Australian grocery and industrial conglomerate, Wesfarmers Ltd (ASX: WES), is perennially popular among household investors for both its strong dividends and reliable business performance. Here?s how the business makes most of its money:
That shows where the company?s sales come from. Differences in profit margins between the businesses mean that this data is not very valuable. However, it does provide a yardstick of the size of the unprofitable Target and Resources segments relative to the rest of the business. Investors will likely find it more useful to…
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Australian grocery and industrial conglomerate, Wesfarmers Ltd (ASX: WES), is perennially popular among household investors for both its strong dividends and reliable business performance. Here’s how the business makes most of its money:
That shows where the company’s sales come from. Differences in profit margins between the businesses mean that this data is not very valuable. However, it does provide a yardstick of the size of the unprofitable Target and Resources segments relative to the rest of the business. Investors will likely find it more useful to focus on how much profit each of the company’s segments generate:
The data above comes from segment EBITDA after including depreciation and amortisation. We can see now that Coles still contributes most of the company’s earnings, although the home improvement business is a close second, followed by Kmart, and Wesfarmers Chemicals Energy and Fertilisers, or WesCEF.
Target has had some well-publicised troubles with profitability recently, with the business making a loss in the most recent half. Likewise with Resources, where profits can vary widely depending on market prices. I would not consider resources as a reliable contributor to profits, although when the market turns it could result in a big increase in profitability.
To provide an alternative view of the importance of each of these businesses, I excluded the losses from Target and Resources, and then calculated segment earnings as a percentage of the modified total:
|% of earnings||47%||31%||12%||3%||2%||7%|
Note that this is hardly scientific – the losses from Target and Resources are still real and impact shareholders. However, by using this method we can see the approximate relative size of each business – for example, ~47% of earnings come from Coles (totals don’t sum to 100% due to rounding). Shareholders thus know that adverse impacts on the grocery segment are far more important than impacts to, say, Officeworks.
There’s one more main thing to consider when we’re looking where a company’s earnings come from – and that’s debt because interest can take a big chunk out of earnings:
While that looks like a big decrease in the cost of debt over the past few years, it’s a relatively small amount compared to the company’s net profit after tax of $1,577 million at the most recent half year. So even if you were betting that interest rates rise again, a return to 2013 level of finance costs would not have a huge impact on the investment thesis.
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.