Liquidity Ratios the Current Ratio

Liquidity Ratios

The current ratio divides the value of the current assets by the value of the current liabilities and is aimed at evaluating whether the organization has the capacity to cover its short-term obligations with the use of its current assets. In Wal-Mart's case, the current ratio in 2007 was 0.90. In general, values of around 1 or higher are recommended, however, a value of 0.90 is close enough to 1.

The value shows that Wal-Mart has a prudent short-term financial approach in which its short-term obligations are not overextended compared to the short-term assets. The value in 2006 was similar, 0.8976, meaning that the company usually retains a similar current ratio value, with both current assets and current liabilities increasing from 2006 to 2007.

The quick ratio is 0.25, relatively small, but perfectly justifiable given the fact that the value of the inventories for Wal-Mart in 2007 was $33,685, a characteristic of the retail industry in which Wal-Mart activates. Inventories increased in value from 2006 as well.

Profitability ratios

The gross profit margin was 24.47% at Wal-Mart in 2007, somewhat below the industry average of 31.41% and below its most important competitor on the U.S. market, Target, with 31.24%, but still above Costco Wholesale Corporation, with 12.51%. The operating profit margin was 5.9% in 2007 (the industry average at 3,93%, so better in Wal-Mart's case), with the earnings per share (EPS) at 3.361, above the industry average of 1.54 in 2007. The return on total assets was 19.7%.

Leverage ratios

The debt to equity ratio at Wal-Mart was 1.455 in 2007, showing that the company relies more on debt than on equity to finance its activity. This ratio gives us a better idea about the financial policy at Wal-Mart. However, this is not necessarily a negative aspect and is closely linked to the industry in which Wal-Mart operates, where one first purchases the merchandise to sell and only after that obtains profits from it. The fact that more of the activity is financed through debt is justified by this being much simpler, with the object of finance, usually merchandise to be sold, less expensive that more capital intensive assets such as buildings. This also justifies the large value of inventory previously pointed out when the current ratio was calculated.

The debt to assets ratio will show the leverage of the company and evaluate the financial risk at Wal-Mart. In 2007, the debt to assets ratio at Wal-Mart was 0.216. The financial leverage used by the company is quite small, but the explanation for this resides not necessarily in the small value of debt (as we have seen previously, the company does use this as an important method of financing its activities), but in the very high value of the assets, part of these being financed by shareholders' equity. Things like markets and buildings are worth the largest part of the total assets (property is listed at $109,798 million in 2007).

The times interest earned ratio shows the company's ability to meet all its assumed debt obligations. In our case, in 2007 Wal-Mart's times interest ratio was 13.198. This shows a solid approach to financial issues, the company being able to cover its interest obligations from its current earnings over 13 times over.

Activity ratios

The days of inventory at Wal-Mart were 46.54 in 2007, compared to 49 days to sell the inventory in 2006. The slight decrease is caused by the increase of inventory value at a faster pace than the net cost of sales. The inventory turnover was 9.94 in 2007, compared to 9.68 in 2006. The latter ratio showed a slight increase mainly due to an increase in the inventory value over this period of time.