The Financial Statements and Reports Interpretation - Case Study Example

ACCOUNTING REPORT: By (Insert both names) (Name of class) (Professor’s name) (Institution) (City, State) (Date) Introduction This report analyses the financial reports for Wesfamers for the periods running from 2007 up to 2010. This financial assessment is drawn from the consolidated data and outlines the financial ratios and trend analysis for the given period. The report analyses the capital structure, profitability, liquidity, asset efficiency and market performance. According to (Monica 2009), all the successful businesses are constantly assessing their company performance, by comparing the historical figures of the company, with its competitors within the industry and by extension other successful investments from other sectors. For an organization to have a comprehensive assessment of the firm’s effectiveness, the company needs look beyond the easily attainable figures for instance the profits, sales and total assets. They should be in a position to read between the lines of their financial reports and statements and make the ostensibly inconsequential figures comprehensible and accessible. Such a huge data overload would appear staggering. Providentially, there are a number of properly tested financial ratios which normally render this task somehow less daunting. Financial ratios and trends assist the company to quantify and indentify the weakness and strength of the organization, asses the financial position of the company and comprehend the risks that the firm could be taking. A number of the off-the- balance sheet might play some role in the failure of success of an organization, however, when applied in concert with different forms of investment evaluation processes. The financial statements and reports interpretation is an essential component within the accounting field because it offers very important information to the users which helps them is critical decisions. This report has a number of important percentages and numerical figures to assist in understanding Wesfamers performance. The major reason as two why the figures beyond two years are used is to make the assessment more informative and reliable as (Peter and Eddie 2007) found out. Brief Profile of Wesfarmers Before carrying out the analysis, a short background of Wesfamers is provided. The company was started in 1914 as Western Australian farmers’ cooperative. The organization has developed to be one of the biggest companies listed in Australia. The companies diverse investment operations interest are: department stores, supermarkets, office supplies and home improvements, chemicals, coal mining, fertilizers, energy, insurance and safety and industrial products, The fundamental goal of Wesfarmers is to provide a satisfactory return to its shareholders according to the company website. Trend Analysis Trend analysis technique applied to assess the patterns, movements and changes within a data for a given number of years or a period of time. This assessment is performed in order to compare the information concerning an organization in the course of some significant time period. Absolute Figure in $000 2010 2009 2008 2007 Sales Revenue 51,827,000 50,982,000 46,365,000 39,383,000 EBIT 3, 456,270 3,356,009 2,989,209 2,782,092 Profit after Tax 2,676,909 2,162,890 1,782,909 1,526,209 Trend Analysis Sales Revenue 51,827 50,982 48,898 48,890 EBIT 2,672 2,526 2,425 2,314 Profit after Tax 23,829 18,267 15,267 9,754 The calculations in the above table indicate that the sales revenue for Wesfarmers Ltd has been on an increasing trend from 2007 to 2010 which shows that in absolute figures, Wesfarmers realized the highest sales income in 2010, of 51,827,000 the year 2009 had 50,982,000, year 2008 had, 46,365,000 and 2007 had 39,383,000. In the year 2010, Wesfarmers Limited has the largest revenue before tax compared to the previous years, of 123.4% of the year 2007, 119.5% in the year 2008 and 112.5% in the year 2009. It therefore indicates that Wesfarmers Limited’s profit been on a gradual increase since 2007. The profit and sales volume is highest in 2010, which implies that 2010 was the best year for Wesfarmers Limited. Financial Ratios Analysis 1. Profitability Analysis: Profitability Ratios These ratios measure the profit in comparison to the available resource in place to establish profit. In view of this analysis, these ratios include; the return on assets, return on equity, the profit margin, cash flow proportion to sales revenue and gross profit margin according to (Barclay & Clifford, 2009). 2010 Return on Equity (ROE) = profit available to the investors/average investors’ equity= 2679.9/ ((8729.7+8567.3)/2)= 2.84% Return on Assets (ROA) =EBIT/average assets=3673.2/ (22873.3+21921.7)/2)= 2.26% Profit Margin (PM) =EBIT/sales revenue=3673.2/52872.8= 1.97% Gross Profit Margin (GPM) =gross profit/sales revenue= 16282.6/52827.8= 49.74% Cash flow to sales ratio=cash flow from operating activities/sales revenue= 3629.2/ 52827.8= 3.39% 2009 ROE= profit available to owners/average owner’s equity=2981.6/((8271.3+7182.9)/2)= 31.8% ROA=EBIT/average assets= 3756.5/((22608.7+17181.1)/2)= 19% PM=EBIT/sales revenue= 3756.5/51827.7= 8.6% GPM=gross profit/sales revenue= 11644.8/51827.7= 29.6% Cash flow to sales ratio=cash flow from operating activities/sales revenue= 3107.2/ 51,827.7= 7.3% 2008 ROE= profit available to owners/average owner’s equity=1782.7/((7627.1+6372.8)/2)= 24% ROA=EBIT/average assets=3272.8/((19728.1 +17829.2)/2)= 17% PM=EBIT/sales revenue= 3272.8/49832.6= 6 % GPM=gross profit/sales revenue= 152672.8/49832.6= 27% Cash flow to sales ratio=cash flow from operating activities/sales revenue= 3201.1/49832.6= 6.14% 2007 ROE= profit available to owners/average owner’s equity= 16172.9/((7282.8+6127.9)/2)= 28.87% ROA=EBIT/average assets=2314.7/ (17838.7+15433.7)/2)= 17.29% PM=EBIT/sales revenue=2314.7/48980= 7% GPM=gross profit/sales revenue= 117637/48980= 28% Cash flow to sales ratio=cash flow from operating activities/sales revenue=2873.9/48980= 6.67% Ratio Analysis 2007 2008 2009 2010 ROE 28.87 24 27.8 30.90 ROA 17.29 17 19 16.4 PM 7 6 8.6 9.7 GPM 28 27 29.6 30.74 Cash flow to sales ratio 6.67 6.1 7.3 5.9 ROE This falls under profitability category of ratios. It compares Net Income to Total Shareholders’ equity to show how efficiently Wesfamers has used shareholders’ equity to generate income. ROE decreased slightly between 2007 and 2008 but increased significantly from 2008 to 2010. Share holders now receive a return of 30.90% on their equity investment in Wesfamers, compared to 27.8%, 24% and 28.87% in 2009, 2008 and 2007 respectively. Compared with the industry average as the benchmark, Wesfarmers investors continue to gain substantial amount of return on their investment. ROA This is another category of profitability ratio and compares net income to total assets. With this Wesfarmers will know how efficiently it has used its available assets to generate income. ROA has increased slightly from 2007 to 2009 but decreased in 2010. Given net profit grew by 15% between 2009 and 2010, it would be reasonable to assume ROA should have increased in 2010. This may be an indication newly purchased assets have yet to generate a return. GPM Gross Profit Margin measures the profitability of the organization in terms of selling products to customers. Gross Profit margin is stable. In 2007, the company had approximately 28 cents of every sales dollar available to contribute to other expenses and profit, after covering cost of sales, compared to 30.74 cents in 2010. 2. ANALYSIS OF THE MARKET PERFORMANCE This section comprises of the earnings per share, price earnings ratio, and Net tangible assets backing per share. It demonstrates the Wesfarmers financial figures to the company’s share price and highlights the market sentiments towards Wesfarmers Limited. Calculations Net Tangible Asset backing per share = 2007= (7482.7-6928.4)/4232.8= $0.57 2008 = (7832.2-7382.5)/42728= $0.63 2009= (7251.5-6922.2)/4453.8= $0.89 2010= (6928.1-6728.2)/44983.1= $1.76 Earnings per share = 2007= 2172.2/189.4=$0.89 2008 =2282.2/1928.7= $1.12 2009 =2837.2/1827.2= $1.34 2010 = 2935.6/1922.5= $1.72 From the calculations, the Net Tangible Asset per share value had gone up in the years analyzed from $0.89 in 2007 to $1.72 in 2010. While the value of Earnings per share also increased during the same period from 3. LIQUIDITY ANALYSIS In as much as the liquidity ratios are very important for bankers and short term suppliers or creditors, they are also critical for the financial managers in all circumstances must meet obligations of different government agencies and suppliers of the credit. Comprehensive analyses of the liquidity ratio assist organizations to unravel weaknesses of the financial position of the company as (Daniel 2007) found out. These ratios provide information regarding the ability of the company to meet financial obligations which are on short term basis. The success of an organization relies on its ability to repay debts when they are due. This is very important is helping organization to escape legal battles associated with unsettled debts. The below calculations indicates the ratios needed to determine Wesfarmers liquidity and commonly referred to as the capability of a company to pay their financial commitments. CURRENT RATIO = 2007= 6252.0/6192.1=0.66 2008 = 6342.7/6312.1=0.69 2009 =6451.8/64782.6=0.71 2010= 6982.2/7291.3=0.87 QUICK ASSET RATIO (ACID TEST RATIO) = 2007=5243.6-4152.2/5242.2=0.26 2008 = 5624.2-4521.2/6527.2.4=0.31 2009 = 6726.2 2-5241.7/6453.7=0.31 2010= 7837.6-3627.4/7256.6=0.36 CASH FLOW RATIO = 2007= 3637.8/2832.2= 0.23 2008 =4536.5/7625.2= 0.38 2009 =4637/7526.6=0.39 2010=4937.3/7783.2=0.42 Debt to Equity Ratio = x 100 2007 = (12736.4/61728.2) x 100 = 162.71% 2008 = 11726.1/7837.1 x 100 = 152.24% 2009 = 11093.1/8278.1x100 = 148.76% 2010 = 10839.9/8482.6x 100 = 141.52% Debt Ratio = x 100 2007 = (12736.4/17262.6)x 100 = 64.18% 2008 = 11726.1/16252.8 x 100 = 59.22 % 2009 = 11093.1/18212.7x 100 = 56.71% 2010 = 10983.2/22817.1x100= 52.8% Equity Ratio = x 100 2007 = (6453.7/17627.2)x 100 = 29.98% 2008 = 6652.7/1872.5x 100 = 35.29% 2009= 7018/20921.1x100= 39.28% 2010 = 7872/21829.8 x 100 = 41.28% Interest Coverage Ratio = 2007 = 2726.9/2182.8= 8.28 2008 = 28239.2/278.2= 11.28 2009 =3292.2/298.6= 17.6 2010 = 2483.8/289.2= 21.87 Debt Coverage Ratio = 2007= 4252.2/3282.5= 1.45 2008 = 4672.3/3762.9 = 1.32 2009 = 4738.1/3827.2=1.29 2010 = 4929.8/4172.9=1.09 From the calculations, it comes out that the Quick Asset Ratio has declined from the year 2007 up to 2010. The quick ratio has also gone down from within the same financial period. Similar changes are true with the cash flow ratio. This indicates that Wesfarmers has not very strong ability to meet their current financial obligations form their cash flow operating activities. Wesfarmers ability to pay their debt has significantly increased. Conclusion Financial or accounting analysis is the evaluation, selection and interpretation of the fiscal data, alongside other relevant information, to help in financial decision making and in investment. These analyses can be applied internally to asses’ issues for instance, operations efficiency, employee performance, as well as credit policies and externally to asses’ credit worthiness, potential investors, among other elements (Lenneberg, 2007). Financial reports and statements analysis is a precise comprehensive illustration of how to apply financial statement information to evaluate the financial position and operation outcomes. The financial reports help the organization to know and understand the financial position of the company. References: Martin Mellman et. al.(2008). Accounting for Effective Decision Making. Irwin Professional Press. Wald, J.K. (2009). Bankruptcy Cost, Some evidence: Journal of Finance. 32(2): pp.337-387. Barclay, M & Clifford, S. (2006). The capital structure puzzle: another look at the evidence. Journal of Applied Corporate Finance 14, (4): pp. 7-23. Lenneberg, E (2007). Stock markets, Corporate Finance, and Economic Growth. Oxford: Blackwell Publishers Ltd Monica D (2009). On the Excistance of an Optimal Capital Structure, Princeton, NJ: Princeton University Press Peter. A and Eddie M. (2007).Accounting and Finance for Non-Specialists. Prentice Hall. Leopold B. (2008). Analysis of Financial Statements. McGraw-Hill. Daniel L. (2007). Advanced Accounting. McGraw-Hill College Publishing Read More