the retail sector there are also strong competition is going in
that sector, as there are many other retail companies, who are emerging very strongly.
However, Wesfarmers and the Woolworths is the strong contender in the field of the retail
sector. The brand images of these two companies are very strong and well known to the
people. These two companies cover half of the Australian market. As per the risk of the two
companies are the consumer's taste and preferences, which can be changed in near future.
Therefore, the companies have to make their product as per the future needs.

The Enterprise analysis is the analysis of the company's internal environments. In this type of
analysis, the strategy of management of the company and the goals and objectives can be
analyzed. The main objectives and the goals of the company Woolworths are to become the
leader in the current market segment over the competitors and the company is focusing on the
profit generation. The company is on right track to achieve the goals and the objectives
because the companies have the perfect and effective strategy[ CITATION WOO17 \l
16393 ].

Moreover, in the case of the Wesfarmers, the objective of the company is to create values and
maintain them in front of the consumers as well as to provide the highest returns to the
shareholder of the companies[ CITATION 20117 \l 16393 ]. To achieve these objectives the
company is focusing on the strategies that they have made. Apart from that, the company is
controlling their financial operations, doing innovation as per the demand of the market.
Principals of Financial Markets 8

Moreover, the company is allowing the ideas of the employees and implementing those ideas
for the betterment of the company.

Bottom-UP analysis:

The following data are for the bottom-up analysis of the Wesfarmers and Woolworths:

Name of Ratio Woolworths(2017) Million $ Wesfarmers(2017) Million $

Liquidity Ratio    

Current ratio= Current assets/ liabilities 0.8 0.92

Current assets 7,121.00 9,667

Liabilities 8,952 10,417

Quick Ratio = Current Ratio-

0.32 0.33
Inventories/liabilities

Current assets 7,121.00 9,667

liabilities 8,952 10,417

Inventories 4,207 6,530

Cash Ratio= Cash+ Cash Equivalents/

1.1 1.4
Liabilities

Cash 909 4,226

Liabilities 8,952 10,417

Source: for Wesfarmers [ CITATION 20117 \l 16393 ], For Woolworths [ CITATION

WOO17 \l 16393 ]
Principals of Financial Markets 9

The Current Probability Ratio:

Woolworths(2017) Wesfarmers(2017) Industry

Name of Ratio
Million $ Million $ Age

Profitability Ratio      

Profit Margin(Gross) = Gross 21.0420197533750

32.02
Profit/Revenue*100 2 19.22

Gross Profit 15,928.00 14,402  

Revenue 49,743 68,444  

Profit Margin(Net) = Net Profit/  

3.08 4.197592192
Revenue*100
3.63

Net Profit 1,533.50 2,873  

Revenue 49,743 68,444  

Operating profit margin ratio =

3.2 8.26
Operating profit / revenue * 100  

Operating profit 1593.4 5668

 

Revenue 49,743 68,444  

shareholder fund (on return ) = Net `1.1987803349901

`1.66911610329624
income / shareholder fund * 100 8  

Net income 159.3 287  

shareholder fund 9526 23941  

Return on assets = net profit after  

8.150758858 4.64
tax / total asset * 100 1.198780335

net profit after tax 1,593.40 2873  

total asset 19,549.10 40,115  

Source: for Wesfarmers [ CITATION 20117 \l 16393 ], For Woolworths [ CITATION

WOO17 \l 16393 ]
Principals of Financial Markets 10

Calculation of Efficiency Ratio:

Woolworths(2017) Million Wesfarmers(2017) Million Industry

Name of Ratio
$ $ Age

Efficiency
   
Ratio  

Company
Inventory
turnover ratio
35.06242888 44.63828707  
= average
inventory / cost
of sales * 365

average
4558.5 6,260
inventory  

costing of sale 47,454 51,187  

Trade payable
turnover =
average trade 58.9196485 46.28548264  
payable / cost of
sale * 365

average trade
7660.2 6,491
payable  

cost of sale 47,454 51,187  

Trade
receivable
turnover =
4.294253382 17.56295544
average trade
receivable / cost
of sale * 365  
Principals of Financial Markets 11

average trade
558.3 2463
receivable  

cost of sale 47,454 51,187  

Sale revenue to
capital
employed =
4.016403046 2.15791034
sales revenue /
capital
employed  

sales revenue 58,276 65,512  

capital
14509.5 30359
employed  

Source: [ CITATION Woo17 \l 16393 ] for Wesfarmers [ CITATION Wes17 \l 16393 ]

Principals of Financial Markets 12

Capital Structure ratio Calculation:

Woolworths(2017) Million Wesfarmers(2017) Million Industry

Name of Ratio
$ $ Age

Capital
   
Structure  

Equity ratio =
total equity / total 41.74842703 59.68091736 50.71
assets * 100

Total equity 8161.4 23,941  

total assets 19,549 40,115  

Debt to equity
ratio = total
54.37961831 67.55774613 60.98
liabilities / total
equity * 100

Total liabilities 9876.1 16,174  

Total equity 18161.4 23,941  

Gearing ratio =
long-term debt /
16.15515772 17.2112666 16.68
capital employed
* 100

Long-term debt 1895 4809  

Funds employed 11,730 27,941  

Source: [ CITATION Woo17 \l 16393 ] for Wesfarmers [ CITATION Wes17 \l 16393 ]

Principals of Financial Markets 13

Market performance ratio calculation

Woolworths(2017) Wesfarmers(2017) Industry

Name of Ratio
Million $ Million $ Age

Market Performance
   
Ratio  

Earnings per share= net

income which is
available to
-97.7056962 36.24220837 -61.43
shareholder/weighted
average share
outstanding*100

net income which is

available to the -1235 407  
shareholder

average share
1264 1123  
outstanding weighted

Price-earnings ratio=
-21.38053441 110.6444717 89.62
MPS/EPS*100

Market price per share 20.89 40.1  

Earnings per share -97.7056962 36.24220837  

Source: for Wesfarmers [ CITATION www17 \l 16393 ] for Woolworths [ CITATION

mar17 \l 16393 ]
Principals of Financial Markets 14

Ration analysis of both companies:

Liquidity Ratio:

Liquidity Ratio is used to see the capability of the company to pay its debt[ CITATION
Liq18 \l 16393 ]. In the liquidity ratio, there is another three type's ratio, which is used for
calculation:

Current Ratio: in this is one of the types of liquid ratio, which is used to see the company's
capacity of paying the long-term and the short-term responsibility. The current ratio of the
Woolworth is 0.8 and the Wesfarmers ratio is 0.92 in the year 2017. By comparing these two
companies, it shows that both the companies are not so good now. However, Wesfarmers
look better than the Woolworths do.

Quick Ratio: in the quick ratio it shows the companies capabilities to the completion of the
short-term responsibilities. The quick ratio of the Woolworth is 0.32 and the Wesfarmers is
0.33, which shows the Wesfarmers is in good position than the Woolworths. The percentage
is small but better than Woolworth is.

Cash Ratio: cash ratio shows the company's payment capabilities on the current liabilities
through the cash. The cash ratio of both the companies is not so good. However, Wesfarmers
is in a good position with 1.4 and the Woolworths having only 1.2. It shows that companies
are trying to pay on the current liabilities.

Profitability Ratio

Profitability Ratio is used to see the capability of the companies for creating profits from the
business. In the profitability ratio, there are few other ratios, which are available for
calculations, which are mentioned below:

Profit Margin (Gross): in the year 2017, the profit margin of the Wesfarmers is 21.02 and
the Woolworths profit margin is 32.02 It shows that both the companies can meet the future
liabilities easily. However, the profit margin of Woolworths is greater than the Wesfarmers.
That means the Woolworths can perform their daily activities very well. And the company
can meet the future responsibilities.

Profit margin (NET): the net profit margin of Wesfarmers 4.19 and the net profit margin of
the Woolworths is 3.07. If the company's net profit margin is high then the company can
Principals of Financial Markets 15

control the cost of the company very effectively. So, in that case, Wesfarmers can control
their cost more effectively than the Woolworths.

Operating Profit margin: From the operational profit, a company shows that their financial
position is good and the company is making more money from its operation. The profit
margin of the Woolworths is 3.2 and the Wesfarmers operational profit. By this, it can be
understood that Wesfarmers is doing good in the terms of Operational profit.

Efficiency Ratio:

Efficiency ratio can be defined as the organizational efficiency[ CITATION Ste181 \l

16393 ], which means whether the company is utilizing the three resource for an example
balancing assets and the liability.

Inventory turnover ratio: inventory turnover ratio indicates the companies maintain or the
controls over its inventory. As the high amount of inventory shows the low amount of
investment and the low amount of inventory shows the high level of investment in the
company.

Average payment period: this shows the companies average payment submission status, the
high number of days indicates the higher number of days the company taken for delivering
the payment. As the Woolworths have done, the payment on average of 58 days and the
Wesfarmers have taken around 46 days for the payment.

Average collection Period: This shows that the companies collect their dues in how many
days or Period. As the average period of the Woolworths, average period for collecting the
dues is around 4 days. Moreover, the Wesfarmers have taken 17 days.

Capital Structure Ratio:

Capital structure ratio shows the capital structure of the particular company. This ratio can
examine different types of the financial statement of the company.

Equity Ratio: equity ratio shows the how healthy the company is and it can attract the new
investors from the market for investing. The equity ratio of the Wesfarmers is 59 and the
Woolworths ratio is around 49 that mean the Woolworths can attract many investors.
Principals of Financial Markets 16

Market performance ratio:

Market performance ratios show the performance of the companies in the market. it can
provide the information on the shareholders earning on the investment done[ CITATION
Mar17 \l 16393 ].

Price-earnings ratio: the price-earnings ratio of the Woolworths is -97 and the Wesfarmers
earning is 36. Which shows that Wesfarmers are doing great.
Principals of Financial Markets 17

Conclusion:

Woolworths and the Wesfarmers need to maintain the flexibility in their working and
management system so that they can perform well in terms of economic. They can even
perform well if the inflation and the rules and regulation of the country will become stable.
The Wesfarmers is in a good position and it needs to maintain the same in the future.
Woolworths need to improve their strategy and to perform well.

By the report, it can be understood that the Woolworths and the Wesfarmers both have the
good brand image in Australia and the rest of the world. The demand in the retail sector is
going high and the GDP of Australia is looking good. Therefore, it can understand that the
future of both companies is in high mode.
Principals of Financial Markets 18

References:

Annual Report. (2017). 2017 Annual Report. Retrieved September 20, 2018, from
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source/default-document-library/2017-annual-report.pdf?sfvrsn=0

Australia GDP Growth Rate. (2017). Australia GDP Growth Rate. Retrieved September 20,
2018, from tradingeconomics.com: https://tradingeconomics.com/australia/gdp-
growth

Australia Retail Sales YoY. (2017). Australia Retail Sales YoY. Retrieved September 20,
2018, from tradingeconomics.com: https://tradingeconomics.com/australia/retail-
sales-annual

Bragg, S. (2018). Steven Bragg. Retrieved September 20, 2018, from

www.accountingtools.com: https://www.accountingtools.com/articles/efficiency-
ratios.html

GDP per Capita (current US$). (2017). GDP per Capita (current US$). Retrieved September
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Historical Rates for the AUD/USD currency conversion on 31 December 2017. (2017).
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Liquidity Ratios. (2018). Liquidity Ratios. Retrieved September 20, 2018, from
www.investopedia.com: https://www.investopedia.com/terms/l/liquidityratios.asp

market share. (2017). Retrieved September 20, 2018, from markets.businessinsider.com:

https://markets.businessinsider.com/balance-sheet/woolworths
Principals of Financial Markets 19

Market value ratios. (2017). Market value ratios. Retrieved September 20, 2018, from
www.accountingtools.com: https://www.accountingtools.com/articles/market-value-
ratios.html

Measures of Consumer Price Inflation. (2017). Measures of Consumer Price Inflation.

Retrieved September 20, 2018, from www.rba.gov.au:
https://www.rba.gov.au/inflation/measures-cpi.html

Wesfarmers Limited(WES). (2017). wesfarmers limited(WES). Retrieved September 20,

2018, from www.investsmart.com.au: https://www.investsmart.com.au/shares/asx-
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Wesfarmers Ltd (WES). (2017). Wesfarmers Ltd (WES). Retrieved September 20, 2018, from
www.investing.com: https://www.investing.com/equities/wesfarmers-limited-ratios

WOOLWORTHS GROUP. (2017). WOOLWORTHS GROUP. Retrieved September 20,

2018, from www.woolworthsgroup.com.au:
https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf

Woolworths Ltd (WOW). (2017). Woolworths Ltd (WOW). Retrieved September 20, 2018,
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World Bank national accounts data, and OECD National Accounts data files. (2017). World
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Principals of Financial Markets 20

Referencing