Business Overview and Financial Statements Based Decision Making

Question: Discuss about the Business Overview and Financial Statements Based Decision Making. Answer: Introduction Wesfarmers limited is a diversified business group which is based in Australia and has its headquarters in Perth. It started as a farmers cooperative in 1914 with the main focus on the providing a host of services of the rural community based in Western Australia. The scope of activities gradually enhanced with the cooperative engaging in trading of food and animal products. The company was listed on the Australian Stock Exchange in the year 1984 after being restructured from a cooperative to company in the same year. Post its listing, the company has acquired interests in diversified businesses. Some of the prominent ones are discussed below (Wesfarmers, 2015). Coles The company acquired the retail business of Coles group in 2007 for a consideration of AUD 22 billion. Coles is a prominent retailor which along with Woolworths forms a duopoly in the supermarket industry. Coles has a workforce in excess of 100,000 and operates supermarkets (767), liquor outlets (815), fuel and convenience stores(636) along with 92 hotels. Home Improvement and Office Supplies The prominent brands under this business are Bunnings Warehouse and OfficeWorks. While Bunnings deals with home improvement products along with home servicing products, OfficeWorks tends to deal with office products that may be required in education, business or home. Recently, the company has acquired a British player named Homebase. Department Stores- This is operated under two main brands namely Kmart and Target. Kmart is a discount departmental store with wide presence in Australia and New Zealand. Targets presence is limited only to Australia. The cumulative employees in these stores are about 55,000. Industrials The group also has presence in three main segments as indicated below. Energy and Fertilisers The company is involved in the production of various chemicals and fertilisers. Also, it has made inroads with regards to distribution of LNG and LPG regionally in Australia. Resources The company is involved in coal mining and exports metallurgical coal. Further, steaming coal is produced for local consumption in power plants. Industrial and Safety The company provides solutions related to industrial safety in Australia and New Zealand through a host of partners and associates. Other businesses The company has made investments in various diversified businesses globally and these belong to different sectors. Although majority of the revenue of the group is generated from Australia and New Zealand, the company through wholly owned subsidiaries has presence in various geographies namely China, India, Hong Kong, USA, UK, Indonesia, Singapore, UAE, Bermuda and Botswana. In the year FY2015, the consolidated group revenue stood at AUD 62.45 billion with an operating profit of AUD 3.76 billion and a net profit of AUD 2.44 billion. The total employees associated with the group stood at a staggering 205,000 (Wesfarmers, 2015). Use of financial statements in decision making The various financial statements that are periodically disclosed by the company are immensely useful for decision making by a host of stakeholders as explained below. Balance Sheet The balance sheet aims to capture the financial position of the firm on a given date. This provides useful data with regards to the assets, liability and equity which is critical for many stakeholders as highlighted below (Parrino and Kidwell, 2011). Creditors The balance sheet provides vital information with regards to the capital structure and the outstanding liabilities of the company along with the various assets that it has. This is critical so as to form an informed opinion about the liquidity position through ratios such as current ratio, acid test ratio etc. The creditors may adjust the credit limit based on this. Stock Analysts The stock analysts gain vital information with regards to the ongoing business especially with accounts receivables and inventory since these indicate about the prevailing business scenario. Also, the various efficiency ratios are also computed using the balance sheet of the company (Damodaran, 2008). Shareholders It provides a summarised picture of the financial position of the firm and hence is immensely useful for the investors with regards to taking investment decision. Also, the idle cash on the balance sheet is an important parameter as investors want the cash to be converted into dividends. Management The management gets key data from the balance sheet with regards to the existing capital structure and sources of funding. It also reflects on the degree of leverage and thereby allows the management to reflect the altering priorities for the company in altering the funding mix (Brealey, Myers and Allen, 2008). Income Statement The income statement of the firm tends to indicate the profitability of the operations of the firm during a given period. The utility of the income statement in decision making by various stakeholders is explained below (Petty et. al, 2015). Lenders The profitability of the company provides a fair idea to the lenders as to whether the company is able to generate operating profits which are atleast required to service the debt obligations. In this regard, the interest coverage ratio is a critical indicator of short term liquidity. Typically loss making companies would require more comfort for the lenders and also higher finance costs (Damodaran, 2015). Shareholders- The income statement provides data with regards to the profitability of the company which is a critical investment parameter for the investors. This is because the share prices tend to be sensitive to the underlying EPS of the firm and it needs to be ascertained whether the earnings are higher or lower than expected. Further, the dividend also to some extent is dependent on generation of profits (Brealey, Myers and Allen, 2008). Management- The income statement provides critical information with regards to the margins at the gross level and the net level. By conducting an analysis of the income statement, the management can identify underperforming products and markets and can also concentrate on the significant costs and the mechanism to control the same. The decisions regarding quantum of bonuses also depends on the income statement components such as revenue and profitability. Further, based on performance of various businesses, the management can separate the core businesses and divest in non-core businesses (Parrino Kidwell, 2011). Employees The income statement is also keenly observed by employees who tend to take decision to stay or quit based on the profitability and the future business prospects. If the company is making losses that too sustainably, it is highly likely that the career progression would be hampered and in such cases, employees may look for opportunity elsewhere. Cash Flow Statement The cash flow statement tends to represent the cash position of the company at a particular date. The utility of the cash flow statement in decision making by various stakeholders is explained below (Damodaran, 2008). Shareholders The cash flow statement has gained immense importance in the recent time with regards to making prudent investment choices. The cash flow statement tends to act as complementary to the income statement and provides an idea as to whether the revenue is effectively being converted into cash or not. Lenders Creditors The cash flow statement is imperative for creditors and lenders as their financing decisions would be influenced by the manner and size of cash generation as compared to the cash spending. Further, a positive cash generation at the operational level is a significant parameter with regards to the health of the business (Petty et. al., 2015). Management The cash flow statement provides an indication of the cash flow patterns and the cash surplus and deficit situation that the company faces and hence can be effectively used by the management to estimate future capital requirements (Parrino Kidwell, 2011). References Brealey, R., Myers, S.and Allen, F. (2008), Principles of Corporate Finance (Global edition), New York: McGraw Hill Publications Damodaran, A. (2008), Corporate Finance, London: Wiley Publications Parrino, R. and Kidwell, D. (2011), Fundamentals of Corporate Finance, London: Wiley Publications Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. Burrow, M. (2015), Financial Management: Principles and Applications, Sydney: Pearson Australia Wesfarmers (2015), 2015 Annual Report, Retrieved on August 24, 2016 from https://www.wesfarmers.com.au/docs/default-source/reports/2015-annual-report.pdf?sfvrsn=2