7111afe Assignment May 2013

7111AFE - Accounting

Introduction

This report provides an investment recommendation based on a comparative analysis of both Wesfarmers (hereafter WES) and Woolworths (hereafter WOW). Comparative analysis herein is based on information contained in the Annual reports (2011 and 2012) as well as financial statements. No additional information including the performance of previous years including share price has been included in the analysis.

Analysis

Liquidity

In relation to liquidity, there was a reduction in WES liquidity between 2011 and 2012. This was due to increases in interest bearing loans and borrowings. WES issued two lots of $500 million domestic bonds to reduce the reliance on bank funding.

WOW however has seen some improvement in its current ratio now at 0.86 (2012). This was achieved by a reduction in borrowings, namely $600 million worth of notes reaching maturity. Significant investment in freehold land also saw large amounts of borrowings reclassified from current to non-current liabilities. Whilst these actions had a positive effect on their current ratio, WOW acid test ratio fell from 0.32 (2011) to 0.25 (2012).

Overall WES has a much stronger capacity to pay off its current liabilities when compared to WOW.

Profitability

Looking at profitability shows that both WES and WOW gross margins have remained steady across the last two years (WOW 26% and WES 31%).

An interesting point of difference is that WOW is much better at using its assets to generate sales. WOW 2012 asset turnover ratio was 2.60 compared to WES only achieving half this at 1.34. This result is also reflected in the rate of return on total assets with WOW achieving a 2012 result of 16.4% compared to WES result of only 8.3%.

WOW return on shareholders equity at the end of 2012 was 28%, 2.2 times that of WES with 13%. This represents a great opportunity for WES to drive sales by leveraging and trading off the company’s substantial equity.

2012...