Walmart Financial Analysis: Liquidity, Assets & Profitability
This paper presents a comprehensive financial analysis of Walmart, the world's largest retailer, using data from its FY2011 and FY2010 annual reports. The analysis evaluates Walmart's creditworthiness through four lenses: liquidity ratios (current ratio, quick ratio, receivables and inventory turnover, times interest earned), asset structure (debt-to-worth ratio and capital structure), profitability ratios (pre-tax ROE, ROA, and sales-to-assets), and cash flow patterns. Each metric is benchmarked against RMA industry standards for general merchandise retailers. The paper concludes with a lending recommendation supported by the ratio findings, arguing that Walmart's strong operating efficiency, short cash conversion cycle, and consistent profitability make it a low default risk.
- Introduction: Walmart's Business Model and Competitive Position: Overview of Walmart's strategy and analysis scope
- Liquidity Analysis: Current ratio, quick ratio, and turnover metrics
- Asset Analysis: Capital structure and debt-to-worth ratio
- Profitability Analysis: ROE, ROA, and asset-to-sales conversion ratios
- Cash Flow Analysis: Sources and uses of cash, leverage shifts
- Recommendation and Conclusion: Lending recommendation based on ratio findings
✍️ How to write this paper — guide, tools & examples ▾
What makes this paper effective
- Each ratio is clearly defined with its formula before results are reported, making the analysis accessible to readers unfamiliar with financial metrics.
- Every calculated ratio is benchmarked against RMA industry standards, giving the analysis an objective external reference point rather than relying solely on year-over-year comparison.
- The paper consistently connects financial findings back to Walmart's specific business model (just-in-time inventory, cost leadership), demonstrating that ratio interpretation requires contextual judgment.
Key academic technique demonstrated
The paper demonstrates ratio contextualization — the practice of explaining why a ratio that appears unfavorable by standard benchmarks may actually be appropriate or even positive given a company's operating model. For example, the low current ratio is reframed as a natural consequence of Walmart's deliberately lean inventory strategy, and the quick ratio is introduced as a more suitable measure for this context. This technique shows analytical maturity beyond mechanical ratio calculation.
Structure breakdown
The paper follows a classic financial-analysis structure: a brief introduction establishes the company and scope, four analytical sections (liquidity, assets, profitability, cash flow) work through specific ratio categories in sequence, and a concluding recommendation synthesizes the findings into a lending decision. Financial data tables for the balance sheet, income statement, and cash flow statement are appended after the narrative, serving as transparent source documentation for all computed ratios.
Introduction: Walmart's Business Model and Competitive Position
Walmart is the world's largest retailer. The company operates primarily in the discount retail industry, competing with a cost leadership strategy. It is also active in a number of export markets, the most important being Mexico, Canada, China, and the United Kingdom. The company also competes in the warehouse club segment of the retailing industry, where its Sam's Club brand trails Costco in market share and revenue. Walmart is the world's second-largest online retailer, behind Amazon. The company became successful based on its strengths in logistics and purchasing. Walmart uses its bargaining power and economies of scale to drive down prices to consumers, and uses this as a source of competitive advantage.
This paper focuses on a financial analysis of Walmart using data for the two most recent fiscal years (FY2011 and FY2010). This analysis will result in a determination of whether or not to lend to Walmart. The figures used in this report come from the 2011 Walmart Annual Report, unless otherwise specified.
Liquidity Analysis
The liquidity analysis is the most important form of analysis for a potential creditor. It is a means by which the creditor can ascertain the likelihood of default (Loth, 2011). Favorable liquidity ratios indicate that the company is likely to be in a position to repay its debts. The current ratio is computed as current assets divided by current liabilities. The current ratio for Walmart as of FY2011 is 0.88, and for FY2010 it was 0.86. This is lower than the RMA figures, which indicate that a figure below 1.0 is "worst." There is a caveat, however: current assets include inventory. Walmart's business model encourages rapid inventory turnover. It uses a just-in-time ordering system that keeps inventory levels to a minimum. The RMA statistic is based on "all other general merchandise stores," which includes non-discount retailers that traditionally carry much higher inventory levels than firms competing in the discount space.
In order to discount the effect of bloated inventory levels on the RMA statistics, the quick ratio should also be used. For Walmart, the quick ratio is 0.26, and for the previous year it was 0.28. The quick ratio places Walmart closer to the "average" category based on the RMA statistics. Thus, while the current ratio is the most popular means of understanding a firm's liquidity — and on this measure Walmart appears to have poor liquidity — when the business model is taken into account, Walmart's liquidity looks considerably better.
Continuing with the liquidity analysis, there are several measures of managerial efficiency. The first is a reflection of accounts receivable turnover, measured in days. This measure indicates how quickly the firm converts credit sales into cash. Firms with a lower number of days have a more efficient receivables turnover, which leads to a shorter cash conversion cycle. For a creditor, it is important that the borrowing company has a short cash conversion cycle, as this reduces the risk of default. The longer receivables are held, the greater the likelihood of default on those receivables. The formula for receivables turnover is 365 divided by (sales / average receivables). For Walmart in FY2011, accounts receivable turned over in 4 days. The RMA standard for "average" is 3 days. According to this measure, Walmart falls near the industry average in terms of receivables turnover.
Inventory turnover is a similar measure to receivables turnover and also affects the cash conversion cycle. This measure is especially important for retailers because they often have a significant portion of their assets tied up in inventory. Inventory can become dated, so a rapid inventory turnover is a sign that the business is operating well and that the company has sound inventory management. The formula for inventory turnover is 365 divided by (COGS / average inventory). For Walmart in FY2011, inventory turnover was 30 days. The RMA for inventory turnover holds that 38 days represents "best." This puts Walmart better than the industry best with respect to inventory turnover, and it supports the earlier contention that Walmart's lean inventory system makes the quick ratio a more relevant indicator of liquidity than the current ratio.
While the receivables and inventory turnover ratios can be used to analyze the cash conversion cycle, it is also important to examine the payables turnover ratio. For creditors, this is particularly important. Companies with cash flow problems will often extend their payables as far as possible in order to stretch their outbound cash cycle. A high payables turnover in days can therefore indicate financial distress. Payables turnover is calculated as 365 divided by (sales / average payables). For Walmart in FY2011, the payables turnover was 37 days. The RMA holds that 34 days is average, indicating that Walmart's payables turnover is around the industry average.
The final liquidity ratio examined is times interest earned. This measures how many times over the course of a year the firm is able to cover its interest obligations. The more times per year a company earns its interest obligations, the less likely it is to default or experience a cash crunch that delays either an interest payment or principal repayment. Times interest earned is calculated as EBIT divided by interest expense. For Walmart in FY2011, times interest earned was 12.75 times, or approximately once every 28 days. The RMA for this metric holds that 10.8 times represents "best," meaning Walmart outperformed the industry best on this measure. The company's business model, which emphasizes a short cash conversion cycle, allows it to earn its entire annual interest expense within a single month.
Asset Analysis
The asset analysis reflects the firm's capital structure — that is, the degree to which the firm finances its activities through debt versus equity. In general, firms seek to strike a balance between the relatively low cost of debt and the relatively high risk that debt obligations represent. Debt obligations create a drag on the firm's cash flow. This is especially true of obligations that are senior to new lending. As a lender, a new loan may be subordinate to existing loans, making the amount of those existing loans as a percentage of the firm's net worth an important consideration. The debt-to-worth ratio provides an indicator of the firm's capital structure. For Walmart, the debt-to-worth ratio in FY2011 was 1.53. The RMA for this metric holds that 1.4 is average, meaning Walmart carries a slightly higher degree of leverage than the average firm in the industry.
There are a number of potential explanations for this. The company could be deliberately acting to lower its cost of capital, or it could be seeking new funds to finance expansion. Walmart's cash flow statement provides some insight: the company's largest cash outflow was to purchase company stock, and its second-greatest source of financing came from the issuance of debt. Stock repurchases increase the market value of the company's stock but lower its book value by retiring shares. The number of shares outstanding has been steadily declining. The company added debt over the past year, with a portion of those proceeds used to finance operations and another portion used to fund stock repurchases.
Financial Data Tables
Company: Walmart
Accounts Receivable: FY2011 change: +22.8% | Common size (FY2010): 2.8% | RMA: 4.5%
Inventory: FY2011: $36,318M | FY2010: $32,713M | Change: +11.1% | Common size: 20.1% | RMA: 40.7%
Total Current Assets: FY2011: $51,893M | FY2010: $48,032M | Change: +8.0% | Common size: 28.7% | RMA: 55.4%
Net Fixed Assets (PP&E + Land only): FY2011: $129,484M | FY2010: $122,135M | Change: +6.0% | Common size: 71.7% | RMA: 37.0%
Total Assets: FY2011: $180,663M | FY2010: $170,407M | Change: +6.0%
Accounts Payable (Trade Payables): FY2011: $33,557M | FY2010: $30,451M | Change: +10.1% | Common size: 18.5% | RMA: 15.4%
Total Current Liabilities: FY2011: $58,484M | FY2010: $55,543M | Change: +5.3% | Common size: 32.3% | RMA: 34.1%
Total Liabilities: FY2011: $109,416M | FY2010: $97,759M | Change: +11.9% | Common size: 60.6% | RMA: 64.5%
Retained Earnings: FY2011: $63,967M | FY2010: $66,357M | Change: −3.6% | Common size: 35.4%
Total Net Worth: FY2011: $71,247M | FY2010: $72,648M | Change: −1.9% | Common size: 39.4% | RMA: 35.5%
Total Liabilities & Net Worth: FY2011: $180,663M | FY2010: $170,407M | Change: +6.0%
Company: Walmart
Revenue (Sales): FY2010: $421,849M | FY2009: $408,085M | Change: +3.4%
Cost of Goods Sold: FY2010: $315,287M | FY2009: $304,444M | Change: +3.6% | Common size: 74.7% | RMA: 68.1%
Gross Profit: FY2010: $25,542M | FY2009: $24,002M | Change: +6.4% | Common size: 6.1% | RMA: 31.9%
Interest Expense: FY2010: $2,004M | Change: +6.4% | Common size: 0.4%
Net Income: FY2010: $16,389M | FY2009: $14,370M | Change: +14.1% | Common size: 3.9%
Tax Expense: Change: +5.9% | Common size: 1.8%
Pre-Tax Income: FY2010: $23,538M | FY2009: $22,118M | Change: +6.4% | Common size: 5.6% | RMA: 3.3%
Company: Walmart
Top 4 Sources:
Income from continuing operations: $15,959M | Proceeds from issuance of long-term debt: $11,396M | Depreciation and amortization | Accounts payable
Top 4 Uses:
Purchase of company stock: $14,776M | Payments for property and equipment: $12,699M | Dividends paid | Payments of long-term debt
References
Loth, R. (2011). Financial ratio tutorial. Investopedia. Retrieved October 31, 2011, from http://www.investopedia.com/university/ratios/
Walmart. (2011). 2011 Walmart Annual Report. In possession of the author.
Always verify citation format against your institution’s current style guide requirements.