Comparing between harvey norman and wesfarmers ( financially) - Essay Example

Investment Decision Conclusion and Recommendation For a prospective investor, the decision of where to invest his fund is often based on the financial performance of the business organization. It should be noted that investors earn from stock investments through two channels—appreciation of stock prices and earnings per share. Each of these channels are in turn hugely influenced by how companies quantitatively. In terms of earnings per share, it seems logical that if the company generates a high level of profit, each stock holders benefit because this will be distributed evenly in the book value of stockholder’s equity.

On the other hand, stock price appreciates almost exclusively through good financial results. Through the use of financial analysis, this paper compares the performance of two companies Harvey Norman and Westfarmers in different financial aspects namely liquidity, profitability, asset efficiency and capital structures. The company’s ability to generate wealth for its stockholders is the ultimate measure of the financial performance of a business organization and should become the basis of where to invest.

It should be noted that as opposed to creditors, companies have little liability to its stockholders. Before dividends are paid, current liabilities are first settled together with long term obligations. In fact, payments to stockholders are not required. Thus, stockholders have the last claim in the company’s earnings and if it is able to keep much for them after other liabilities are settled, the business organization’s stock is considered as a better investment.In this consideration, this paper recommends the use of return of equity as the sole ratio for the investment decision.

Thus, investment in Harvey Norman appears to be more profitable than Westfarmers. It should be noted that during the fiscal year 2007, Harvey Norman’s return on equity is 26.74% which represents an increase of 8.7% from the 18.04% recorded in 2006. This is much higher than the 0.125% recorded by Westfarmers in 2007. Thus, we recommend that funds should be better invested in Harvey Norman as it has a better ability of maximizing shareholder wealth through higher returns.