Financial Analysis

Discuss about the Environmental Incidence On Financial Performance.

The following section compares financial results for different retail businesses of Westfarmers Group. The Westfarmers Group originated from Western Australian farmer’s cooperative that was founded in 1914. Westfarmers is among the largest listed companies in Australia stick Exchange (ASX) and largest private employer in Australia. Westfarmers Limited aims to provide satisfactory returns to its shareholders. The conglomeration is led by Richard Goyder as the managing director and Michael Chaney as the chairman. Westfarmers limited recorded revenues amounting to $68444 million in 2017 FY from $65981 million in 2016 FY. The company net profits for 2017 FY were $2873 million which was 22.1% increase from previous financial year. The company paid $2.23 dividend per share for 2017 FY from $1.86 in 2016 financial year. The write-up focuses on each individual division of Westfarmers financial results. The divisions include; Coles, Department Stores, Home Improvements, and office Works. The write up will use financial results for 2016 and 2017 financial years. The write-up will aim to establish best financial performing retail business in Westfarmers group.

Cole started in Collingwood in 1914 and has grown over the years to be one of the largest and iconic Australian retailers. The division operates Coles Express, Spirit Hotels, Coles Supermarkets, Vintage Cellars, Liquorland, Coles online, and Coles Financial Services. Coles recorded revenues amounting to $39217 million in 2017 FY which is slightly lower compared to $39242 million in 2016 FY. The earnings before interest and tax amounted to $1609 million that was a 13.5% decline from 2016 FY that recorded $1860 million.

Bunnings was acquired by Westfarmers in 1994. Bunnings is an international warehouse of household hardware with chains in New Zealand, United Kingdom, Australia, and Ireland. The Bunnings is the market leader in home improvement retail in New Zealand and Australia and second largest home improvement retailer in Ireland and United Kingdom. The division recorded $13586 million revenues that were 17.4% increase from 2016 FY that had recorded $11571 million. The Home Improvement division earnings before tax and interest rate increased to $1245 million in 2017 FY from $1214 million in 2016 financial year.

The Westfarmers department Stores division was started in February 2016. It was a combination of target and Kmart stores. The Department Stores operates 774 stores in Australia and New Zealand. Kmart deals with home-wears, clothing, and general merchandize and operates 220 stores in New Zealand and Australia. Target also deal with the same products as Kmart and operates 303 stores and an online store. The Department Store recorded revenues that amounted to $8528 million that was lower compared to previous financial year that recorded $8646 million. The division also recorded $543 million earnings before tax and interest rates that were higher to 2016 FY that recorded at $275 million.

Revenue

The Officeworks division first opened in 1994 in Richmond. The division is a market leader in supply of office products and solutions in Australia. The Officework 2017 FY revenues amounted to $1964 million an increase from $1851 million in 2016 FY. The division also recorded an increase in earnings before interest rates and tax to $144 million in 2017 FY from $134 million in 2016 FY.

The Westfarmers retail businesses financial performance will be compared in terms of revenue, earnings before interest and tax (EBIT), capital employed, and ratio of return on capital employed.

Revenues are the total amount of income received from sale of products less returned products. The higher the revenue the more sales a company or unit made in a specified period of time.

Division	Revenues ($M)
Financial Year
2017	2016
Coles	39217	39242
Home Improvement	13586	11571
Department Stores	8528	8646
Officework	1964	1851

Coles division has the largest amount of revenue while Officework has the lowest amount of revenue recorded for both financial years. Both Coles and Department Stores revenues declined in 2017 FY form 2016 FY. The Home Improvement and Officework division revenues increased in 2017 FY from 2016 FY. The Home Improvement division recorded the highest increase in revenues while Department Stores recorded the largest decline in revenue in 2017 FY from 2016 FY.

EBIT is a profitability measurement of a company that calculates operating profits without considering tax implications and cost of capital (Gitman, Juchau, & Flanagan, 2015). It is total revenue less operating expenses and cost of goods sold. The EBIT shows the ability of a company to earn profit.

Division	EBIT ($M)
Financial Year
2017	2016
Coles	1609	1860
Home Improvement	1245	1214
Department Stores	543	275
Officework	144	134

From the comparison table, Coles has the highest EBIT while Officework has the lowest. Department Stores recorded the highest increase in EBIT in 2017 FY from 2016 FY. Coles is the only division that recorded a decline in EBIT recorded in 2017 FY from 2016 FY.

Capital employed refers to amount of capital that a company or business unit uses to earn profits (Grubnic, 2014). It all assets employed and are calculated by adding working capital to fixed assets or total assets less current liabilities.

Division	Capital Employed ($M)
Financial Year
2017	2016
Coles	16586	16541
Home Improvement	4110	3599
Department Stores	2253	3629
Officework	980	994

Coles division recorded the highest amount of capital employed in 2017 FY with Officework recording the lowest. Coles and Home Improvement divisions increased the capital used in the financial year while Officework and Department Stores capital use was reduced. Home Improvement had the highest capital employed increased in 2017 FY years from 2016 FY while on the other side Departmental Stores had the highest reduction in capital employed for the same period.

EBIT

The following ratio is a financial measurement of profitability and efficiency at which capital is employed (Scott, 2015).

Division	Return to Capital Employed (%)
Financial Year
2017	2016
Coles	9.7	11.2
Home Improvement	30.3	33.7
Department Stores	24.1	7.6
Officework	14.7	13.5

From the comparison table, Home improvement has the highest return on capital employed percentage while Coles has the least return on capital employed percentage. Department Stores return to capital employed tripled from 2016 FY to 2017 FY. Department Stores and Officework divisions increased their rate of return to capital employed while Home improvement and Coles return on capital employed declined in 2017 FY from 2016 FY.

Conclusion

Among the four divisions of Westfarmers, Coles had the largest revenue in 2017 FY while Officework has the least revenue. Home improvement division recorded the highest increase in revenue received for 2017 FY. Coles had the largest EBIT while Officework had the small EBIT. Department Stores recorded the highest EBIT margin in 2017 FY. Coles division employed the highest amount of capital in 2017 FY. Department Stores significantly reduced capital employment for the 2017 FY. Lastly, Home Improvement division had the highest percentage of return on capital employed. Therefore it can be concluded that Home Improvement was the most profitable division for 2017 financial year in the Wesfarmers Group.

The following section analysis Westfarmers’ retail businesses sustainability report to find out how they show sustainability. Wesfarmers recognizes the importance of sustainable approach and is a member of Dow Jones sustainability Indices (Antonini, 2016). This shows that the Group is conscious about humanity and conservation of the environment. The Wesfarmers discloses sustainability on employees, source of raw materials in supply chain, communities where the company operates, the impact of the company to the environment, and corporate governance in the company (Schaltegger, Etxeberria, & Ortas, 2017). The following discussion aim to rate the Wesfarmers retail businesses sustainability. These retail businesses are Coles, Department Stores, Officeworks, and Home Improvement.

Coles provides groceries, fresh food, liquor, general merchandise, fuel and financial services. The retail business operate 801 supermarkets, 72 convenience outlets, 89 hotels and employ a team of 106000 members. Coles pay attention on several activities that enhance sustainability in their business. First, Coles enhance responsible sources by collaborating with suppliers. Collaboration enables the business to help suppliers become more efficient and deliver great products to their stores and pass the benefits to its customers. Secondly, Coles rolled out an app-based Coles Farm Program that aim to support and improve sustainability on farm operations through enhanced environmental monitoring, traceability and employee training (Shauki, 2016). Coles has implemented country of origin labeling to enhance transparency. Another ethical practice of Coles is ethical sourcing. The Coles ensures minimum potential of human and labour rights violations are happening in its supply chain.

Capital Employed

Bunnings lead in retail home improvements and outdoor living products. The business is involved in several material issues that relate to sustainability in 2017 FY. First the business ensures that it maintains support both internally and wider community to grow community involvement in a localized, meaningful, and sincere manner (Lawley, Birch, & Craig, 2016). Secondly, the business ensures that it maintains strong processes for product sourcing to verify that they meet requirements of both local and global standards. Thirdly, the Bunnings business maintains where feasible minimum water consumption through waste recycling and reduction and finding new methods of reducing reliance on grid-sourced energy (Schaffartzik, Wiedenhofer, & Eisenmenger, 2015). This reduces overall carbon footprint. Another sustainable related issue in Bunnings is employees’ safety. The business division strives to ensure all employees go home safe.

Development Stores include Kmart and Target stores that deal with clothing, house wears, and general merchandise. The Stores have diverse range of suppliers who are spread in different parts of the world. The Department Store is involved in several activities that can be termed as sustainable. First, the business ensures safety and quality standards are prioritized in their products. The business is committed to consistently complying with its safety and quality standards. Secondly, the business is committed to ethical sourcing of services and products to ensure its supply chain meets high standards of sustainability. Thirdly, Department Stores embrace inclusivity and diverse cultures in the business. Another sustainable related activity in the Department Stores is use of natural resources efficiently. This minimizes exploitation of natural resources.

The Officeworks lead office products and solutions retail market. The business has 164 stores and an online platform around Australia with over 7000 employees. Officework sustainability report show several activities focused to sustainability. First, the business ensures responsible sourcing of wood fibre that is widely used in it products. Secondly, the business is committed to keeping employees safe in their work places. Thirdly, the Officework supports local communities to solve their problem such as paying school fees to needy students. Officework is also committed to reducing operations and products that have environmental impact.

From the sustainability report review, different retail businesses have different methods of enhancing sustainability in their operations and products. This shows that the retail businesses not only focus on achieving high revenues but have a holistic approach that takes into considerations of all stakeholders. The Wesfarmers retail businesses can therefore be rated excellent in terms of upholding high standards of sustainability to different stakeholders and the environment.

Return on Capital Employed

Racey Business

Accrued Income statement

For the year ending 30 June

Item	Amount ($)
sales	282200
Cost of goods sold	158000
Gross profits	124200
Expenses
Salary and wages	28400
Depreciation	7200
Rent	9200
Insurance	573
Advertising	8560
Administration	18800
Interest	4760
Other expense	9960
Net Profit	36747

As a financial statements user, accrual accounting is better than cash accounting. Accrual accounting refers to a method of accounting where expenses and revenues are recorded when they are incurred without considering when cash is exchanged (Eulner, & Waldbauer, 2018). This method requires transactions to be recorded when they occur with the assumption that there is high probability that the cash will be collected. On the other side, cash accounting refers to a system where financial transaction are recorded when cash is received (Ball, Gerakos, Linnainmaa, & Nikolaev, 2016). Cash accounting is simple to use because it does not need adjustments when closing accounts. Accrual method of accounting is preferable because of the following factors; first, accrual accounting system enables recognition of revenues and expenses when they happen. The system ensures transactions are recognized when they happen without waiting for cash payment. This is important for businesses that buy and sell products on credit. Secondly, accrual accounting enhances accuracy of transactions in a business. The method ensure transactions are accurately recorded when they happen that ensures there is no ambiguity or underestimation of revenues and expenses. This is difference from cash accounting that leads to underestimation of expenses and revenues as account receivables and account payables are not recorded (Bushman, Lerman, & Zhang, 2016). Another reason accrual accounting is preferred is that it leads to better measurement of profitability. Accural method of accounting matches revenues and expenses as they occur within a specified account period. Therefore, accrual accounting is preferable to users of financial information because it reflects the true state of financial performance of an entity enhancing infored financial decision.

References

Antonini, C. (2016). An empirical analysis of environmental externalities incidence on financial performance.

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Burritt, R., & Schaltegger, S. (2014). Accounting towards sustainability in production and supply chains. The British Accounting Review, 46(4), 327-343.

Bushman, R. M., Lerman, A., & Zhang, X. F. (2016). The changing landscape of accrual accounting. Journal of Accounting Research, 54(1), 41-78.

Eulner, V., & Waldbauer, G. (2018). New development: Cash versus accrual accounting for the public sector—EPSAS. Public Money & Management, 1-4.

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Grubnic, S. (2014). Accountability, Social Responsibility and Sustainability: Accounting for Society and the Environment.

Lawley, M., Birch, D., & Craig, J. (2016). 20 Managing sustainability in the seafood supply chain. A Stakeholder Approach to Managing Food: Local, National, and Global Issues, 4, 284.

Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Schaffartzik, A., Wiedenhofer, D., & Eisenmenger, N. (2015). Raw material equivalents: the challenges of accounting for sustainability in a globalized world. Sustainability, 7(5), 5345-5370.

Schaltegger, S., Etxeberria, I. Á., & Ortas, E. (2017). Innovating corporate accounting and reporting for sustainability–attributes and challenges. Sustainable Development, 25(2), 113-122.

Shauki, E. (2016). Is This a Case of Self-Enlightened Interest or Genuine Accountability: A Study on Different Reporting Media in the Australian Retail Industry. Asia Pacific Journal of Accounting and Finance, 2(1), 51-76.