Wal-Mart Stores, Inc.
Wal-Mart Stores Inc., commonly referred to as Walmart, is a multinational corporation that is listed in New York Stock Exchange (NYSE). Walmart Stores Inc. is in the retails industry. . Wal-Mart Stores Inc. was ranked the largest retail store in the world by Fortune 500.The fiscal year of Wal-Mart Inc. begins on 1st February and ends on 31st January the following year. This paper analyses the most recent financial statements of Wal-Mart Stores Inc. In the case, the latest financial statements that could be obtained was for the year ended 31st January 2012 while the comparative figures are for the financial year ended 31st January 2011.
Analysis of the Consolidated Income Statement
The consolidated net income attributable to Walmart decreased from $ 16,389 million in the financial year ended 31st January 2011 to $15,699 million in the financial year ended 31st January 2012. This is a decrease of $ 690 million which represents a 4.21 per cent decrease in net income between the two most recent financial years. The company’s most significant operating expense for the financial year ended 31st January 2012, which was the most recent financial year, was warehousing and occupancy for Walmart distribution facilities both in the U.S and in international segments. Other significant operating expenses included leasing fees, preopening cost relating to start up activities and advertising costs.
The sales revenue of the company increased in the financial year ended 31st January 2012 compared to the previous financial year. Walmart sources of revenue include; sale of merchandise, provision of financial and other services, and membership fees. The company did not report any investment in marketable securities. Therefore, there were no provisions for unrealized gains or losses.
Analysis of the Consolidated Balance Sheet
The largest asset in Wal-Mart’s Consolidated Balance Sheet in the most recent financial year was property and equipment which had a net book value of $ 109,603 million. This represents 56.67 per cent of the total assets. It was followed by inventories which were valued at $ 40,714 million. On the other hand, the largest liability was long-term obligation under capital leases which was valued at $ 44,070. It represents 37.46 per cent of the total liabilities. It was closely followed by accounts payable which was valued at $36,608.
Summary of significant accounting policies
Property and equipment are initially valued at cost. Any gains or losses that accrue from the disposal are recognized when they are earned or incurred. All assets are depreciated on a straight line basis over their respective useful lives. From the endnotes, the useful lives of the various long lived assets are as follows; buildings and improvements is 40 years, fixtures and equipment is 25 years and transport equipment is 15 years.
Walmart recognizes sales revenue after deducting sales taxes and any sales returns it estimates at the point it sells merchandise to a customer. The company also sells shopping cards. Sale of shopping cards to customers is not recognized as revenue until the shopping card is redeemed by a customer by making a purchase of merchandise from its stores. The company also earns revenue from the provision of financial and other services. The company recognizes revenue from the provision of financial and other services when the financial or that other service is rendered. Lastly, the company earns revenue from the membership fees both in the U.S.A and internationally. This revenue is recognized when it is received.
The company states receivables at their carrying values which is net of a given reserve of doubtful debts. The company estimates doubtful accounts based on historical trends in collection of receivables and write-off history. The reserve for doubtful accounts increased from $ 252 million in the financial year ended 31st January 2011 to $ 323 million in the financial year ended 31st January 2012.
Walmart values it inventory using the retail method of accounting at the lower of cost and net realizable value (NRV). The cost of Wal-Mart’s domestic segment merchandise is determined through the last-in first-out (LIFO) method, the cost of Sam’s Club merchandise is determined through the weighted average cost while that of the international segment is determined using the first-in first-out (FIFO) method.
Ratio analysis
Gross profit margin is computed by dividing the gross profit by the net sales revenue which is then multiplied by 100 per cent whereas the gross profit is the difference between the net sales revenue and the cost of sales. Gross profit margin indicates the ability of a company to control its cost of sales expenses. In the case of Walmart, the gross profit margin for the two most recent years is given in the table below;
Financial year
Computation
Gross Profit margin
Change
The change in the gross profit margin does not raise any concern because the change is very small. A change of less than 0.5 per cent is insignificant.
Accounts receivable collection period is used to determine the average number of days the accounts receivable of a company remain outstanding. It is computed by dividing 365 days by the accounts receivable turnover. The accounts receivable turnover is computed by dividing the credit sales by average account receivable. Average accounts receivable is given by opening accounts receivable plus the closing accounts receivable which is then divided by 2. In the case of Wal-Mart, the credit and cash sales have not been given. Therefore we will have to assume that 20 per cent of sales were on credit. The Accounts receivable collection periods for the most recent financial year, which is the financial year ended 31st January 2012, is computed below
Account receivable collection period = 365/ Accounts receivable turnover
Account receivable turnover = Credit sales/Average accounts receivable
Credit sales are 20% *$ 443,583 million = $ 88,716.6 million
Average accounts receivable = (5,937 million + 5,089 million)/2 = $ 5,513 million
Account receivable turnover = $ 88,716.6 million/$ 5,513 million = 16.09 times
Therefore;
Account receivable collection period = 365 days /16.09 times = 22.68 ≈ 23 days
The average accounts receivable collection period for the financial year ended 31st January 2012 is favourable because it is less than one month. Walmart could be having stringent credit policy. It could also be issuing credit discounts to encourage debtors to settle their accounts early. However, the ratio indicates that Walmart can increase sales revenue by adopting a more lenient credit policy.
Inventory turnover period is used to determine the average number of days a company takes to convert inventory into sales. It is computed by dividing 365 days by the inventory turnover. The inventory turnover is computed by dividing the cost of sales by average inventory. Average inventory is given by opening inventory plus the closing inventory which is then divided by 2. In the case of Walmart, the Accounts receivable collection periods for the most recent financial year, which is the year ended 31st January 2012, is computed below
Inventory turnover period = 365 days / Inventory turnover
Inventory turnover = Cost of sales/Average inventory
Cost of sales = $ 335,127 million
Average inventory = ($ 40,714 million + $ 36,437million)/2 = $ 38,575.5 million
Inventory turnover = $ 335,127 million/ $ 38,575.5 million = 8.69 times
Therefore;
Inventory turnover period = 365 days /8.69 times = 42 ≈ 42 days
In the financial year ended 31st January 2012, Walmart had a high inventory turnover period. Therefore, Walmart is not doing well. It indicates that Walmart has low sales compared to the inventory it holds because it takes 42 days to convert inventory into sales. It also indicates that Walmart has a high opportunity cost because it holds inventory for a very period of time. However, it points to a low risk of incurring stock out costs because there are high inventory levels compared to sales.
Current ratio is given by current assets divided by current liabilities. Current ratio indicates the number of times that current liabilities can be fully paid by the current assets. The most recommended ratio is 2:1. In the case of Walmart, current ratio for the financial year ended 31st January 2012 will be as computed below.
Current ratio = Current assets/ Current liabilities
Current ratio = $ 54,975 million /$ 62,300 million = 0.88:1
The current ratio for the financial year ended 31st January 2012 was less than 1. This implies that the company may not be in a position to pay all its short term maturing obligations. Walmart could improve it liquidity position by rescheduling some of its long term debts, suspending dividend payment in order to save cash, making a rights issue in order to raise additional cash or pay off some current liabilities or obtaining a long terms liability to settle some of the maturing obligations.
Quick ratio is given by current assets minus inventory divided by current liabilities. Quick ratio indicates the number of times that current liabilities can be fully paid by the current assets. The most recommended ratio is 1:1. In the case of Walmart, the quick ratio for the financial year ended 31st January 2012 will be as computed below;
Current ratio = (Current assets- Inventory) / Current liabilities
Current ratio = ($ 54,975 million - $ 40,714 million)/$ 62,300 million = 0.22:1
The current ratio for the financial year ended 31st January 2012 was less than 1. This implies that the company may not be in a position to settle all it short term maturing obligations. Walmart could improve it liquidity position by rescheduling some of its long term debts, suspending dividend payment in order to save cash, making a rights issue in order to raise additional cash or pay off some current liabilities or obtaining a long terms liability to settle some of the maturing obligations.
Debt ratio is given by the total debts divided by the total assets. It indicates that portion of total assets which is financed using current and long term liabilities. The debt ratio of Walmart for the financial year ended 31st January 2012 is computed below;
Debt ratio = Total debt/ Total assets
Debt ratio = ($ 62,300 million + $ 55,345million)/ $193,406 million = 0.608
In the financial year ended 31st January 2012, Walmart had excessive debt because it had a very high debt ratio. 60.8 per cent of its assets are financed by debt. Walmart can improve the situation by increasing equity through a rights issue and using the proceeds to settle some of its liabilities.
Equity
The par value of common stock is $ 0.10. The common stock was issued at more than par. This is in the consolidated balance sheet for the financial year ended 31st January 2012, there is an item of capital in excess of par value. This indicates that the shares were issued at a price higher than the par value. The authorized share capital is 11,000,000,000 shares whereas the issued and outstanding shares as at 31st January 2012 are 3,418,000,000 shares. Walmart did not have any outstanding preferred stock neither did it hold any shares of stock in treasury in the most recent financial year.
Analysis of Wal-Mart’s Consolidated Statement of Cash flows
The net cash provided by operating activities increased from $ 23, 643 million in the fiscal year ended 31st January 2011 to $ 24,255 million in the year ended 31st January 2012.This represents a 2.5 per cent increase in the net cash provided by operating activities. The cash provided by operating activities do not appear adequate to cover current liabilities as they mature. This is because the net cash provided by operating activities is only $ 24,255 million in the year ended 31st January 2012 compared to current liabilities of $62, 300 in the same financial year.
Free cash flow is computed by net cash provided by operating activities less capital expenditures. The free cash flow of Walmart for the two most recent financial years is computed below;
Financial year ended 31st January 2011: Free cash flow = 23,643-12,193 = $ 11,450 million
Financial year ended 31st January 2012: Free cash flow = 24,255-16,609 = $ 7,646 million
The free cash flows of Walmart are shrinking over the years which are evidenced by the decrease in the free cash flows between the two most recent years. The free cash flow reduced by $ 3,804 million which represents a 33.22 per cent decrease in the free cash flow. This could prelude to decreased earnings. This may signal liquidity problems in the future. The net income is lower than the net cash provided by operating activities. The net income is $15,699 million while the net cash provided by operating activities is $ 24,255 in the most recent financial year. This indicates that Walmart could be buying inventory and services necessary for operation on credit. The net cash from investing activities is $ (16,609 million). The net cash from investing activities is negative. This implies that the company spends more on investing activities than it earns from investing activities. The net cash from financing activities is $ (8,458 million). The net cash from financing activities is negative. This implies that the company spends more on financing activities than it earns from investing activities.
References
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