Running head: ANALYZING
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Analyzing, Liquidity, & Solvency of Wal-Mart
Matthew Bell
MGMT500 – Organizational Behavior and Human Resource Management
December 06, 2012
Steve Adams
Southwestern College Professional Studies
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Abstract
The purpose of this paper is to summarize and analyze, by using ratio analysis, liquidity,
profitability, and solvency information obtained from Wal-Mart’s annual reports from the years
2010-2012. Wal-Mart’s liquidity will be analyzed to find where the money that is invested in the
company is going. Since liquidity is the ability to pay current obligations, it is very important
that the liquidity is constantly monitored. After liquidity has been analyzed, Wal-Mart’s
profitability will be looked at. Profitability is the determinant of a company’s success or failure.
Finally, solvency will be analyzed to determine if Wal-Mart has the ability to meet its long-term
fixed expenses and to accomplish long-term expansion and growth.
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Analyzing, Liquidity, & Solvency of Wal-Mart
With the ever changing economy, it is essential for companies to produce and publish
annual reports at the end of each year. These reports contain multi-year financial analysis
information that shows and compares the operating results of all years, financial position, and
unit counts. The annual report also reports growth of the company over the years, return on
investment reports, and every other important factor such as assets and liabilities to potential
investors. Vital information in regards to a company’s strength and ability to grow can help
investors decide if they want to become shareholders and contribute to the company in hopes to
receive some type of financial reward for their investment.
Liquidity is spotted by identifying where the “smart money” from investors is flowing
(Bowie, n.d.). Liquidity is the ability to pay off current debt. Wal-Mart claims to use the cash
flow obtained from operating activities supplemented with long-term debt and short-term
borrowings to fund their operations and expansion activities. In 2010, Wal-Mart received net
cash provided by operating activities in the amount of $26.2 billion. That number declined by
approximately 10% to $23.6 billion in 2011 and then rose again in 2012 by approximately 3% to
$24.2 billion. Wal-Mart is able to use this net cash to pay off debts such as property and
equipment which they have continually done and also use net cash to finance new activities.
Wal-Mart’s numbers clearly show that they have enough funding whether it come from ongoing
cash flows generated from operations, external borrowings, or both, to meet their liquidity needs.
Cash and cash equivalents of $6.6 billion and $7.4 billion were recorded in years 2012 and 2011.
This cash and/or equivalent can also be used to support the liquidity needs of the company.
The current ratio is an effective tool to measure liquidity. To calculate the current ratio,
current assets have to be divided by current liabilities. Wal-Mart accumulated $58.603 billion of
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current liabilities in 2011 and $52.012 billion of current assets. The current ratio in 2011 was
.89. In 2012, $62.3 billion of current liabilities and $54.975 billion of current assets resulted in a
ratio of .88. Today, many strong companies use sophisticated management techniques to
minimize funds invested in current assets and as a result have current ratios below 1 (Libby,
Libby, and Short, 2011).
Profitability is the ultimate determinant of a company’s success or failure (Beasty, n.d.).
Company’s often use profitability ratios to determine the company’s bottom line and its return to
its investors. Profitability is important to a company because if the numbers are good, more
investors will put their own money into the company. By dividing gross profit by net sales, it is
noticed that Wal-Mart had a gross profit margin (GPM) of 24.5% in 2012. This number is
slightly lower than in 2011 when the GPM was 24.8%. This is not a major concern because
although the GPM in 2010 is the highest at 24.9%, this number is bound to fluctuate and WalMart has a good hold on this. The flatness of the GPM in 2012 comes from Wal-Mart buying
two more major companies. From 2010-2012, net sales have continually increased from $405
billion to $418.9 billion to $443.8 billion in 2012.
Net profit margin is another good tool to use for measuring profitability. Net profit
shows how much of each sales dollar shows up as net income after all expenses are paid. The
calculation for net profit margin is net income divided by net sales (Libby, Libby, and Short,
2011). In 2010 Wal-Mart had a net income of $14.370 billion and net sales of $405.132 billion.
The net profit margin for 2010 was 3.5% which means that for every dollar made, 3.5 cents of
that dollar was profit. In 2011 Wal-Mart had a net income of $16.389 billion and net sales of
$418.952 resulting in a net profit margin of 3.9%. Finally, in 2012 net income of $15.699 billion
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and net sales of $443.854 billion resulted in a net profit margin of 3.5%. These numbers show
that Wal-Mart consistently profits approximately 3.5 cents of every dollar that the store makes.
Solvency is a company’s ability to meet its long-term obligations as they are coming due
while continuing to implement its business strategy and deal with any financial hurdles that may
happen. To measure solvency, companies can use the leverage ratio which is the total debt
divided by total equity. Wal-Mart had $117.645 billion and $109.535 billion in debt in years
2012 and 2011 respectively. In those same years, Wal-Mart had $75.761 billion and $71.315
billion in equity. This results in a solvency of 1.55 in 2012 and 1.54 in 2011. For the past two
years, Wal-Mart’s creditors have had more given to them than the shareholders. These numbers
can be hard to look at but Wal-Mart does remind potential investors that two more companies
were just purchased and will be receiving revenue within the next year.
Measuring Solvency can also be accomplished by using the total debt/total assets ratio.
This ratio measures how much of the assets are financed with debt. From 2011 to 2012 WalMart’s assets increased approximately $13 billion from $180.782 billion in 2011 to $193.406
billion in 2012. Using the debt amounts above, Wal-Mart had a debt/total assets ratio of 61% in
2011 and in 2012. This means that 61% of the assets are financed by debt. This number can be
considered high but these ratios help business owners keep an eye on possible bankruptcy. As
this ratio increases, the likelihood of bankruptcy increases.
When it comes to making an investment into Wal-Mart, it would not be a bad idea. This
company is not by any means a get rich quick company but they have been able to keep a semiflat line across board. This means that they are balanced. Sure, Wal-Mart may rely heavily on
debts but because of the business that they are in, that is the way it works. There is no sign of
Wal-Mart going out of business and they do report dividends to shareholders. Wal-Mart is a
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company that investors can project what their dividends would be based from all information on
the annual report and of previous years.
Liquidity, profitability, and solvency are all shown by reviewing the annual report. WalMarts liquidity is very stable at .88, using the current ratio, over the last two years and since
strong companies have found a way to make this number not too far below 1, Wal-Mart is
proving to be a strong company with a great liquidity. When it comes to profitability, the
number of 3.5 cents per dollar does not seem like much but Wal-Mart makes over $400 billion
annually so those numbers add up. Solvency of Wal-Mart does not look good on paper. WalMart has a lot of liabilities and more than half of the assets are financed by debt rather than
equity. If Wal-Mart should go out of business, investors look to lose a lot of money. Even
though Wal-Mart does not have the perfect numbers, they are a well-known company that has
proven success, they are not going out of business anytime soon, and their numbers are decent
every year with minimal changes. While solvency showed that debt collectors receive more than
shareholders’ it would still be beneficial to invest money in Wal-Mart.
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References
Beasty, C. (n.d). Predicting Profitability. Customer Relationship Management, 11(11)
Bowie, M. (n.d). Dude, Where's My Liquidity?. Inside Market Data, 24(28)
Libby R., Libby P., Short D. (2011). Financial Accounting. Columbus, OH: 7th Edition,
McGraw-Hill Irwin Publishers.
2012 Walmart Annual Report - Sams Club. (n.d.). Walmart Corporate - We save people money
so they can live better.. Retrieved December 7, 2012, from
http://www.walmartstores.com/sites/annual-report/2012/