Walmart is a multinational store that was founded on the idea of selling inventory at a low price (selling more for less). This selling concept has propelled the retailer to be among the largest across the globe. The firm enjoys a presence in over twenty-eight countries. Its network is made up of eleven thousand five hundred stores and eleven e-commerce sites (Walmart, 1). The adoption of e-commerce has enabled it to tap the growing demand for internet shopping. In the recent financial year, the firm revenue was $482.1 billion. The continuous growth and increasing economic value of the retail giant forms the convincing point for any investor willing to purchase Walmart stocks.
Liquidity Ratios
They are used to gauge the ability of a company to meet its current obligation as they fall due. In cases where the ratio is quite low, the company is expected to arrange for short-term financing to meet its current obligation. This short term financing increases the company’s interest expenses and should be avoided. The popular liquidity ratios are current ratio and acid test ratio (Kimmel, Jerry & Donald, 12).
Current Ratio
The ratio measures the ability of a company to meet current obligation from all the current assets.
Current ratio= current assets/ current liabilities
= 60239/64619 = 0.9
Acid test Ratio
The ratio measures the firm’s ability to meets the current obligation from current assets without necessary disposing of its inventory. This ratio is most useful in events where the company takes a considerable period to dispose stock i.e. where the rate of stock turnover is low (Kimmel, Jerry & Donald, 17).
Quick ratio= (current assets-stock)/ current liabilities
= (60239- 44469)/64619 =0.24
Leverage Ratios
These ratios are made to scrutinize whether the company relies on debt or owners equity to finance the majority of its projects. Therefore, it brings out the proportion of owners capital and borrowed capital of the company. A company that has more debt than equity is said to have adopted aggressive financing strategy. The increase in debt financing leads to increase of interest expense. The common leverage ratios are the debt to equity ratio and interest coverage ratio (Kimmel, Jerry & Donald, 22).
Debt to Equity Ratio
The ratio measures long-term company’s debt proportion to owner’s equity. Too much debt exposes the company to possibilities of credit down grades. In extreme cases, it may make the company face bankruptcy if major projects financed through debt fail. On the other hand, too little debt raises the question of management failure to acquire debt that can be used to finance projects with a higher rate of return than the interest expense.
Debt to equity ratio = debt/ equity = 119035/80546 = 1.5
Interest Coverage Ratio
This ratio is used to determine the firm’s ability to pay the interest expense. High-interest coverage ratio indicates that the company will meet the interest obligations without any problem. This ratio is important to financial institutions that are willing to finance the company’s new projects. Thus, companies with high-interest coverage ratio are more likely to obtain additional debt financing.
Interest cover ratio= earnings before interest and tax/ interest expense
= 33640/ 2548 =13.20
Profitability Ratios
These ratios show how the management has been generating income for the company. The main profitability ratios are the gross profit margin and the operating profit margin.
Gross Profit Margin
This ratio shows the percentage of profit realized out of sales of inventory. A high percentage shows that the company can raise adequate gross profit to cover business expenses. However, a quite high percentage may be a signal of a firm that is exploiting its consumers by over charging them. This exploitation may lead to losing of market share to competitors. A low gross profit margin shows that the company uses low price strategy to grow revenue and market share. The companies that have low gross profit margin have a high rate of stock turnover (Kimmel, Jerry & Donald, 34).
Gross profit margin= gross profit/ revenue
=121146/482130= 0.25
Operating Profit margin
This ratio scrutinizes the firm’s ability to raise profit after covering all expenses. A high operating profit margin shows the company has successfully adopted effective and efficient ways of operations that reduce overheads. The company’s operating profit margin increases when cost cutting measures are adopted.
Operating profit margin = net income/ revenue
= 14694/482130= 0.03
Asset Management ratios
These ratios show how management utilizes assets of the firm to generate revenue and profit for the organization. The ratios are also known as turnover ratios or activity ratios.
Fixed Assets Turnover
The ratio shows how the management is using firm’s fixed assets to generate sales. A high fixed asset turnover shows high efficiency of managers in using company’s assets.
Fixed asset turnover= sales/net fixed assets
= 482130/139,342 = 3.46
Inventory turnover
It is also called the rate of stock turnover. It gauges the management of inventory in a firm. The higher the inventory turnover, the better the performance of the company because a high ratio indicates inventory is sold quite fast. However, quite high inventory turnover indicates the possibility of inventory shortages that may make the firm lose customers to competitors.
Inventory turnover= cost of goods sold/ inventory
=360,984/ (45141+44469)*.5 =2.0141
Market Value Ratios
These ratios are also called valuation ratios. They are used to compare the stock’s market value to the book value. The book value is the difference between company’s assets and liabilities. The price book value ratio assists investors to compare the value they are paying for the share in the stock exchange market to the value in the books of the company. The stock’s market price can be above, below or equal to the book value. In the case where the market value is below the book value, two scenarios are predicted. The first one gives a possibility that the stock is unfairly undervalued in the market because of transitory circumstances. This scenario provides a good opportunity for an investor to purchase such shares because their market value is likely to increase. However, the second possibility is that the market value is correct, and the company is losing its value. This indicates a stagnant investment opportunity (NYSE, 1).
Price/ book value
2016 price book value ratio=15.3(NYSE, 1).
Price Earnings Ratio
This is a better investment valuation ratio than the price book value ratio. It uses the basic earnings per share and the market price per share. A stock with high price-earnings ratio indicates is expected to experience a high future earnings growth. The stock is considered a growth stock. On the other hand, a stock with low price earnings ratio offers a low expectation of its future growth in comparison to other stocks in the market. Thus, growth investors should consider buying growth stocks. However, value investors may buy the stocks that are considered undervalued and bargain for a better price then hold on them hopping their prices will start to increase after some time (NYSE, 1).
2016 PE ratio = 15.53 (NYSE, 1).
Dupont analysis
It tells efficiency of return on equity through three major things: operating efficiency, financial leverage, and asset use efficiency.
ROE= profit margin * total asset turnover * (assets/equity)
= (60239/64619)*(199581/482130)* (199581/ 80546) =9.56
Economic value added
This is a measure of the true economic profit of a company. It is calculated by subtracting cost of capital from its operating profit. Thus, it provides the incremental difference between the rate of return and the firm’s cost of capital. A negative economic value added indicates no value generated from funds invested in the firm’s projects. Thus, positive economic value added is the preferred outcome because it indicates the value for funds invested in business. It is advisable for investors to venture in companies that have a positive economic value added (Kimmel, Jerry & Donald, 12).
EVA= Net operating profit after taxes – invested capital *weighted average cost of capital.
EVA= 16477- 0.0542 * 155895= 8027.5
Projection for the income statement (Morningstar, 1)
Projection for the balance sheet
Finding
The current ratio is almost one. This means the company can comfortably meet the current obligation when they fall due. This is despite the acid test ratio being 0.24. The small quick ratio does not signify poor liquidity management because companies with stock that is easily convertible into cash do not need to have high acid test ratio.
The gross profit margin is quite low because the company’s sales strategy is based on the slogan of selling more for less. Thus, it keeps the low margin to attract many customers. The calculated net profit margin cannot be used to gauge management efficiency to control overheads. This is because a trend of several years has not been established.
The company debt is more than shareholder’s equity. Thus, it has adopted aggressive financing strategy. This ratio is within comfortable limits because the interest coverage ratio is quite high. Thus, the company will be able to raise adequate revenue to meet all the debt obligations.
The market ratios place the company’s in the category of growth stocks. This is because the market price per share and the price earnings ratio are all above one. This shows that the market price of the company’s stock is expected to grow.
The calculations of economic value added show a positive ratio. This shows management has been increasing the economic value of the company. Thus, the company was able to earn a positive economic profit in 2016.
Recommendation
I can encourage an investor to invest in the company’s shares. This is based on the positive indications in the ratios calculated. First, the company gross profit margin is kept low to maintain the company’s competitiveness in the market. Second, the current ratio shows that the company will be able to maintain credit relations with suppliers because it will pay them in time. Third, the company has made positive economic value an indication of increasing value. Fourth, the stock of the company is classified under the growth category. Thus, the investor will benefit from increased market value of the company’s stocks.
Conclusion
Walmart‘s financial ratios create a picture of a company that is effectively managed. Its pricing strategy has been the backbone in realizing high revenue realized through high stock turnover. Over years, the retailer giant has grown to over twenty countries, and it has embraced e-commerce to meet the demand of online shopping. To avoid failing to meet its current obligations, the company has kept a commendable current ratio. The management has adopted aggressive financing strategy to use loans to grow the company. Its effective management has enabled the company to have a positive economic value added ratio in 2016. Thus, it is advisable for investors to invest in the company’s stocks.
References
Morningstar. Wal-Mart Stores Inc. Balance Sheet for (WMT) from Morningstar.com. N.p., 2016. Web. 27
May 2016.
Investopedia. Return On Equity (ROE) Definition | Investopedia. Investopedia. N.p., 2003. Web. 27 May
2016. <http://www.investopedia.com/terms/r/returnonequity.asp?layout=infini>.
Kimmel, Paul D., Jerry J. Weygandt, and Donald E. Kieso. Financial Accounting: Tools for Business
Decision Making. Hoboken, NJ: John Wiley, 2007. Print.
NYSE. Wal-Mart Stores Inc. (WMT) | Economic Value Added. Stock Analysis on Net. N.p., 2016. Web. 27
May 2016. <https://www.stock-analysis-on.net/NYSE/Company/Wal-Mart-Stores-Inc/Performance-Measure/Economic-Value-Added>.
Walmart. Related Links. Walmart Investor Relations. N.p., 2016. Web. 27 May 2016.
<http://stock.walmart.com/investors/financial-information/annual-reports-and-proxies/default.aspx>.
