Introduction:
In this report, we will analyze the financial position and attractiveness of Wal-Mart’s Stock to an average investor. For this purpose, we shall conduct the ratio analysis of the company for the period of 2012, 2013 and 2014, along with comparison to the industrial average. Important to note, as part of ratio analysis we will be using five ratio sets, namely:
- Liquidity Ratios
- Profitability Ratios
- Asset Management Ratios
- Solvency Ratios
- Market Ratios
We are sure that by the end of this report and with the help of trend analysis of the ratios, we will be in a comfortable position to comment if the investor should look forward to purchase Wal-Mart’s stock.
a)Liquidity Ratios:
Also known as ‘’Balance Sheet Ratios’’, these ratios access the ability of an entity to honor short-term obligations. Below discussed is the liquidity trend of Wal-Mart courtesy two ratios calculated:
i)Current Ratio: Current Assets/ Current Liabilities
ii) Quick Ratio: (Cash+ Receivables +Marketable Securities)/ Current Liabilities
-Liquidity Analysis:
Referring to the above numbers, we can easily infer that during the past three years, the liquidity position of the company has been relatively stable as indicated by the trend in current ratio and the quick ratio. Hence, the liquidity roots and the working capital position of the company is constant.
b) Profitability Ratios:
These ratios carries great significance as it indicates the level of profit margins being earned by the company from its business activities and thus has a direct influence over the investment decision of the investors. Below provide are the profitability ratios of Wal-Mart followed by the trend analysis:
i)Profit on Sales: Net Profit/ Sales
ii)Return on Asset: Net Income+ Interest Expense/ Average Assets
iii) Return on Equity: Net Income/ Average Equity
iv)Earnings Power Ratio: EBIT/ Total Assets
-Profitability Analysis:
Noted from the above numbers, we can infer that during the year 2014, the company witnessed a marginal decrease in its profitability margins. To begin with, the net margins decreased from 3.62% to 3.36%, however, the shareholders will be concern to witness decrease in ROA and ROE multiples. During 2014, the ROE multiple which had increased to 23.02% during 2013, declined again to 21% and if the trend continues, this might affect the investor’s confidence in the company’s stock. Finally, the Earnings Power ratio from 13.68% to 13.12% was another evidence of the decreased ability of the company to use asset base to generate operating earnings.
c) Asset Utilization Ratios
Also known as Efficiency Ratios, these ratios indicate the efficiency of the management to use asset base of the company. Below discussed are some popular efficiency ratios followed by the related trend analysis:
i)Inventory Turnover Ratio: COGS/ Average Inventory
ii)Asset Turnover Ratio: Revenue/ Average Total Assets
iii)Fixed Asset Turnover Ratio: Revenue/ Average Fixed Assets
iv)Days of Sales Outstanding: 365/ Debtor Turnover Ratio
Efficiency Analysis:
Referring to the above calculations, we can infer that just as the profitability, even the efficiency of the management was declined with fall in these ratios. Most importantly, the inventory turnover rtaio of the company has been consistently declining since 3 years indicating that it take now more time for the company to sell off their inventory. Similar trend was witnessed in Asset Turnover and Fixed Asset Turnover Ratio that has also been declining since 3 years, indicating that the management has been turning inefficient to use asset base to generate revenues.
Our results were concreted, with days of sales outstanding, that indicated that over the years, the debtors of the company has been paying off their bills slowly and hence, capital is tied up in receivables for a longer period of time. Important to note, if the trend continues, the company might start facing liquidity issues.
d)Debt Management Ratios:
Another set of ratios, these ratios indicate the ability of an entity to honor its long-term obligations. Calculating these ratios provides a deep insight into the solvency position of the company:
i)Interest coverage ratio: Operating Earnings/ Interest Expenses
ii)Total Debt to Total Assets Ratio: Total Debt/ Assets
iii)EBITDA Coverage Ratio: EBITDA+ Lease Payments/ Interest Payments+ Lease Payments
Solvency Analysis:
Noted from the above calculations, we find that during 2013, the solvency roots of the company has gone weak. As indicated by the declining Interest and EBITDA Coverage ratios, the company has marginally lost their ability to honor their debt obligations. Hence, it needs to work on their solvency position in the coming future.
e)Market Ratios:
All the calculations below are calculated using current market price of $78.29, EPS(TTM) of $4.87, CFO of $23906 Million and market cap of $252290 Million and Book Value of $77569 Million.
i)Price/Cash Flow= 78.29/7.91= 9.89
ii)PE Ratio: Price/ EPS= 78.29/4.87= 16.07
iii)Market/ Book Value= 252290/77569=3.25
Conclusion: Buy
Despite of the decline in most of the ratios, we would still recommend our investors to purchase the stock of the company. However, our recommendation will be to take a small position and analyze the trend over the next quarter. Important to note, most of the ratios has only experienced a marginal decline and with improvement in consumer spending in US and consistent development in the emerging nations as Brazil, China and India, we are sure that the company will soon be witnessing increased profitability and other positive fundamentals.
Even for the bondholder, the bonds of the company will be an attractive option as although presently in the declining trend, but we can surely assume Wal-Mart to be highly solvent and will pay its debt obligations without any delay.
Works Cited
Robinson, T. (2011). Financial Analysis and Techniques. In C. Institute, Financial Reporting and Analysis (pp. 180-185). Boston: Custom.
Wal-Mart Stores Inc. (2014). Annual Report 2014. Wal-Mart Stores Inc.
