Financial analysis of Wal-Mart Stores Inc.

Financial Analysis: Wal-Mart

In this analysis, I concern myself with Wal-Mart Stores -- an NYSE listed multinational corporation. Amongst other things, I will come up with a concise description of the company and its line of business. Further, in addition to evaluating the vulnerability of the retailer to current financial threats, I will also highlight the impact of the company's financial trends on its future financial performance.

Wal-Mart: Overview

Founded 51 years ago by Sam Walton, Wal-Mart's key purpose is helping "people around the world save money and live better -- anytime and anywhere -- in retail stores, online and through their mobile devices" (Wal-Mart, 2013). Currently, Wal-Mart's key competitors in the discount, variety stores industry include but they are not limited to Target Group and Costco Wholesale Corporation. Through the retail stores it operates in various formats, Wal-Mart offers for sale a wide range of products including but not limited to home decor, jewellery, books, toys, electronics, frozen foods, stationery, etc. The retailer also offers for sale products and items such as gardening tools, office and home furniture, etc. Recently, Wal-Mart launched walmart.com, an online platform that seeks to guarantee customers "the best shopping experience on the internet" (Wal-Mart, 2013). Wal-Mart likens this online retail platform to a neighborhood Wal-Mart store.

In recent times, the company has expanded to other geographic locations in an attempt to further enhance its global presence. Indeed, as Daniel (2012) points out, the retailer has had to embrace growth so as to stay ahead of the competition in today's global economy. The retailer in the words of Daniel (2012) "has 8,500 stores under 55 different banners in 15 countries and employs more than 2 million people."

It is important to note that although the profitability of the company recently took a slight dip (as per its most recent financial statements); its performance in the past has been largely impressive. This impressive performance of the company can be attributed to the talented cast of managers at the helm. The retailer's current C.E.O is Michael Terry Duke who has previously held senior positions with other major retailers such as May Department Stores (Wal-Mart, 2013). Other key officers of the company include Charles M. Holley, Neil M. Ashe and Douglas McMillion who are the retailer's CFO, CEO -- Global eCommerce, and CEO -- Wal-Mart International respectively (Wal-Mart, 2013).

Although the company continues to face immense competition from the likes of Costco and Target, Wernau (2010) describes the power of Wal-Mart as being indisputable. According to Wernau, being the largest retailer in the world, Wal-Mart is in a unique position to negotiate for lower prices from manufacturers (Wernau, 2010). This effectively gives the retailer a competitive advantage other retailers in the same industry would find it difficult to match. From a strategic management perspective, Wal-Mart utilizes what Griffin (2012) calls an overall cost leadership strategy. A company implementing this particular strategy in the word of the author "attempts to gain a competitive advantage by reducing its costs below the costs of competing firms" (Griffin, 2012). This is the strategy Wal-Mart has embraced to remain competitive.

Financial Performance

In this section, I will make use of a number of financial ratios to predict Wal-Mart's future performance. In so doing, I will from time to time make comparisons between the performance of Wal-Mart and that of Target. Target happens to be Wal-Mart's main competitor in the U.S. discount retail market.

Although Wal-Mart registered a slight decline in its return on equity (ROE) ratio in the latest financial period in comparison to the previous years, the company has been generating more profits using the money provided by its shareholders than Target (See Table 1 and 2). For the financial year ended Jan 30th 2010, Wal-Mart had a return on equity of 0.20. For the year ended Jan 31st 2011 and Jan 31st 2012 respectively, the company had a return on equity of 0.24 and 0.22 respectively. Target's ROE ratio for the financial year ended Jan 29th 2010, Jan 28th 2011, and Jan 27, 2012 is 0.16, 0.19, and 0.19 respectively. For this reason, Wal-Mart earns more profit per dollar of investment than Target. Further, its performance on this front has largely been consistent over time. Wal-Mart is hence likely to continue raking in an impressive return for its shareholders going forward.

The company's overall performance is also likely to continue being impressive into the foreseeable future. This is more so the case given that the retailer has a highly competent team of managers at the helm. To further reinforce my assertion in this case, I will make use of the return on assets ratio which according to Stickney, Weil, Schipper, and Francis (2009) "measures a firm's performance in using assets to generate net income independent of how the firm financed the acquisition of those assets." Thus in basic terms, the return on assets ratio measures how efficient a firm's management is in the utilization of company assets to generate earnings. From Table 1 and Table 2, it is clear that Wal-Mart's management is much more efficient than the management of Target in the utilization of assets to generate profits. With a talented team of professional corporate officers, Wal-Mart's overall performance is likely to continue being impressive going forward.

In seeking to chart Wal-Mart's current financial health and its stability going forward, it would be prudent to take into consideration its gross profit margin and debt ratio. Over the three-year period under consideration, the company has maintained a gross profit margin of 0.25. What this means is that for each dollar of sales, Wal-Mart retains $0.25 for other operating expenses. In my opinion, such a gross profit margin is sufficient and should the trend continue; Wal-Mart would not encounter any significant difficulties in the payment of its operating expenses. The fact that Wal-Mart's gross profit is relatively stable over the three-year period is also an indication of good financial health which could further be replicated into the future. The company's debt ratio also clearly indicates that Wal-Mart's level of risk is relatively low. This ratio in the words of Albrecht, Stice and Stice (2010) "represents the proportion of borrowed funds used to acquire the company's assets." Wal-Mart has a debt ratio of less than 1. For this reason, the retailer has more assets than debt. Thus in terms of debt load, Wal-Mart does not currently face any potential risks.

The retailer's current ratio for the most recent financial period clearly demonstrates that the retailer would encounter difficulties in the repayment of its short-term obligations were they to suddenly become due (See Table 1). Indeed, the retailer's current ratio has not exceeded 1.0 in recent times. It is however important to note that given its profitability, it is likely that Wal-Mart converts its inventory into cash at a rate that is much faster than that of its peers in the same industry. For this reason, it is highly unlikely that in the normal course of doing business, the retailer could encounter challenges paying back vendors in the near future.

Stock Price Analysis

In my opinion, Wal-Mart's stock is likely to continue performing relatively well into the future. This is particularly the case given that the company's ROE (in relation to that of its peers) has largely been impressive in the past. Active investors are likely to be drawn to this stock given its impressive performance. To further improve the performance of the stock, the management should embrace an extensive growth and expansion strategy that seeks to capture emerging markets including but not limited to China, India, Brazil, and parts of Africa. In addition to ensuring that the retailer does not rely on only a few markets, such a move would have the effect of increasing the company's bottom-line

Conclusion

Based on the analysis I have conducted above, I am of the opinion that Wal-Mart would be a good company to invest in. In addition to having a stable gross profit margin, the company has also managed to maintain a relatively high and stable return on equity. It is also important to note that Wal-Mart continues to utilize a winning competitive strategy to remain relevant and profitable in a relatively competitive industry. For this reason, Wal-Mart has a unique chance to further consolidate its market share as it seeks to exploit emerging markets.