Financial Evaluation of Wal-Mart
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February 12, 2009
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Examining Wal-Mart's annual financial reports gives an optimistic position
on Wal-Mart's financial wellbeing. After a systematic examination of the detailed
ratios and its association to other companies within the same sector, Wal-Mart is
expected to continue its domination. Even though Wal-Mart didn’t lead in all
figures, its management and sturdy presence of the market solidifies their
continuing accomplishments.
The evaluation of the current ratio, quick ratio, inventory turnover ratio,
debt ratio, net profit margin ratio, ROI, ROE, and P/E ratio all point to a positive
prospectus for Wal-Mart. The current ratio (which is identified as current assets
divided by current liabilities) is a determination of how many liabilities a company
possesses when compared to its assets. In 2007, Wal-Mart had a current ratio of
.90, and in January of 2008, they had a current ratio of .81. The quick ratio
(which is identified as current assets less inventory; divided by current liabilities)
is a determination of a company's capability to disburse short-term commitments.
In 2007, Wal-Mart had a quick ratio of .25, and in January of 2008 they had a
ratio of .21. Both the quick ratio and the current ratio are a determination of
liquidity. Wal-Mart isn’t as liquid as its opponents who primarily consist of Family
Dollar Stores, Inc. and Costco. The rationale of why Wal-Mart is not overly liquid
is because they are deeply investing their profits for development and escalation.
Upper-management maintains that preserving their liquid reserves in other
currencies has assisted Wal-Mart in evading inflationary stress of the US dollar.
Wal-Mart’s inventory ratio (which is identified as the cost of sales divided
by their average inventory) was 7.68 in 2007, and 7.96 in January of 2008. WalMart has a large amount of transactions, and as such, they are able to turn over
their inventory with ease. Their competitions possess comparable ratios although
they do not complete as much transactions as Wal-Mart does. Their capability to
sell at reduced prices for same value gives them a large advantage over their
competition. As of the 2007, Wal-Mart had a debt ratio of .58, and in January of
2008 they had a debt ratio of .59. The debt ratio is determined by dividing the
total debt by its total assets. Wal-Mart possesses much more assets than debt,
and as such, they are not overleveraged. Wal-Mart surpasses their opposition in
the evaluation of assets.
Wal-Mart’s net profit margin ratio (which essentially measures the return of
sales) was at 4% in 2007 and 3% as of January, 2008. The industry average is
comparable, so the associations among the competitors stayed flat. Wal-Mart’s
ROI was at 8% in the 2007 and in January of 2008. Wal-Mart possessed one of
the top ROI’s in their sector; nevertheless, the most imperative correlation of this
figure is in its regularity. Wal-Mart figures in this area are more constant than
their opponents. Their return on net worth (return on stockholder’s equity)
provides a clear understanding of the performance of the company. In 2007 they
had a ROE of .19 and as of January 2008, they had a ROE of .19. Wal-Mart’s
steadfast gains make it a vast corporation. They were able to get nearly a 20%
return for their shareholders.
Finally, the ratio that further establishes Wal-Mart’s remarkable
performance is the P/E ratio. The P/E is determined by dividing the market price
per share by the current earnings per share. Wal-Mart had a P/E ratio of 17.89 in
2007, and 16.28 P/E as of January, 2008. Commonly, an elevated P/E suggests
that investors are expecting advanced future earnings growth.
Wal-Mart’s aptitude to turn their inventory into cash is extraordinary. They
have the shortest operating rotation in their sector. Through the addition of the
inventory conversion period and receivable conversion period, one would attain
the operating cycle. Wal-Mart had 49.36 days for its operating cycle as of
January 2008. A comparable calculation of Wal-Mart’s bottom line can be found
in their cash conversion cycle which is calculated by subtracting the period of
payable deferral from the operating cycle. The amount of days for Wal-Mart to
convert their resource inputs to cash is nearly 12.36 days. Their cash cycles are
much more efficient than their competition. They are able to move their inventory
extremely fast. Their system is incredibly proficient as a result of their fantastic
aptitude to require less working capital.
Wal-Mart sells their common stocks with a current selling price of 58.62
per share. They had a 52-week average price amongst the high 40’s and low
50’s. Their average cost of capital in 2007 was 5.3% and 4.0% as of January,
2008. These figures are extremely remarkable. The prime basis why they have
the ability to do so is because they are considered a first-rate credit risk. Their
distinguished brand promotes their sales, and they have a history of paying off
their debts within s short period of time.
Wal-Mart's large performance has established sanguinity for their
investors. The recent economic conditions call for consumers to spend less, and
as such, Wal-Mart is doing well. Their long-term intensification and position looks
encouraging. Many analysts have the same opinion that Wal-Mart will execute
fine in the future and continue surpassing their competition. With adequate
management in place, Wal-Mart has the potential to monopolize their sector.
Wal-Mart’s numbers speak for themselves. The eight ratios that were
analyzed were mostly all high-quality and better than their competition. The
current ratio, however, was not the best in the industry. This is most-likely the
result of their current liabilities as a result of their high inventory requirements.
The quick ratio tells us that Wal-Mart has the potential to pay their creditors and
has better figures than their competition. The inventory ratio shows that Wal-Mart
is the leader in their sector because of their overall sales. Their inventory is
constantly being pushed because of their low prices and high demand. The debt
ratio of Wal-Mart has also surpassed most of their competition. Wal-Mart also
has a higher net worth and market cap than their competition.
Wal-Mart’s net profit margin ratio is also efficient; nevertheless, it is not
performing as well as it could. This may also be the result of them setting their
prices low. They are able to do this, however, because of the high inventory they
sell. Their ROI on its assets in addition to their ROE is steady - unlike their
competition. As they gain additional market shares, they will continue to
dominate their competition. The P/E ratio suggests that they are ready for
additional growth, particularly as they expanded to other markets. Wal-Mart is a
great company with exceedingly diminutive flaws, and they are certainly a
company that is worth investing in.
Works Cited
Birchall, J. (2006). A purchase on psephology. Financial Times.
Walmart (Ticker: WMT). Yahoo Finance. Retrieved on February 12, 2009.