Characteristics of Modelling and Statement Analysis

Question: Discuss about the Characteristics of Modelling and Statement Analysis. Answer: Introduction: Cash Flow statement showcase the changes within the accounts of the balance sheet and income statements have a due impact on cash and cash equivalence and so break down its analysis to operating, financing and investing activities. Here in this report cash flow statement of Wesfarmers Limited and Woolworths Limited is being compared to know the current financial standing of companies. Furthermore, the ratio is calculated to draw a deeper analysis of cash solvency of respective companies. Lastly, the firms are recommended to evaluate the expected exposure to credit risks, business generation of cash from sales revenue and survival capacity measurement of the stated companies. Woolworths Limited: Woolworths is the largest supermarket chain in Australia. It has about 961 stores spread across Australia and possesses a team of 111,000 members within its stores, offices and distribution centre to serve its customer with the supreme quality of services, convenience and value (Park and Jang, 2013). Recognised among the most creative retailers, Woolworths seeks to understand that customer desire for simple and new systems to shop. Their aim is to put its customer at first and for this, they have valued retail team who focus on improving the customer shopping experiences continually. They tend to do active retailing by maintaining with technologies and working hard to earn customers rewards as well as loyalties. Wesfarmers Limited: the Western Australian Farmers Cooperative is among the largest listed companies in Australia. With a base of 220000 employees and 530000 shareholders company aims to satisfy the needs of its customers to remain competitive (Tangsucheeva and Prabhu, 2013). In order to meet the primary objective of bringing a satisfactory return to its shareholders Wesfarmers maintain a financial discipline and have an exceptionally diversified portfolio management of its business (Marshall, McManus and Viele, 2011). It focuses on placing the six key enablers in business to strive operative performance at its best, i.e., employing outstanding people, develop commercial excellence, empowering culture, being innovative, social responsibility and robust financial capacity. The method used in the preparation of Cash Flow Statement: Woolworths Group has used Indirect Method for the Preparation of Cash Flow Statement. When the Cash Flow Statement is prepared by Direct Method than actual cash receipts are, actual cash payments are arranged and presented in the Cash Flow statement. The difference between them is as referred as Net Cash from Operating Activities. In other words, it is a Revenue Statement, which is prepared on Cash basis under direct method. Since Direct Method is not used hence, no reconciliation has been reported in notes to the accounts. Wesfarmers Group has used Direct Method in preparing Cash Flow Statement, and Appropriate Reconciliation Statement has been presented in Notes to accounts. Examination of Cash Flow Statement of Both the companies (In $m) Particulars Woolworths Limited Wesfarmers Limited Net Cash Flow from Operating Activities 2357.50 3365.00 Net Cash Flow from Investing Activities (1266.70) (2132.00) Net Cash Flow from Financing Activities (377.40) (1333.00) Net Cash Increase / Decrease in Cash and Cash Equivalents 713.40 (100.00) Net Cash Flow from Operating Activities: This portion shows how much liquid assets are generated from the revenue of the company, reduced by cash required to sell those commodities. Net Cash Flow from Operating Activity of both the company has shown declining trend in comparison to Last Year. This fact states that the ability to generate cash from the operations if the concern is decreasing. The reason for this decrease can be declined in sales, Increase in Variable and Fixed Cost, Increase in Tax Rates, etc. Net Cash Flow from Investing Activities: It reflects the amount of cash and cash equivalents i.e. liquid assets are used for the purpose of Capital Expenditure such as the purchase of Plant and Machinery. It also includes the acquisition of any other business. Woolworths and Wesfarmers both have negative cash flows in this section since both have incurred massive capital expenditures in this year. High Capital Expenditures are good indicators of the concern because these expenses would be generating profits in the coming years. Net Cash Flow from Financing Activities: It reflects the movement of cash and cash equivalents associated with financing activity. It is the sum of the amount raised by equity and by borrowing reduced by the amount paid by equity and borrowing. Wesfarmers Limited has repaid the earlier increased loans and has also paid equity dividends this year. Woolworths have less movement in their borrowings. Computation of Ratios Here in this section, the ratios calculated are cash flow indicators that aim at evaluating the cash generation in terms of in what way much it is being generated and the safety net that it offers to its company (Bodie, Kane and Marcus, 2014). These ratios also help us in bringing an insight of the performance and financial health of the respective companies. Particulars Woolworths Limited Wesfarmers Limited Cash Adequacy Ratio 1.16 Times 0.99 Times Cash Flow Ratio 4.70% 4.72% Debt Coverage Ratio 8.86 Times 4.39 Times Cash Flow to Sales Ratio 2.03% (-1.51%) Working Notes: Cash Adequacy Ratio: This ratio states the proportionate of cash and cash equivalents required in relation to available cash and cash equivalents (Dickinson, 2011). Particulars Woolworths Limited Wesfarmers Limited Required Cash and Cash Equivalents 4211.40 74386.00 Available Cash and Cash Equivalents 4924.80 74286.00 Cash Adequacy Ratio 1.16 Times 0.99 Times Cash Flow Ratio: this ratio employs operating cash flows in comparison to other companys metrics for determining the cash it would generate from its net sales. FORMULA: (Net Operating Cash Flow/Net Sales (Revenue)*100 Particulars Woolworths Limited Wesfarmers Limited Net Operating Cash Flow 2357.50 3365.00 Net Sales 50085.70 71157.00 Cash Flow Ratio 4.70% 4.72% Debt Coverage Ratio: this ratio helps in the measurement of the entity abilities to entail enough cash to meet its debt payments (Drake and Fabozzi, 2010). FORMULA: (Net Operating Income/Total Debt Service) Net Operating Income 2563.80 1346 Total Debt Service 207.70 306 Debt Coverage Ratio 12.34 Times 4.39 Times Cash Flow to Sales Ratio: it is expressed as percentage helps in giving investors an insight of the companys ability to convert its sales into cash. FORMULA: (Net Cash Flow/Net Sales (Revenue)*100 Particulars Woolworths Limited Wesfarmers Limited Net Cash Flow 713.40 (100.00) Net Sales 34978.00 6591.00 Cash Flow Ratio 2.03% (-1.51%) Conclusion It can be seemingly articulated from this report that Woolworths and Wesfarmers both are leading retail store chains in Australia. Both the companies have used different methods to determine their cash flow statement while Woolworths has used indirect method Wesfarmers has used direct method. The operating cash flow is in declining trend for both companies in comparison to last year trends. The financing cash flows are negative as both seemed to invest in capital. In addition to this, the investing ratio shows that Woolworths have less momentum; on the other hand, Wesfarmers seems to repay earlier loans. Lastly, the ratios are calculated, and company analysis is done to indicate the cash flow positioning respectively. The sum up to all ratio analysis brings out in straight that Woolworths has a better chance of surviving in the long run as it has better debt state and more liquidity standing than the Wesfarmers. Recommendation As per the analysis carried out in this report, it is quite evident that Woolworth's cash flow positioning is much more stable than the Wesfarmers. Since debt coverage ratio takes into consideration all the expenses and obligation it tells you better about companies ability to repay its debt. It is quite evident from the debt coverage ratio that Wesfarmers is facing lower cash positioning than Woolworths. It is important to maintain this for both the investors and creditors (Petersen and Plenborg, 2010). Woolworths is better for the short-term credit risk than the Wesfarmers. Looking at the overall cash status of both companies it is quite evident that Woolworths has enough cash resources but Wesfarmers seems to be not having enough cash resources, and it is recommended to maintain cash to keep the liquidity positioning of the firm stable. Furthermore to meet the prime objective of satisfying the shareholders Wesfarmers should suction cash to maintain good financial reports (Bitsch, Buchner and Kaserer, 2010). It is quite vivid from the other two ratios also Cash Flow Ratio and Cash Flow to Sales Ratio that Woolworths is better at generating cash from its sales than Wesfarmers. These ratios are an indicator to investors showcasing the consistency of company sales growth with the operating cash flows of the company (7 Cash Flow Ratios Every Value Investor should know, 2015). Healthy consistency in growth will reflect better standards for investment. 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