Financial Analysis of Wal-Mart, Inc
Wal-Mart
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Wal-Mart 1

Wal-Mart 2
Abstract:
This study is aiming to analyze some financial ratios and policies adopted by Wal-Mart,
Inc. so as to decide whether the company represents a good investment opportunity. In the study, I have analyzed some of the commonly used liquidity, solvency, and profitability ratios as well as some stock information as well as the capital structure of the firm to be able to arrive at a sound investment decision.
Ratio and Working Capital Analysis:
Wal-Mart enjoys high liquidity ratios as evident by the attached excel sheet. It even enjoys a working capital deficit due to “an efficient use of cash in funding operations and in providing returns to shareholders.” i
The low quick ratio is due to the fact that as a retail store, Wal-Mart has to maintain high inventory levels which mean that most of its funds is tied in inventory. This, however is not a bad sign since Wal-Mart enjoys a small inventory turnover ratio which means that the company is effectively managing its inventory.
The company’s Long-term Debt to Equity is much lower than the industry average which shows that the company relies more on equity financing rather than debt financing. This is a good indication because the company’s borrowing needs are mostly short term to manage working capital, this means that the company does not need to rely on long-term debt to finance its operations. Maintaining this ratio at such a lower level is a

Wal-Mart 3 conservative policy so that the company’s solvency (ability to meet long-term obligations) does not get affected.
Wal-Mart’s Net Profit Margin as well as the Return on Equity ratios are within the industry average; and since both ratios measure the company’s profitability, then the company is profitable which is evidenced by the high P/E ratios for both years. Since the
P/E ratio measures investors’ expectations about the firm, then Wal-Mart is a good investment.
The Gross Profit Margin is 24.4%, and 24.36% for 2006, and 2007, respectively, while the Net Profit Margin is 3.24%, and 3.36%, for 2006, and 2007, respectively. This means that the Operating Expenses for Wal-Mart are very high, but this is normal for the retail industry. Stores such as Wal-Mart depend on huge sales volume and lower net profit margins.
A Horizontal Analysis of Wal-Mart’s financial statements shows that the company is starting to rely more on debt since the Debt Ratio is 0.59, and 0.6 for 2006, and 2007, respectively. The increase in debt ratio, however is not significant and is not a cause of concern. The company’s Current Ratio has dropped from 0.9 in 2006 to 0.81 in 2007, and the Quick Ratio has dropped from 0.2 in 2006 to 0.16 in 2007, but again this is not a cause of concern because Wal-Mart’s operating and cash cycles are currently optimized
(evidenced by the negative conversion cycle in both years.

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The operating cycle represents the length of time involved in purchasing raw materials, manufacturing the product, and distributing (selling) the product. The cash conversion cycle represents the net time interval between the collection of cash receipts from sales and the cash payments for the various resources used by the firm. The operating cycle is equal to the sum of the inventory conversion period and the receivables conversion period. The cash conversion cycle is equal to the operating cycle less the payables deferral period.
Wal-Mart’s Operating Cycle has decreased from 49.52 to 48.34 in the years 2006, and
2007, respectively; which indicates a growth in sales that is higher than the growth rate of inventory- a positive sign. The Cash Conversion Cycle is negative in both years which is an indicator of the high liquidity of the company as it enjoys a short receivable period and a long payable deferral period. This shows that the company is efficiently managing its resources.
Capital Structure:
Wal-Mart’s capital structure consists of both Debt, and Equity.
The following schedule is obtained from the company’s annual report and lists the maturities as well as interest of Long-term Debt:

Wal-Mart 5
Equity is in the form of Common Stock shares that sell at a current price of $57.14, with a 52-week average selling price of $51.02.
Last Year’s annual dividend is $0.52, Growth Rate is expected to be 10.1% (Taken from the company’s annual report), and therefore the cost of equity is approximately 1%
The After Tax Cost of Debt (Both Short and Long term) is 1.4%, and the Tax Rate is
34.2%.
The Weight of equity is 0.4, and the Weight of debt is 06.

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Therefore, the Weighted Average Cost of Capital is approximately 1.24% (please see the attached excel sheet for calculations)
Findings:
Based on the above, as well as the ratio analysis (please see the attached excel sheet),
Wal-Mart seems to enjoy an optimal capital structure which minimizes the weighted average cost of capital. This is indicated by a lower than industry average debt to equity ratio, where Wal-Mart Debt-To-Equity ratio was 0.5 and 0.52 in 2006, and 2007 respectively, while the industry average is 0.73. I could not find the industry average for the Debt-to-Total Assets ratio, but judging from the debt-to-equity ratio figures mentioned above, I presume that Wal-Mart enjoys a better debt ratio than the industry average. This shows Wal-Mart to enjoy a higher than industry averages solvency ratios; which means that Wal-Mart is less risky than the average industry as it is able to meet its long-term obligations as they become due.

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In its opening statement of the annual report, Wal-Mart says:
“Around the world, Wal-Mart continues to put major emphasis on balancing returns and growth. We are focused on prioritizing capital spending to the projects that produce the highest returns. We want to improve our Company’s return on investment, or ROI, improve our comparable store sales and improve our working capital productivity. The outcome is a focus on the most capital efficient opportunities and a continued focus on the customer.” ii
And I believe that their efforts are proving to be successful which is obvious from the working capital deficit, as well as the return on equity ratio which is within the industry average.
The efficient working capital management is obvious if we check Wal-Mart’s current assets. The Receivables Conversion Period (Time taken for credit sales to mature into cash) was 2.97, and 3.52 days which is a very low ratio, but this is explained in the annual report where Wal-Mart says:
“Accounts receivable consist primarily of receivables from insurance companies resulting from our pharmacy sales, receivables from suppliers for marketing or incentive programs, receivables from real estate transactions and receivables from property insurance claims. Additionally, amounts due from banks for customer credit card, debit card and EBT transactions that take in excess of seven days to process

Wal-Mart 8 are classified as accounts receivable.” iii
The company therefore does not offer credit to its customers while many of its competitors do, this might have resulted in lost sales, but it certainly allows for less risk to the company’s operations. This is because as per the report above, the credit customers are mainly insurance companies which are probably the safest credit customers.
Inventory represents 71.7%, and 73.93% in 2006, and 2007, respectively, and although it seems that the company’s funds are mostly tied in inventory, this is typical of the variety stores industry especially when the inventory turnover ratios were 0.13 and 0.12 in 2006, and 2007, respectively. These low ratios shows that Wal-Mart turns its inventory pretty fast and this is again supported by the low inventory conversion periods where it was
46.55 and 44.82 (an improvement) in 2006, and 2007, respectively, while the Payables
Deferral Periods for the same years were 60.07, and 56.41. This proves Wal-Mart to be efficiently managing both its inventory and accounts payable. In this, Wal-Mart says:
“Cash flows provided by operating activities supply us with a significant source of liquidity. Our cash flows from operating activities of continuing operations were $20.2 billion, $17.7 billion and $15.2 billion in fiscal 2007, 2006 and 2005, respectively. The increases in cash flows provided by operating activities for each fiscal year were primarily attributable to improved income from continuing operations and improved

Wal-Mart 9 management of inventory procurement resulting in accounts payable growing at a faster rate than inventory.” iv
Wal-Mart’s management is obviously engaged in trying to provide the highest returns to its shareholders; this is exemplified in their statement about Long-term Debt:
“We plan to refinance existing long-term debt as it matures and may desire to obtain additional long-term financing for other corporate purposes. We anticipate no difficulty in obtaining long-term financing in view of our credit rating and favorable experiences in the debt market in the recent past” v
In the report, management continues to explain their capital structure policy stating that:
“In fiscal 2007, we paid dividends of $2.8 billion, made $15.7 billion in capital expenditures, paid $1.7 billion in cash to repurchase shares of our common stock, received $7.2 billion from the issuance of long-term debt, repaid $5.8 billion of longterm debt and repaid $1.2 million of commercial paper (net of issuances).” vi
From the above, we can see that Wal-Mart is looking for ways to increase returns to shareholders, in that they are refinancing old long-term debt so as to benefit from the declining interest rates, they are also engaged in Treasury Stock purchase so as to decrease the amount of outstanding shares. This action of reducing outstanding shares would increase the earnings per share as well as dividends.
Finally, by examining the company’s financial statements, we can see that sales is increasing at a slow rate (Sales have increased by 8.65% from 2006 to 2007), but this

Wal-Mart 10 small percentage increase in sales is coupled with a higher increase in Net Income which increased by 12.82% for the same period. This shows that Wal-Mart’s management is efficiently managing its costs so as to increase the bottom line income to its stockholders.
Recommendation:
I believe that Wal-Mart represents a good investment because although the company’s return on equity is within the industry average, Wal-Mart seems to be a less risky investment, this is supported by a lower Beta coefficient of 0.05
vii
, and the high Price
Earnings ratios as well as the company’s expected growth rate (10.10%) are an indication of the company’s strength. Investors have faith in the company’s management and operations which is reflected in the Price Earnings ratio. I also believe that the expected growth rate is easily achievable by a company such as Wal-Mart and this is evidenced by the percentage change in Earnings per share from 2006 to 2007 (15.54%) which is coupled with a 7.52% percentage increase in the Return on Equity over the same period.
The company is also efficiently managing its assets to provide a better return on investment, this is exemplified in the working capital management as well as turnover figures.
Finally, I can see that Wal-Mart’s management is trying to professionally manage the eternal trade-off between Risk and Return. From all the above, it is clear that the management is

Wal-Mart 11 focusing on increasing returns to shareholders while at the same time professionally managing the risk whether it is a systematic or unsystematic risk. i http://walmartstores.com/Media/Investors/2007_annual_report.pdf
ii Ibid iii Ibid iv ibid v ibid vi ibid vii http://finance.yahoo.com/q?s=WMT

References for Kohl Dep.. stores
1) Balance Sheet http://finance.yahoo.com/q/bs?s=KSS&annual
2) Income Statement: http://finance.yahoo.com/q/is?s=KSS&annual
3) Cash Flow Statement: http://finance.yahoo.com/q/cf?s=KSS&annual
4) Annual Report: http://www.kohlscorporation.com/InvestorRelations/sec-filings.htm
5) Company’s website: http://www.kohlscorporation.com/InvestorRelations/Investor01.htm
Notes:
Please note that Kohl do not pay dividends (an important point), you can read about that ib the pdf file, search for “we have never paid a cash dividend”