Wal-Mart: Financial Statement Analysis
WAL-MART FINANCIAL STATEMENT ANALYSIS
Company Description
Wal-Mart Stores Inc. (WMT) is a world largest grocery chain and retail stores. The company operates 8000 stores across three business segments which include apparel, groceries, electronics and small appliances. While the company operates globally, half of the company stores are located in the United States. To complete in the international markets, Wal-Mart also operates its business through subsidiaries in Canada, Argentina, China, Brazil, the United Kingdom and Japan. However, the company majority-owned subsidiaries are located in Chile, and Central & South America. Wal-Mart business strategy is to buy products at rock-bottom prices and pass savings on customers and Wal-Mart has been able to drive up its profitability by purchasing billion of dollars worth of low costs merchandise directly from China and the company has been able to win the trusts of customers by providing its products at low prices. The company uses ruthless efficiencies and economic of scale to offer its products at lower prices than its competitors. To decline the costs, Wal-Mart purchases goods directly from manufacturers and since 2010; the company has been able to increase the sales as well as revenue. In 2010, Wal-Mart generates sales of $405.1 billion and in 2011, the company increased its sales to $418.9 billion revealing the 3.4% increase in the company net sales between 2010 and 2011. (Wal-Mart 2012). However, the company has been able to realize the 5.9% increase in the net sales between 2011 and 2012 because Wal-Mart has been able to generate approximately $443.9 billion in the net sales at the end of the 2012 fiscal year. The company emphasizes on three priorities to improve shareholders values: Growth, Leverage and Returns. Typically, the company efficiently utilizes the company assets to increase its ROI (return on investment).
Objective of this report is to provide Wal-Mart financial analysis. The report uses key financial ratios to evaluate the company strengths.
Table 1: Wal-Mart Financial Statement Ratios
Financial Condition
2012
2011
2010
Industry
Current Ratio
0.88
0.89
0.87
1.19
Inventory turnover
10.90
11.54
12.21
10.4
Debt/Equity Ratio
0.75
0.73
0.58
0.52
Net Profit Margin
3.54%
3.91%
3.54%
4.79%
Return on Equity
22.01%
23.91%
20.26%
15.92%
Price earnings (P/E)
13.25
11.15
14.66
12.74
Wal-Mart Ratio Analysis
The report uses Current Ratio, Price Earning (P/E), Inventory Turnover, Debt/Equity Ratio, Net Profit Margin, and Return on Equity to demonstrate Wal-Mart financial position.
Current Ratio
Current ratio measures a company ability to settle its short-term debts and other current liabilities. Current liabilities are company financial obligations that need to be settled within a year. A firm current assets are cash and other assets that could be converted into cash within a year. A company having current ratio of exactly one shows that such company has the same current assets with current liabilities Investors generally look for companies having current ratio of 2:1 meaning that such companies have twice of current assets to current liabilities. A current ratio less than one reveals that such companies might have problems to meet their short-term financial obligations. When the ratio is too high, it indicates that a firm is not efficiently using its short-term financing facilities or its current assets. Generally, the current ratio demonstrates ability of a company to remain solvent.
A formula to calculate current ratio is as follows:
Current ratio = Current assets + Current liabilities
As being revealed in Table 1, Table 2 and Fig 1, Wal-Mart current ratio deteriorated between 2010 and 2012. In 2010, the company current ratio was 0.87 and improved to 0.89 in 2010. However, at the end of the 2012 fiscal year, the company current ratio slightly deteriorated to 0.88. The calculation below reveals the Wal-Mart current ratio in 2012.
Current ratio = Current assets + Current liabilities
Current ratio = 54,975 + 62,300 = 0.88
The company current ratio in 2012 is 0.88 showing the ratio of the company current assets to current liabilities. This reveals that the company only has 0.88 in possession for every $1 of current liabilities. The results indicate that Wal-Mart current ratio is below one and the company may face challenges in meeting the short-term obligation to its creditors. The company current ratio is below the industry average showing that the company has 0.12 of more current liabilities than current assets at the end of the 2012 fiscal year.
Table 2: Wal-Mart Current Ratios
2012
2011
2010
2009
2008
Current Ratio
0.88
0.89
0.87
0.88
0.81
Fig 1: Wal-Mart Current Ratios
Return on Equity (ROE)
Return on Equity measures the rate of returns investors expect to realize from the money invested in the company stocks. The ROE demonstrates the ability of a company to generate profits from shareholders' total equity. In other word, ROE reveals the extent...
Return on equity is a useful tool to compare a firm profitability with the industry. Typically, investors are generally interested in companies that could generate high returns on equity.
Formula to calculate ROE is as follows:
Formula: ROE = Net Income / Shareholder's Equity
Data in Table 3 and Fig 2 reveal that Wal-Mart ROE improved between 2010 and 2011, however, the company ROE slightly deteriorated between January 31, 2011 and January 31, 2012. However, and the deterioration does not reach 2010 level. At the end of the 2010 fiscal year, Wal-Mart ROE was 20.26% and the company was able to increase its ROE to 23.91% at the end of 2011 fiscal year. However, the company ROE declined to 22.01% at the end 2012 fiscal year. The calculation to arrive at Wal-Mart ROE for 2012 is as follows:
ROE = 100 x 15,699 + 71,315 = 22.01%
Compared to industry, Wal-Mart ROE is higher than the industry average revealing that the company is more profitable than the industry average between 2010 and 2012.
Table 3: Five-Year Wal-Mart Return on Equity
2012
2011
2010
2009
2008
Return on Equity
22.01%
23.91%
20.26%
20.53%
19.70%
Fig 2: Five-Year Wal-Mart Return on Equity
Inventory Turnover
Inventory turnover measures the speed a company has been able to move its inventory and high inventory turnover generally indicates high efficiencies. In the other word, inventory turnover demonstrates the number of time a company inventory is sold and is replaced within a year. Formula to measure inventory turnover is as follows:
Formula: Inventory Turnover = Cost of Sales / Average Inventory
Alternatively, the inventory turnover is calculated by dividing revenue by the total inventory. Based on the data in Table 4 and Fig 3, Wal-Mart inventory turnover declines from 2010 to 2012 and the company inventory turnover was 12.21 at the end of the fiscal 2010. However, the inventory declined to 11.54 at the end of 2011 fiscal year, and the company inventory further declined to 10.90 at the end of the 2012 fiscal year.
The company inventory turnover in 2012 is calculated as follows:
Inventory turnover = 443,854 + 40,714 = 10.90.
However, the company inventory turnover is higher than the industry average between 2010 and 2012 revealing that the company has better sales and higher efficiencies than the industry average.
Table 4: Five-Year Wal-Mart Return on Equity
2012
2011
2010
2009
2008
Inventory turnover
10.90
11.54
12.21
10.63
10.65
Fig 3: Five-Year Wal-Mart Return on Equity
Debt/Equity Ratios
Deb-to-equity ratios show the leverage ratio of relative proportion of shareholder equity and debt used to finance company assets. The debt to equity ratio provides the information on how a company finances its total assets. A lower debt to equity ratio reveals a lower risk because shareholders will be able to claim large proportion of the company assets in case of company liquidation. On the other hand, a high debt to equity ratio reveals that a company has been aggressively financing its growth with debt, which could relatively lead to volatility in the company earnings.
The formula to calculate Debt to Equity Ratio is:
Formula: Debt to Equity Ratio = Debt / Shareholders' Equity
The data in Table 5 and Fig 4 reveal that Wal-Mart debt-to-equity ratio increases between 2010 and 2012 and the increase in the company debt-to-equity ratio indicates that the company has aggressively financed its growth with debt between 2010 and 2012. Since 2010, the company has aggressively continued to finance its growth with debts, which indicates that the company earning could be volatile leading company beta to be greater than one. In 2010, the company debt-to-equity ratio was 0.58, and increased to 0.73 in 2011, and the company debt-to-equity ratio further increased to 0.75 at the end of 2012 fiscal year.
The calculation to arrive at Wal-Mart for 2012 fiscal year is as follows:
Debt to equity = Total debt + Shareholders' Equity
Debt to equity = 53,427 + 71,315 = 0.75
Compared to the industry average, the company debt to equity ratio is greater than the industry average of 0.52 indicating that the company earning is volatile than the earning of industry average.
Table 5: Five-Year Wal-Mart Debt-to-Equity Ratio
2012
2011
2010
2009
2008
Debt/Equity Ratio
0.75
0.73
0.58
0.65
0.69
Fig 4: Five-Year Wal-Mart Debt-to-Equity Ratio
Net Profit Margin
Net profit margin is calculated by dividing net income by total revenue, and net profit margin represents the percentage of revenue that a company has been able to keep as profits after deducting both variable and fixed costs. However, narrow profit margin indicates higher volatility and wide profit margin indicates that a firm is operating with reduced risks. A formula used to calculate net profit margin is as follows:
Formula: Profit Margin = Net Income / Revenue
The data in Table 6 and Fig 5 reveal that Wal-Mart has been able to improve its net profit margin between 2010 and 2011. However, the company net profit…
