Introduction
An organization needs a strategic plan to grow its operations profitably. To develop an effective company strategy, one needs to examine examples and determine what it entails. Kusuma & Dhiyaullatief Bachtiar (2018) state that “intellectual capital, organizational learning, and corporate governance significantly improved firms’ performance” (p. 77). The strategy is compiled based on the company’s objectives, taking into account its specifics. Each enterprise needs planning to keep up with the changing market situation and constantly improve its level.
Annual Report Analysis
The organizational management system encompasses services, subsystems, and communication channels between them, as well as processes that ensure its specified functionality. The management process provides for coordinated actions that ultimately ensure the implementation of a standard set of goals facing the organization. To coordinate actions, a unique body should be established to implement the management function.
Therefore, in any organization, the managing and managed parts are clearly defined and allocated. The management team comprises the directorate, managers, and information departments, which ensure the effective operation of the management. This part of the organization is referred to as the administrative and managerial apparatus. The input action and the final product of the control part are information. The management link is a necessary element of any organization.
Wesfarmers Ltd (WES) is managed in a way that divides the company into departments, each controlled by a board of directors. This Board includes the managing director and the chief financial officer. The Board is guided by a governance structure that considers the operating cycle as a whole group. In their work, the company’s management staff adheres to high standards of corporate governance practices, enabling the development of effective management systems.
The company has strategies to harmonize the interests of managers and shareholders. This is seen in the statement, “The company regularly reviews its governance framework and practices to ensure they reflect market practice and stakeholder expectations” (Wesfarmers Limited). This statement demonstrates that the company is attentive to its shareholders and considers their interests, which reflects a sound management strategy.
The report also states that the Board of Directors is committed to protecting the interests of shareholders while considering the needs of its employees, managers, and customers (Wesfarmers Limited). The Board of Directors of WES is committed to creating a positive corporate culture that makes it a pleasure to work for the company. This again demonstrates that the company strives to ensure all parties are satisfied with its work.
The net working capital of WES was 1 billion and 269 million in 2020 and 1 billion and 930 million in 2021. Currently, the company is guided by an asset management strategy aimed at expanding its portfolio of sustainable, advanced enterprises. WES aims to expand its investment portfolio through substantial investments to meet the evolving needs of its clients. The company is also focusing on similarly related areas to expand its influence. WES tracks its performance by using the Rate of Change (ROC) indicator.
Thus, the advantages of this strategy include exceptional opportunities for tracking cash flow and increasing capital productivity. The company takes risk identification and management with great responsibility. Given that “the global financial crisis has significantly changed the view of risk management in companies all over the world,” organizations should take risk management seriously (Hudakova & Dvorský, 2018).
Wesfarmers highlights changes in macroeconomic conditions that may affect the household sector as the main risks. In addition, the risks of digging include data loss, infrastructure damage, climate-related risks, and logistical challenges. The company is still actively fighting the risks caused by the COVID-19 pandemic. All these risk groups are systemic because they can affect the entire industry in this business area.
The initial data for evaluating investment prospects were chosen such that a share costs $49.97, and the company’s dividends and obligations are repaid. Based on the initial data, it is not advisable to buy shares of WES today, as the company’s beta coefficient is 0.72. This means that, first of all, the stock dynamics correlate with the stock index’s dynamics. Accordingly, the company’s shares will react sharply to crises, which are now very frequent, and the share price can be unpredictable. The closing price on January 31, 2022, was $52.71. The total volume of shares was 2.282.944. From this, the company’s market capitalization on that day was $120.333.978.
Previously, the company’s financial source was the Australian government’s assistance in connection with COVID-19. The organization also used global bonds and cost optimization. In previous years, WES also issued seven-year domestic sustainability bonds. The disadvantage of this type is the risk of liquidity of the bonds. If the company experiences financial difficulties, this will directly impact the value of the bonds.
The advantage is that the company attracts funds on favorable terms for business development without interacting with credit and banking institutions. The company’s 2021 lease commitments were $109 million (Wesfarmers Limited). Given that each bond has a value of $1,000 and the rate of return for similar bonds in the market is 4.5%, the company must issue 4,905 bonds.
Capital Budgeting
FCF is the net cash flow from operating activities after deducting capital expenditures. For Project A, a total of $150 million in costs would be required, while ten years of revenue after operating expenses would yield $315 million. The subsequent sale of the warehouse for $150 million adds up to $465 million in revenue. The FCF for Project A will be $277.5 million. For Project B, under a similar scheme, the FCF is expected to be $245 million.
Table 1 – Internal Rate of Return for Projects A and B
The net present value of Project A is $150,100,000, and for Project B, it would be $85,100,000. The discounted payback periods for Project A and Project B will be three and a half financial years and four years, respectively. The internal rate of return (IRR) is one of the two primary methods for evaluating investment projects. The IRR for Project A and Project B will be 27%.
If the risk of investing in these mega warehouses is higher than the company’s overall risk, then the discount rate will be less than the weighted average cost of capital. The NPV would, therefore, be much higher, making investing in warehouses unprofitable. This would happen because the company could not fully predict the profitability of projects, and the amount of investment could change significantly.
Conclusion
Considering the analyses, we can conclude that Project A should be selected for investment. Although its net worth is significantly higher than that of the second project, it has a shorter discounted payback period. The IRR for both projects is the same; therefore, Project A is more profitable based on the payback period. Additionally, the final decision may be influenced by the total net profit factor, which Project A also possesses in greater abundance.
References
Au.finance.yahoo.com. 2022. Yahoo is part of the Yahoo family of brands. Web.
Hudáková, M. and Dvorský, J., 2018. Assessing the risks and their sources in dependence on the rate of implementing the risk management process in the SMEs. Equilibrium, 13(3), pp.543–567. Web.
Kusuma, H. and Dhiyaullatief Bachtiar, A., 2022. Working Capital Management and Corporate Performance: Evidence from Indonesia. Web.
Wesfarmers Limited (WES). Annual report 2021. Web.