In: Accounting
Company: Wesfarmers Limited & Woolworths Limited
Using MorningtonStar DatAnalysis, select two companies in the
same industry sector that MUST
have an accounting period from 1 July to 30 June each year. Perform
Strategy analysis,
including industry-level analysis and firm-level analysis, as well
as an accounting analysis, using the
five years of data provided by MorningtonStar DatAnalysis for these
two companies. The purpose for
your analysis is to select one of the two companies for you to
invest $25,000 in via the purchase of
shares in this company.
Requirements:
1. Perform a strategy analysis, including Porter’s ‘five forces’
framework for industry-level analysis,
competitive strategy analysis of the firm-level analysis
(incorporating the source of the sustainable
competitive advantage), and Corporate strategy analysis for the two
selected multi-business
organisations (adding the benefits and costs to the companies
separate segments)
2. Perform an accounting analysis that addresses the six (6) steps
in performing accounting analysis
of the five components of the financial statements for the two
selected companies (35marks)
3. Evaluate the quality of the financial statements of the two
companies. Are you are happy with
their quality? If yes, why and if no, why not?
4. Choose one company (of the two selected companies) you decide to
invest your $25,000 and
identify how many shares this will purchase. Construct your
conclusions to support your selection
of that company.
1.Industry analysis—also known as Porter’s Five Forces Analysis—is a very useful tool for business strategists. It is based on the observation that profit margins vary between industries, which can be explained by the structure of an industry.
The Five Forces primary purpose is to determine the attractiveness of an industry. However, the analysis also provides a starting point for formulating strategy and understanding the competitive landscape in which a company operates.
Porter’s Five Forces Analysis
The framework for the Five Forces Analysis consists of these competitive forces:
Industry analysis and competition
Competition within an industry is grounded in its underlying economic structure. It goes beyond the behaviour of current competitors.
The state of competition in an industry depends upon five basic competitive forces. The collective strength of these forces determines profit potential in the industry. Profit potential is measured in terms of long-term return on invested capital. Different industries have different profit potential—just as the collective strength of the five forces differs between industries.
Industry analysis as a tool to develop competitive strategy
Industry analysis enables a company to develop a competitive strategy that best defends against the competitive forces or influences them in its favour. The key to developing a competitive strategy is to understand the sources of the competitive forces. By developing an understanding of these competitive forces, the company can:
Industry analysis and structure
The five competitive forces reveal that competition extends beyond current competitors. Customers, suppliers, substitutes and potential entrants—collectively referred to as an extended rivalry—are competitors to companies within an industry.
The five competitive forces jointly determine the strength of industry competition and profitability. The strongest force (or forces) rules and should be the focal point of any industry analysis and resulting competitive strategy.
Short-term factors that affect competition and profitability should be distinguished from the competitive forces that form the underlying structure of an industry. Although these short-term factors may have some tactical significance, analysis should focus on the industry’s underlying characteristics.
2.
For any financial professional, it is important to know how to effectively analyze the financial statements of a firm. This requires an understanding of three key areas:
There are generally six steps to developing an effective
analysis of financial statements.
1. Identify the industry economic
characteristics.
First, determine a value chain analysis for the industry—the chain
of activities involved in the creation, manufacture and
distribution of the firm’s products and/or services. Techniques
such as Porter’s Five Forces or analysis of economic attributes are
typically used in this step.
2. Identify company strategies.
Next, look at the nature of the product/service being offered by
the firm, including the uniqueness of product, level of profit
margins, creation of brand loyalty and control of costs.
Additionally, factors such as supply chain integration, geographic
diversification and industry diversification should be
considered.
3. Assess the quality of the firm’s financial
statements.
Review the key financial statements within the context of the
relevant accounting standards. In examining balance sheet accounts,
issues such as recognition, valuation and classification are keys
to proper evaluation. The main question should be whether this
balance sheet is a complete representation of the firm’s economic
position. When evaluating the income statement, the main point is
to properly assess the quality of earnings as a complete
representation of the firm’s economic performance. Evaluation of
the statement of cash flows helps in understanding the impact of
the firm’s liquidity position from its operations, investments and
financial activities over the period—in essence, where funds came
from, where they went, and how the overall liquidity of the firm
was affected.
4. Analyze current profitability and risk.
This is the step where financial professionals can really add value
in the evaluation of the firm and its financial statements. The
most common analysis tools are key financial statement ratios
relating to liquidity, asset management, profitability, debt
management/coverage and risk/market valuation. With respect to
profitability, there are two broad questions to be asked: how
profitable are the operations of the firm relative to its
assets—independent of how the firm finances those assets—and how
profitable is the firm from the perspective of the equity
shareholders. It is also important to learn how to disaggregate
return measures into primary impact factors. Lastly, it is critical
to analyze any financial statement ratios in a comparative manner,
looking at the current ratios in relation to those from earlier
periods or relative to other firms or industry averages.
5. Prepare forecasted financial statements.
Although often challenging, financial professionals must make
reasonable assumptions about the future of the firm (and its
industry) and determine how these assumptions will impact both the
cash flows and the funding. This often takes the form of pro-forma
financial statements, based on techniques such as the percent of
sales approach.
6. Value the firm.
While there are many valuation approaches, the most common is a
type of discounted cash flow methodology. These cash flows could be
in the form of projected dividends, or more detailed techniques
such as free cash flows to either the equity holders or on
enterprise basis. Other approaches may include using relative
valuation or accounting-based measures such as economic value
added.
The next steps
Once the analysis of the firm and its financial statements are
completed, there are further questions that must be answered. One
of the most critical is: “Can we really trust the numbers that are
being provided?” There are many reported instances of accounting
irregularities. Whether it is called aggressive accounting,
earnings management, or outright fraudulent financial reporting, it
is important for the financial professional to understand how these
types of manipulations are perpetrated and more importantly, how to
detect them.
3.Financial Statement Analysis is a method of reviewing and analyzing a company’s accounting reports (financial statements) in order to gauge its past, present or projected future performance. This process of reviewing the financial statements allows for better economic decision making.
4.Following are the steps to analyse which company to invest in:-