Woolworths and Wesfarmers: Accounting for Decision Making

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Table of Contents

Introduction
Profitability
Gross Profit Margin
Net Profit Margin
References

Introduction

Non-financial and overview:

Woolworths Ltd

Woolworths Ltd is an 87-year-old company listed on the Australian Security Exchange and engaged in the retail industry. Its operations include food and grocery, liquor, petrol, general merchandise, and consumer electronics. Its customers which are in millions are spread across Australia and New Zealand. It employs more than 191,000 people thus remaining as one of the largest private-sector employers in Australia.

Out of more than 420,000 shareholders, 40,000 are their employees. The company’s policy is to purchase goods from domestic sources so that meat, fruits, vegetables, and seafood procured are fresh. As a major investor in Australia and New Zealand., the company helps the country economically through job creation, infrastructure development. Socially, the company helps in the advancement of quality standards in the food industry, safety standards in the workplaces, improvement in retail technology, and aiding charities by direct donations. From the environment perspective, the company has launched a sustainable strategy 2007-15 for making positive environmental impacts by setting targets (WoolworthsLtd, n.d)

Wesfarmers Ltd

This company is nearly 97 years old having been started in 1914 as a Western Australian farmers’ cooperative. This is also a listed company with the Australian Stock Exchange engaged in diverse operations in supermarkets, department stores, home improvement, and office supplies, coal mining, energy, insurance, chemicals and fertilizers, and industrial safety products with the primary objective of ensuring a reasonable return to its shareholders. The company’s economical, social, and environmental objectives are the same as that of Woolworths Ltd as outline above (Wesfarmers, n.d ).

Profitability

Profitability is indicated by the company’s profit margin, return on assets, and return on equity. It shows the overall efficiency and performance of the company.

Gross Profit Margin

Woolworths’ gross profit margin for the year 2011 has improved by 0.05 %. For Wesfarmers, it has reduced by 0.03%. But, Wesfarmers Ltd’s gross profit is higher than that of Woolworths Ltd i.e 30.96 % for the former and 25.78 % for the latter.

This ratio is an indication of the cost of goods sold. It reveals how well, a company can control its inventory and manufacturing costs. The company’s ability to purchase raw materials at a competitive price and hold an optimum level of inventory consisting of raw materials, semi-finished goods, and finished goods and selling price of the finished goods determine the volume and percentage of its gross profit.

It follows therefore that the higher the gross profit margin, the better for the company. Thus, Woolworth’s lesser percentage of gross profit margin may be due to its un-remunerative selling price, excessive purchase costs, or inventory holding costs. Woolworth may remedy the situation by increasing its selling price if possible or reduce their purchase costs or inventory costs. Similarly, Wesfarmer’s higher percentage of gross profit margin by 4.18 % for the year 2011 may be due to their lower purchase costs, lower inventory costs, or higher selling price or combination of all these.

Further, they have additional products line consisting of home improvement and office supplies, coal mining, energy, insurance, chemicals and fertilizers, and industrial safety products which Woolworths does not have. These items may help in their competitiveness.

These products being of high value and high volume barring insurance may be by nature fetching more returns in volume. Their presence in the insurance industry is an advantage of being able to service their customers under one roof. Their customers need not go to another service provider and waste their time and energy. It would be possible to find the actual reasons for the high profitability or lower profitability if details sales revenue product-wise and purchase details are available.

Operating profit margin: Otherwise known as EBIT (Earnings Before Interest and Taxes) is calculated as a percentage of sales. It is a measure of overall operating efficiency. As interest and tax figures are not available, the calculation of EBIT is not possible.

Net Profit Margin

Net profit margins have increased for both companies. For Woolworths, it is 0.09% and for Wesfarmers, it is 0.35%. Wesfarmers have earned a higher net profit of 6.11 % than Woolworths with a net profit of 6.05 % for the year 2011.

It shows that Wesfarmers command better selling price and/or lower selling, administrative, interest, and depreciation costs.

Return on equity (ROE) also has increased for both companies. For Woolworths, ROE has increased by 0.21 %, and Wesfarmers, it is 1.25 %. Return on Equity is higher in respect of Woolworths. This ratio helps investors decide to invest or not to invest in a company.
Return on Assets (ROA). For Woolworths, there is a reduction of 1. 14 % and for Wesfarmers, there is an increase of 0.63 %. However, Woolworths’s ROA is higher than Wesfarmers, the percentages being 16.68 % and 7.94 for 2011 respectively.

With the above ratios, Woolworths stands in a better position than Wesfarmers in terms of ROE and ROA.

References

Wesfarmers. n.d. About Us. Wesfarmers. Web.

WoolworthsLtd. n.d. Our Company, Passionate about retail. Woolworths Ltd. Web.

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