Wal Mart financial ratio analysis

Introduction

Wal-Mart is the world’s largest retailer. They operate in many countries around the world, and have over 2 million employees. The largest market for Wal-Mart is the United States. Wal-Mart is the biggest grocer in the country, one of the biggest online retailers as well. By analyzing the financial statements of Wal-Mart, one can ascertain the company’s financial health as of 2015.

Financial Ratios

Financial statements for publicly traded companies are compiled according to a specific set of rules, and a format that is established both by convention and by the governance of the Securities Exchange Commission. The value of having these rules is that the information contained in the financial statements is reliable, and comparable. Not only can one compare Wal-Mart’s financial performance across different years, but it is also possible to compare Wal-Mart’s performance against other companies in its industry.

One of the means by which financial statements are analyzed is through the use of ratios. The ratios are established by convention – typically the same ratios are used by analysts, because they have clear definitions and established formulas. This means that, for example, a current ratio is always done the same way. Again, this helps analysts to understand companies and compare their numbers across years and industries. The current ratio for Wal-Mart, for example, is calculated the exact same way as the current ratio for Target. This comparability and transparency helps people to assess different investments, for example if you want to invest in the retail sector you can choose between companies more easily by using this form of financial statement analysis.

Wal-Mart Ratio Analysis

The following are Wal-Mart’s financial ratios for 2015:

Wal-Mart 2015 Financial Ratios

Current Ratio
0.97
Quick Ratio
0.28
Debt/Equity
0.50
Inventory Turn
8.09
Receivables Turn
71.65
Total Asset Turn
2.38
Net Margin
3.37%
ROA
8.03%

The current ratio is a liquidity ratio, which indicates the level of liquidity that the company has – basically its financial risk in the next year. The quick ratio is also a liquidity ratio. The current ratio is the most basic liquidity ratio, and the rule of thumb is that the company should have around the same value for current assets as it has for its current liabilities, a current ratio of 1.0. Wal-Mart’s level is just under, and thus is perfectly comfortable. Several other ratios provide important context for this number. The quick ratio is an important variable for retailers in particular, because it is the current ratio, but minus the inventory. The principle is that the inventory may not be liquidated at cost – in fact the company might be sitting on unsellable inventory, and thus the truer measure of liquidity for a retailer requires removing the inventory from the measure. So the quick ratio for Wal-Mart is 0.28. This is a reasonably healthy quick ratio, especially given that Wal-Mart will sell most of its inventory, and it shows that Wal-Mart’s liquidity is not entirely reliant on inventory that may have to be sold at a discount.

That said, it is important to look at the operation performance ratios, or efficiency ratios, to provide some context to the liquidity ratios. The inventory turnover is an important ratio for a retailer, because it is important that retailers are able to convert inventory into cash. The quicker they can do this, the higher their inventory turnover will be.Wal-Mart has an inventory turnover of 8 times, which is a fairly healthy level, but still indicates that inventory spends well over a month in Wal-Mart’s system. There’s nothing wrong with this number, but nothing great about it either.

Receivables turn reflects the ability of the company to collect on its debts. This is an important measure for any company that sells on credit. Wal-Mart’s number here, 71, is excellent. Credit purchases are generally on credit cards, and this figure is strong even for a large retailer. It indicates that Wal-Mart has substantial leverage over the credit card companies – they pay Wal-Mart within about 4-5 days for purchases made. This means that if Wal-Mart needs extra cash for something, it will not wait long because its receivables will be converted to cash in a matter of less than a week.

The solvency ratio here is the debt/equity ratio. Each company has its own unique view of capital structure. Essentially, debt is lower cost than equity, but it also incurs interest charges, so it can also be less efficient in the financial sense. Some companies prefer to carry high leves of debt in order to have a low cost of capital. In general, the more stable the business, the higher the debt that the company can carry safely. Wal-Mart has a very stable business – its beta is exceptionally low – but it carrries only around 50% of equity in long-term debt. When this is combined with current liabilities, Wal-Mart has a much higher degree of leverage, but that is acceptable for a company with a diversified, stable business and a relatively fast cash conversion cycle.
The total asset turnover is another efficiency measure, but related less to current assets than to all assets. For a retailer, this figure will never be that high, because both inventory and land costs are going to be high. Thus, the total asset turnover is best when compared in the same company over time periods, or against other companies in the same industry. Wal-Mart’s total asset turnover of 2.38 is not bad.

The net margin is a key profitability ratio. This ratio reflects the pricing power of the company (gross margin) combined with its ability to control costs (operating margin) and its ability to manage its interest and tax burdens. A company like Wal-Mart that competes with a cost leadership strategy is never going to have high margins – the entire business model is built around being able to offer low prices to consumers, so Wal-Mart forgoes high margins in favor of high volumes. The company’s 3.37% net margin is perfectly reasonable and in line with those of competitors like Target and Costco.

Finally, the ROA is a measure of how well the company is converting its assets into profits. As with the total asset turnover, this figure will never be high for a retailer, because that is a business with a high degree of asset intensity. But all told, Wal-Mart’s 8% ROA is a perfectly reasonable number of its space.

Conclusion

Wal-Mart’s 2015 financial show a company that performs well in its industry. Wal-Mart’s financial performance is not exceptional in any one area, but strong is all areas. As such, Wal-Mart can be said to have a strong, stable, financial condition.


References

Wal-Mart 2015 Annual Report. Retrieved April 14, 2018 from https://s2.q4cdn.com/056532643/files/doc_financials/2015/annual/2015-annual-report.pdf