WES share price in focus
Wesfarmers is a diversified Australian conglomerate headquartered in Perth. It’s essentially a listed investment company with outright ownership or significant stakes in companies across retail, chemical, fertiliser, industrial and safety brands and products.
Wesfarmers has a long history of buying businesses, re-investing in them to grow cash flow and assets, then selling them off for a higher price. A good example of this is Coles Group, which it bought in 2007 and spun out in 2018. However, by far (over 50%) of the company’s operating profit comes from Bunnings Warehouse, the #1 hardware and home improvement business in Australia (and the country’s most trusted brand in 2023 & 2024). Wesfarmers originally bought into Bunnings in 1987, buying the final 52% in 1994 for $594 million.
Other household names owned by Wesfarmers include Blackwoods, Kmart, Target, Officeworks, and Priceline Pharmacy. Wesfarmers has been a leading blue chip stock on the ASX for decades and is known for paying a consistent dividend.
The key metrics
If you’ve ever tried to read a company’s income statement on the annual report, you’ll know it can get pretty complex. While there are any number of figures you could pull from this statement, three key ones are revenue, gross margin, and profit.
Revenue is important for obvious reasons – everything starts here. If you can’t generate revenue, you can’t generate profit. What we’re concerned about is not so much the absolute number, but the trend. WES last reported an annual revenue of $44,189m with a compound annual growth rate (CAGR) over the last 3 years of 9.2% per year.
Moving down the income statement, we then get to gross margin. The gross margin tells us how profitable the core products/services are – before you take into account all the overhead costs, how much money does the company make from selling $100 worth of goods or services? WES’s latest reported gross margin was 34.0%.
Finally, we get to profit, arguably the most important figure. Last financial year Wesfarmers Ltd reported a profit of $2,557m. That compares to 3 years ago when they made a profit of $2,380m, representing a CAGR of 2.4%.
Financial health of WES shares
The next thing we need to consider is the capital ‘health’ of the company. What we’re trying to assess here is whether they’re generating a reasonable return on their equity (the total shareholder value) and have a decent safety buffer. One measure we can look at is net debt. This is simply the total debt minus the company’s cash holdings. In the case of WES, the current net debt sits at $10,443m.
A high number here means that a company has a lot of debt which potentially means higher interest payments, greater instability, and higher sensitivity to interest rates. A negative value on the other hand indicates the company has more cash than debt (a useful safety buffer).
However, arguably more important is the debt/equity percentage. This tells us how much debt the company has relative to shareholder ownership. In other words, how leveraged is the company? WES has a debt/equity ratio of 131.4%, which means they have more debt than equity. This isn’t always a bad thing if the company has stable revenue and good cash flow, but it certainly creates more risk.
Finally, we can look at the return on equity (ROE). The ROE tells us how much profit a company is generating as a percentage of its total equity – high numbers indicate the company is allocating capital well and generating value, while a low number suggests the profits might offer more value if they were paid to shareholders as a dividend. WES generated an ROE of 30.3% in FY24.
What to make of WES shares?
With strong revenue growth over the last 3 years, profits trending upwards, and a solid ROE, WES shares could be worth adding to your ASX share price watchlist.
Please keep in mind that these figures are important but should only be the beginning of your research. It’s important to get a good grasp of the company’s financials and compare it to its peers. It’s also very important to make sure the company is priced fairly. To learn more about share price valuation, you can sign up for one of our many free online investing courses.
