For the year ended 30 June 2015 and June 2016, Wesfarmers current assets were consistently at 0.93 times larger than it current liabilities, this is 0.05 times higher than the industry average of 0.88 as shown in Appendix V – Wesfarmers Ltd Industry Averages. Thus, Wesfarmers current ratio is not out of line with the current ratios of many of the company’s in its industry. This gives the indication that Wesfarmers should not have any trouble paying its debts for the next twelve (12) months, as its current liabilities are less than its current assets. However, for the year ended 30 June 2015 and June 2016, Woolworths is 0.05 times below the industry average as seen in Appendix B, Figure… This indicated that Woolworths is out of line with …show more content…
In addition, Wesfarmers are remaining just above the industry averages, more work will have to be done if they want to be number one in the retailing industry in Australia.
Profitability
Financial ratios reflects the level of the company’s profit relative to sales (Titan, 2012, p. 151). In other words, this is a company 's capability of generating profits from its operations. Profitability is one of four building blocks for analysing financial statements and company performance as a whole. The balance sheet contains assets that the business owns and which is used in the business for the purpose of generating profit (Jessop, 2017). See Appendix A, figure II. To determine profitability for Wesfarmers, we will look at the Net Profit Margin, Return on Investment and the Return on Equity using DuPont Analysis.
Net Profit Margin
The Net Profit Margin expresses the net after tax profits of an organisation as a percentage of sales (Titan, 2012, p. 155). The net profit margin for Wesfarmers and Woolworths is computed as follows in Table III below:
Formula – Net Income Sales
Table III
Wesfarmers Woolworths
2015 2016 2015 2016
0.039 or 3.9%
0.006 or 0.6% 0.036 or 3.6% -0.021 or -2.1%
For the year ended 30 June 2015 Wesfarmers made AUD $0.039 of each sales dollar, and for June 2016 they made AUD $0.006 of each sales dollar, this is converted into profits, after taxes. With this in
Profitability ratios are used to measure the overall efficiency of thebusiness, as well as management effectiveness. Examples of profitability ratios include the gross margin ratio and the net margin ratios.
Net Margin is the ratio of net profits to revenues of a company. It is used as an indicator of a company’s ability to control its costs and how much profit it makes for every dollar of revenue it generates. Net Margin is calculated using the formula: Net Margin = (Net Profit / Revenues ) * 100 Net margins vary from company to company with individual industries having typically expected ranges given similar constraints within the industry. For example, a retail company might be expected to have low net margins while a technology company could generate margins of 15-20% or more. Companies that increase their net margins over time generally see their share price rise over time as well as the company is increasing the rate at which it turns dollars earned into profits.
The profitability ration in a financial analysis is the ability of the organization to generate a profit. This ratio looks at areas such as net income, revenue, gross profit, earnings before taxes and interest and operating profit to name a few. Profitability shows the bottom line numbers for a company and is the goal that most organizations strive for. Ratios examined were gross profit margin and net profit margins
This measures the relationship between net profits and sales of a firm. The net profit margin is indicative of management’s ability to operate the business with sufficient success not only to recover revenues of the period, the cost of merchandise or services, the expenses of operating the business and the cost of the borrowed funds, but also leave a margin of reasonable
Profit Margin: -This ratio relates the operating profit to the sales value (Walker, 2009). It tells us the amount of net profit per pound of turnover a business has earned.
SUMMARY OF STUDY OBJECTIVES 1Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; and intangibles. They classify liabilities as either current or long-term. A stockholders' equity section shows common stock and retained earnings. 2Identify and compute ratios for analyzing a company's profitability. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time. 3Explain the relationship between a retained earnings statement
The profitability ratio shows the ability for a company to generate profits. Ratios that are used calculating profitability of a company are return on assets and return on equity. The return on assets calculates the ability of a company to effectively use assets to generate income, the percentages per quarter in year one are; 76%, 22%, 34%, 37%. This shows profit during each quarter. In years two, three, and four the percentages are; 68%, 54%, 49%, 38%. These ratios show a slight decline but still a solid profit. The return on equity shows the amount of money earned per dollar investing into the company by shareholders. By quarter, year one return on equity is .81 .61 .28 .29, years two, three and four are all .32. These numbers show an above average return, the average return in the United States is between .10-.15, and over .20 is considered above average (Kennon, 2011.)
Profitability ratios provide insight into how much profit a company generates with the money that shareholders have invested in the company. Profit margin, return on equity, and earnings per share are all forms of profitability ratios (Stocks Simplified, 2011).
For this capability, strong financial support and effective saving processes as fundamental resources enable Woolworths Ltd to provide products at relatively lower prices. The effective saving processes include the global sourcing process and direct store deliveries also play an important role to achieve competitive prices by reducing inventory costs and operating costs. Besides, the long term and good relationships with suppliers makes Woolworths get this capability to get lower cost products. Then combining the online network and existing delivery system makes customers purchase more conveniently. Last, Woolworths Ltd is also engaging in product expansion in different industries.
Used to determine the competitive strength and cost effectiveness of a company, the operating profit margin shows what percentage of a company’s revenue is left over after covering variable costs. It is the operating profit divided by the net sales. Essentially, the operating profit margin depicts how much a company makes on each dollar of sales.
Every company for example Wal-Mart worries about its profitability. One of the most regularly utilized implements of financial ratio analysis is profitability ratios which are utilized to figure out the bottom line of the company. Profitability measures are vital to corporation managers and owners alike. If a small industry has outside stockholders who have put their own money into the corporation, the primary owner surely has to show profitability to those equity stockholders. (Blanchard, 2008)
Profitability (performance) ratios are used to assess a company’s ability to create equity as compared to its debt and other appropriate expenses created during a particular time frame. A favorable analysis of profitability ratios will reveal that a company’s value is higher than a competitor’s value.
Profitability ratios refer to the relative measure to what an actual created profit. Through these ratios the company is allowed to see how profitable the company. In addition it can serve as an examination of the overall performance of the company’s operations and how do these compare to past performances or other companies. The ratios in which accounting measures the profitability of a company are Profit Margin, Price over Earnings, Return on Equity and Return on
Net Profit Margin- The net profit margin of 18.34 percent for 2008 indicates that 18.34 cents of net income was generated for each dollar of sales. The significant increase of 7.83 percent, from 2007’s 10.51 percent, yielded an additional $1.84 billion in profit on the company’s $23.52 billion in revenue.
Now let’s see how much profit a company makes for every $ 1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better.