unit 101 financial management

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CODE 101 – FINANCIAL MANAGEMENT

LECTURER NAME

HEMANT KUMAR

TOPIC NAME

FINANCIAL MANAGEMENT ASSIGNMENT

SUBMISSION DATE: 28/08/2013

STUDENT NAME: Medhat Mohamed Ahmed Mohamed

UNIT 101 – FINANCIAL MANAGEMENT 1

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STUDENT ID: 866187

EXECUTIVE SUMMARY

The financial data used to prepare the ratio analysis representedin the report are based on Wesfarmers Ltd.’s financial annualreport for the year 2011.

FINANCIAL ANALYSIS REPORT SUMMARY

The first section of the report represents the various financialratio calculations for the year 2011 and its previous year 2010.This comparison shows the key factors causing either good or badperformance of the company.

The second section of the report performs analysis for thefinancial ratios calculation results in the first section bycomparing the results for the year 2011 with their correspondingresults for the previous year 2010; this comparison is used tojudge the company's efficiency in terms of its operations,management and to show how the company has utilized its assets toearn profits.

SUMMARY OF THE CONCLUSIONS

Wefarmers Ltd. Group’s result reflected a strong performance during the year 2011 achieving a Net Profit after tax of $1,922 billion with increase of 22.8% from 2010

Earnings per share have increased by 22.8% from 135.7 cents forthe year 2010 to 166.7 cents for the year 2011 against,reflecting the strong profit growth achieved.


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TABLE OF CONTENT

Introduction.......................................................4

1. Financial ratio analysis results for the years 2011 & 2010......6

1.1 Short term solvency ratios...................................6

1.2 Efficiency ratios ...........................................7

1.3 Profitability ratios.........................................8

1.4 Long term solvency ratios ..................................10

2. Finicial analysis report for year 2011.....................13

2.1 Short term solvency report..................................13

2.2 Efficiency analysis report..................................14

2.3 Profitability ratios report.................................15

2.4 Long term solvency ratios report............................16


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Conclusion .......................................................18

Refrences ........................................................19


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INTRODUCTION A) BACKGROUND

This Financial report assists shareholders and entrepreneurs inunderstanding the financial results of Wesfarmers Ltd. for theyear 2011. It also performs comparison between the companyfinancial records for the year 2011 and its previous year 2010 soas to analyze the company stability, solvency, liquidity andprofitability and gives clear indicators to shareholders aboutthe company’s performance.

Wesfarmers Ltd. Business Description: Wesfarmers Limited (WES) is a diversified business operating supermarkets, department stores, home improvement and office supplies, insurance, resources, chemicals, energy and fertilizers, and industrials & safety products.

WES is headquartered in Western Australia, having operating revenue of 54.875 Billion $ (as per the financial annual report for the year 2011). (http://markets.theaustralian.com.au/Equities/Company/Summary.aspx?SecId=WES)

B) AIMS/ OBJECTIVES

There are many ratios calculated from the financial statementsrepresenting the company's performance, activity, financing andliquidity. Some common ratios include the price-earnings ratio,debt-equity ratio, earnings per share, asset turnover and workingcapital.(http://www.investopedia.com/terms/r/ratioanalysis.asp)

All of these financial ratios can be utilized to give an idea ofthe financial strength of a company. Managers can use thesenumbers to evaluate their own processes, policies, andperformance. Potential investors can utilize these numbers todecide whether or not they want to invest in the company. (http://voices.yahoo.com/financial-ratios-2959904.html)


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C) SCOPE

Financial ratio analysis is an important tool for analyzing thecompany's financial performance by comparing the current yearwith the previous years(s)’s financial results.

Analyzing the ratio results of the past and present of thecompany gives a firm estimation of the company’s performance inthe future.

Analyzing Financial StatementsRatio analysis is an important technique of financial statementanalysis. Accounting ratios are useful for understanding thefinancial position of the company. Different users such asinvestors, management , bankers and creditors use the ratio toanalyze the financial situation of the company for their decisionmaking purpose.Judging EfficiencyAccounting ratios are important for judging the company'sefficiency in terms of its operations and management. They helpjudge how well the company has been able to utilize its assetsand earn profits.Locating WeaknessAccounting ratios can also be used in locating weakness of thecompany's operations even though its overall performance may be


_____________________________________________________________________________________quite good. Management can then pay attention to the weakness andtake remedial measures to overcome them.Formulating PlansAlthough accounting ratios are used to analyze the company's pastfinancial performance, they can also be used to establish futuretrends of its financial performance. As a result, they helpformulate the company's future plans.Comparing PerformanceIt is essential for a company to know how well it is performingover the years and as compared to the other firms of the similarnature. Besides, it is also important to know how well itsdifferent divisions are performing among themselves in differentyears. Ratio analysis facilitates such comparison. (http://accountlearning.blogspot.co.uk/2010/02/importance-and-advantages-of-ratio.html)

The report is divided into two sections; the first section“Financial results for the years 2011 & 2010” is calculating thefinancial ratios shown below for the years 2011 & 2010:

1.1- Short-term solvency or liquidity ratios 1.2- Efficiency Ratios1.3- Profitability Ratios1.4- Long-term solvency or financing ratios

The second section of the report “Financial analysis report forthe year 2011” presents the analysis of the financial ratiocalculation results extracted from the first section of thereport by comparing the results for the year 2011 with theircorresponding results for the previous year 2010; this comparisonis analyzing the company's financial performance.

1-FINANCIAL RATIO ANALYSIS RESULTS FOR THE YEARS 2011

& 2010

1.1-Short-term solvency or liquidity ratios

a)Current ratio


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Formula = CurrentAssestsCurrentLiabilites

Current ratio for year 2010 = 9,6747,852 = 1.23:1

Current ratio for year 2011 = 10,2188,722 = 1.17:1

b)Quick ratio

Formula = QuickAssetsCurrentLiabilites =

CurrentAssets−InventoryCurrentLiabilites

Quick ratio for year 2010 = 9,674−4,6587,852 =

0.6388:1

Quick ratio for year 2011 = 10,218−4,9878,722 =

0.667:1c)Cash Flow from Operations to current

liabilities

Formula =OperatingCashFlow¿Operations ¿

CurrentLiabilites

Cash Flow from Operations to current

liabilities for year 2010 = 3,3277,852

= 0.423$


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Cash Flow from Operations to current

liabilities for year 2011 = 2,9178,722

= 0.3344$

1.2-Efficiency Ratios

d)Debtor’s Turn over

Formula =NetSales

(Accountrecievablesn+Accountrecievablesn+1)/2

Where “n” is the previous year and “n+1” is the

following year

Debtor’s Turn over for year 2010 =51,827

(1,767+1,893) /2 = 28.32

Debtor’s Turn over for year 2011 =54,875

(2,149+1,767) /2 = 28.02

e)Average days sales uncollected

Formula = Days∈year

Debtor's turn¿ ¿


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Average days sales uncollected for year 2010

= 36528.32 = 12.88 days

Average days sales uncollected for year 2011

= 36528.02 = 13.026 days

f)Inventory turnover

Formula = CostofgoodssoldAverageInventory

Inventory turnover for year 2010 =34,411

(4,665+4,658) /2 = 34,4114661.5 =7.381

Inventory turnover for year 2011 =36,515

(4,987+4,658) /2 =36,5154822.5 = 7.571

g)Inventory turnover in days

Formula = Days∈yearInventoryturnover

Inventory turnover in days for year 2010 =3657.38 = 49.4

Inventory turnover in days for year 2011 =3657.571 = 48.2

1.3-Profitability Ratios


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h)Net Profit Margin

Formula = NetProfitRevenue

Net Profit Margin for year 2010 = 1,56551,827 =

3.01%

Net Profit Margin for year 2011 = 1,92254,875 =

3.5%i)Interest cost as percentage of sales

Formula = IntersetexpenseSales

Interest cost as percentage of sales for year

2010 =654

51,827 = 1.26%

Interest cost as percentage of sales for year

2011

= 52654,875 = 0.95%


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j)Asset turnover

Formula = SalesAverageTotalassets

Asset turnover for year 2010 = 51,827(39,062+39,236)/2

= 51,82739,149 = 1.32

Asset turnover for year 2011 = 54,875(40,814+39,236)/2

=54,87540,025 =1.37

k)Return on Assets

Formula = NetProfit+Interest+IncomeTaxAveragetotalassets

Return on assets for year 2010 = 1,565+654+650(39,062+39,236)/2

= 7.32% Return on assets for year 2011 =

1,922+526+784(40,814+39,236)/2 = 8.07%

l)Return on Ordinary Shareholder’s equity

Formula = NetProfit−PreferencedividendAverageOrdinaryShareholder'sequity


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Return on Ordinary Shareholder’s equity for

year 2010

= 1,565−0(24,248+24,694)/2 = 6.4%

Return on Ordinary Shareholder’s equity for

year 2011

= 1,922−0(25,329+24,694)/2 = 7.7 %

1.4-Long-term solvency or financing ratios

m)Debt to equity

Formula = TotalliabilitesTotalshareholder'sequity

Debt to equity for year 2010 = 14,54224,694 = 0.588

Debt to equity for year 2011 = 15,48525,329 = 0.611

n)Debt to total assets

Formula = TotalliabilitesTotalassets

Debt to total assets for year 2010 = 14,54239,236 =

0.396


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Debt to total assets for year 2011 = 15,48540,814 =

0.379o)Interest coverage

Formula = NetProfit+Incometax+InterestInterestexpense

Interest coverage for year 2010 = 1,565+650+654654

= 4.38 Interest coverage for year 2011 =

1,922+784+526526 = 6.14

p)Cash Flow from operations to total

liabilities

Formula = OperatingCashFlowTotalliabilites


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Cash Flow from operations to total liabilities

for year 2010 = 3,32714,542 =

0.228 Cash Flow from operations to total liabilities

for year 2011 = 2,91715,485 =

0.188q)Price/Earnings (P/E)

Formula = MarketPriceperordinaryshareEarningspershare

Price Earnings for year 2010 = 27.48$1.357 =

20.25

Price Earnings for year 2011 = 31.85$1.667 = 19.1

r)Dividend yield

Formula = DividendperordinaryshareMarketPriceperordinaryshare

Dividend yield for year 2010 = 1.2527.48$ = 4.55%

Dividend yield for year 2011 = 1.531.85$ = 4.71%


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s)Dividend Cover

Formula = EarningpershareDividendpershare

Dividend cover for year 2010 = 1.3571,325/1,157 =

1.1849

Dividend cover for year 2011 = 1.6671,557/1,157 =

1.239t)Net tangible asset backing

Formula =Netassets−Intangibleassets−GoodwillNumberofordinarysharesissued

Net tangible asset backing for year 2010 =24,694−4,328−16,206

1,157 = 3.6

Net tangible asset backing for year 2011 =25,329−4,353−16,227

1,157 = 4.1


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2-FINANCIAL ANALYSIS REPORT FOR THE YEAR 2011

2.1-Short-term solvency Analysis report The current assets increased but the current

liabilities increased as well, this increase in the

current liabilities has led to decrease in the current

ratio, which is considered as bad indicator. The

Current ratio for the year 2010 was 1.23:1 and has

become 1.17:1 for the year 2011 which means that the

company was having 1.23$ of current assets for every 1$

of current liability , and this value is decreased in

2011 to be 1.17$ of current assets for every 1$ of

current liability When applying the Quick ratio analysis by subtracting

the Inventory from the current assets then dividing the

value by the current liabilities, the quick ratio for

the year 2010 was 0.6388:1 and has increased to become


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0.667:1 for the year 2011 which is considered as good

indicator. The increase in the quick ratio while

decrease in current ratio reflects that the increase in

Inventory has affected the company’s liquidity.

When performing Cash flow from operations to current

liabilities for the years 2010 & 2011 , the operating

cash flow has decreased from 3,327(M)$ in the year

2010 to 2,917(M)$ , on the contrary the current

liabilities has increased from 7,852(M)$ for the year

2010 to 8,722(M)$ for the year 2011. Accordingly the

cash flow from operations to current liabilities ratio

has decreased from 0.423$ for the year 2010 to 0.3344$

for the year 2011 which is considered as bad indicator

affecting the company’s liquidity

2.2-Efficiency Ratios Report Debtors turnover ratio analysis shows the efficiency of

company sales with respect to the average of account

receivables .The debtors turnover ratio has decreased


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from 28.32 for the year 2010 to 28.03 for the year 2011

which is considered as bad indicator. When analyzing,

the Net sales has increased from 51,827(M) $ in the

year 2010 to 54,875(M) $ in the year 2011, but the

account receivables has decreased from 1,893(M) $ in

the year 2009 to 1,767(M) $ in the year 2010, then

increased back to be 2,149(M) $ in the year 2011

Based on the Debtors turnover ratio, the average day’s

sales uncollected has slightly increased; where it is

the time taken to collect debtor’s accounts.

This period has increased from 12.88 days for the year

2010 to 13.06 days for the year 2011 which is

considered as bad indicator on the company’s efficiency

This period will be decreased when the debtor’s turnover ratio will be

increased.

Inventory turnover has slightly increased from 7.381 in

the year 2010 to 7.57 in the year 2011 although the

average inventory has increased from 4661.5 (M) $ for

the years (2009 & 2010) to be 4822.5(M) $ for the years

(2010 & 2011), this is because the cost of goods sold

has increased from 34,411 (M) $ in the year 2010 to

36,515 (M) $ in the year 2011. The increase in the

Inventory turnover ratio is considered as good

indicator.


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Due to the increase in the Inventory turnover ratio,

the inventory turnover in days which reflects the

number of days required to convert inventory into sales

has decreased from 49.45 days in the year 2010 to 48.21

days for the year 2011 which is considered as good

indicator.

2.3-Profitability Ratios Report The Net Profit Margin has increased from 3.01% for the

year 2010 to 3.5% for the year 2011; which is

considered as good indicator because the profit

produced by each dollar of sales after payment of

interest has increased from 3.01 cents in the year 2010

to 3.5 cents in the year 2011

Interest cost as a percentage of sales has decreased

from 1.26% for the year 2010 to 0.95% for the year 2011

which is considered as good indicator.

The asset turnover ratio has slightly increased from

1.32 in the year 2010 to 1.37 in the year 2011 although


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the average assets has increased from 39,149(M) $ for

the years 2009&2010 to 40,025 (M) $ for the years

2010&2011, but the increase in sales from 51,827 (M) $

in the year 2010 to 54,875(M) $ in the year 2011 has

compensated the increase in average total assets.

Although this ratio shows slight increase from the

years 2010 to 2011 which is considered as good

indicator, the increase in assets has to be well

monitored and controlled

Return on assets ratio has increased from 7.32% for the

year 2010 to 8.07% for the year 2011 , which means that

for every 1$ of assets the number of cents earned has

increased from 7.32 cents to 8.07 cents which is

considered as good indicator.

The Return on ordinary shareholder’s equity has

increased from 6.39% for the year 2010 to 7.68% for the

year 2011 which reflects that the profitability of

shareholders equity is increased by 1.25% which is

considered as good indicator.


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2.4-Long-term solvency ratios Report Debt to equity ratio analysis shows that the relation

between debts to equity has increased from 0.588 for

the year 2010 to 0.611 for the year 2011.The increase

in debt to equity is considered as bad indicator

affecting the company’s long term solvency because it

reflects that the business relies more on external

lenders

Debt to total assets ratio analysis shows that the

proportion of total assets financed by debts has

decreased from 0.396 for the year 2010 to 0.379 for the

year 2011.The decrease in debt to total assets is

considered as good indicator because it reflects that

the business relies less on debts for buying assets

Interest coverage ratio analysis has increased from

4.38 for the year 2010 to 6.14 for the year 2011. The

ratio is above “1” for both years 2010 & 2011 which

reflects that the company the income before interest

and tax of the business safe to pay off all interest

expense. The increase in Interest coverage ratio from

4.38 for the year 2010 to 6.14 for the year 2011 which

is considered as good indicator.


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When performing Cash flow from operations to total

liabilities for the years 2010 & 2011 , the operating

cash flow has decreased from 3,327(M)$ in the year

2010 to 2,917(M) $ on the contrary the total

liabilities has increased from 14,542(M) $ for the year

2010 to 15,485 (M) $ for the year 2011. Accordingly

the cash flow from operations to total liabilities

ratio has decreased from 0.228 for the year 2010 to

0.188 for the year 2011 which is considered bad

indicator affecting the company’s long term solvency

Price/Earnings ratio analysis shows that the ratio has

decreased from 20.25$ for year 2010 to 19.1$ for the

year 2011.The decrease in the P/E ratio reflects that

the market does not have much confidence in the future

of the shares of the company which is considered as bad

indicator

Dividend yield ratio analysis shows that the ratio has

increased from 4.55% for the year 2010 to 4.71% for the

year 2011 where the increase is considered as a good

indicator because the investors use this ratio to

perform trend analysis of the company, having dividend

yield ratio increasing year after year, investors b

confident to invest in the company.


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Dividend cover ratio analysis shows that the ratio has

increased from 1.1849 for the year 2010 to 1.239 for

the year 2011, which means that the ability of the

company to pay ordinary dividends to shareholders out

of profit earned has increased from 1.18 to 1.23 times


Net tangible assets backing ratio has increased from

3.6$ for the year 2010 to 4.1$ for the year 2011, this

reflects that the value per ordinary share based on net

tangible assets has increased from 3.6$ for the year

2010 to 4.1$ for the year 2011with increase of 0.51$,



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CONCLUSION

1- OBJECTIVE

There are many ratios calculated from the financial statementsrepresenting the company's performance, activity, financing andliquidity. Some common ratios include the price-earnings ratio,debt-equity ratio, earnings per share, asset turnover and workingcapital.(http://www.investopedia.com/terms/r/ratioanalysis.asp)

2- RESULTS SUMMARY OVERVIEW

Net profit after tax for the Wesfarmers Ltd. Group in the 2011financial year of $1,922 million against $1,565 million for theyear 2010 which is that the Net profit has increased by 22.8%compared with the previous year 2010.

Net Profit Margin has increased by 0.49% from 3.01% for the year2010 to 3.5% in the year 2011

Earnings per share have increased by 22.8% from 135.7 cents forthe year 2010 to 166.7 cents for the year 2011 against,reflecting the strong profit growth achieved.

Cash dividends paid increased by 14.9% from $1,325 million inyear 20010 to $1,557 million for year 2011.

Average return on equity increased to 7.7% in the year 2011 from6.4% in the year 2010.

3- FINAL COMMENTS

The Current ratio was decreased by 4.8% from 1.23:1 for the year2010 and has become 1.17:1 for the year 2011, applying Quick


_____________________________________________________________________________________ratio analysis, it shows that the ratio has increased by 4.2%from 0.6388:1 for the year 2010 to 0.667:1 for the year 2011,this indicates that the increase in inventory has affected thecompany’s liquidity, the inventory shall be well monitored andcontrolled.

Cash flows from operations have been down by 12.32% from $3,327million for the year 2010 to $2,917 million for the year from theyear 2010 while having liabilities increased from $7,852M foryear 2010 to $8,722M for 2011 , this has led to decrease in cashflow from operations ratio from 0.423$ in 2010 to 0.3344$ in 2011

There was a dip in the account receivables in the year 2010 thenincreased back in the year 2011. This dip has decreased thedebtors turnover ratio from 28.32 for the year 2010 to 28.03 forthe year 2011

Debtors turn over Analysis shall be applied to the next years tokeep track of the recovery of the account receivables withrespect to Net sales and to make sure that the dip in accountreceivables in the year 2010 is not repeated againREFERENCES

“Wesfarmers Limited (WES) is a diversified business operating

supermarkets.”

www.theaustralian.com.au/ Privacy Officer, the Australian, 28

Aug. 2013.

<http://markets.theaustralian.com.au/Equities/Company/Summary

.aspx?SecId=WES>

“There are many ratios calculated from the financial

statements representing the company's performance”


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www.investopedia.com / Investopedia US, A Division of

ValueClick, Inc. 28 Aug. 2013.

<http://www.investopedia.com/terms/r/ratioanalysis.asp>

“All of these financial ratios can be utilized to give an

idea of the financial strength of a company.”

http://voices.yahoo.com, Yahoo! Inc., 28.Aug.2013

<http://voices.yahoo.com/financial-ratios-2959904.html>

“Ratio analysis is an important technique of financial

statement analysis. Accounting ratios are useful for

understanding the financial position of the company”.

http://accountlearning.blogspot.co.uk/, Account management,

21.aug.2013

<http://accountlearning.blogspot.co.uk/2010/02/importance-

and-advantages-of-ratio.html>

Unit 101 Financial Management Study Material

Wesfarmers Annual Report 2011


unit 101 financial management

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