Wal-Mart Evaluation Report by Mattlater

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    Wal-Mart Evaluation Report

            Paul Jenkins

Axia College of University of Phoenix
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   Analyzing Wal-Mart's annual report provides a positive outlook on Wal-Mart's

financial health. Given the specific ratios and its comparison to other companies in the

same industry, Wal-Mart is leading and more than likely continue its dominance. Though

Wal-Mart did not lead in all numbers, its leadership and strong presence of the market

cements the ongoing success. The review of the current ratio, quick ratio, inventory

turnover ratio, debt ratio, net profit margin ratio, ROI, ROE, and P/E ratio all indicate an

upbeat future for the company. The current ratio, which is defined as current assets

divided by current liabilities, is a measure of how much liabilities a company has

compared to its assets. Wal-Mart in the year of 2007 had a current ratio of .90, and as of

January 2008 it had a current ratio of .81. The quick ratio, which is defined as current

assets minus inventory divided by current liabilities, is a measure of a company's ability

pay short term obligations. Wal-Mart in the year of 2007 had a quick ratio of .25, and as

of January 2008 it had a ratio of .21. Both the current ratio and quick ratio are a measure

of liquidity. Wal-Mart is not as liquid as its competitors such as Costco or Family Dollar

Stores Inc. I believe the reason why Wal-Mart is not too liquid is because they are

heavily investing their profits for expansion and growth. Management claims in their

financial report that holding their liquid reserves in other currencies have helped Wal-

Mart hedge against inflationary pressures of the US dollar. The next ratio to look at is the

inventory ratio which is defined as the cost of sales divided by average inventory. In the

year of 2007, Wal-Mart’s inventory ratio was 7.68, and as of January 2008 it was 7.96.

Wal-Mart has a lot of sales therefore it doesn’t have too much a problem of holding too

much inventory. Its competitors have similar ratios though they don’t have as much sales

as Wal-Mart. Wal-Mart’s ability to sell at lower prices for same quality, gives them the
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edge against its competition. As of the year 2007, Wal-Mart had a debt ratio of .58, and

as of January 2008, it had a debt ratio of .59. The debt ratio is calculated by dividing the

total debt by its total assets. Wal-Mart has a lot more assets than it does debt so Wal-Mart

is not overleveraged. Wal-Mart far exceeds their competition in comparison of assets.

The Wal-Mart is the 800 pound gorilla in this industry and looks to remain that way. The

next ratio to look at is the net profit margin ratio, which basically measures the return of

sales. Wal-Mart had a 4% net profit margin ratio in the year 2007, and had a net profit

margin ratio of 3% as of January 2008. The industry average is similar so the

comparisons between the competitors remained flat. The ROI or also known as return on

assets compute the efficiency of an investment. Wal-Mart had an 8% in the year of 2007

and as well as of January 2008. Wal-Mart had one of the highest ROI’s in the industry;

however the most important of the number is its consistency. Wal-Mart is the most

consistent than its competitors when comparing ROI. The return on net worth or also

known as the return on stockholder’s equity gives a clear picture of the performance of

Wal-Mart and in the year 2007, it had a ROE of .19 and as of January 2008, it had a ROE

of .19. Wal-Mart’s dependable profits make it a great company. It was able to get a close

to 20% return for its shareholders. The final ratio that solidifies Wal-Mart impressive

performance is the P/E ratio. It is calculated by dividing the market price per share and

the current earnings per share. Wal-Mart had a P/E ratio of 17.89 in 2007, and as of

January 2008 it had a 16.28 P/E ratio. In general, a high P/E suggests that investors are

expecting higher earnings growth in the future compared to companies with a lower P/E.

   Wal-Mart’s ability to turn their inventory into cash is remarkable. They have the

shortest operating cycle of its industry. By adding the inventory conversion period and
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receivable conversion period, one would get the operating cycle. Wal-Mart had 49.36

days for its operating cycle as of January 2008. A very similar computation of Wal-

Mart’s bottom line is its cash conversion cycle. It is calculated by subtracting the days of

payable deferral period from the operating cycle. The number of days for Wal-Mart to

turn its resource inputs into cash is about 12.36 days. There cash cycles are much

optimized and the best among its competitors. It spells success given they are able to sell

their inventory very quick. The shorter the cycle, the less time capital is tied up in the

business process, and thus the better for the company's bottom line. Wal-Mart’s system is

very efficient because of their superb capability to need less working capital given their

short cash cycle.
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 Below is the list of long term debt with maturity dates and yield to maturity.




Wal-Mart sells only common stocks with a current selling price of 58.62 per share. It had

a 52-week average price between high 40’s and low 50’s.

   The average cost of capital for the year 2007 was 5.3% and as of January 2008 was

4.0%. These numbers are very impressive given how Wal-Mart borrows very cheaply.

The primary reason why Wal-Mart is able to do so is because Standard & Poor’s rates

Wal-Mart’s long term debt as “AA.” Wal-Mart is a good credit risk, meaning
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bondholders are safe in terms of Wal-Mart’s ability to repay. Their strong recognized

brand helps its sales, and I believe along with their great management, Wal-Mart is in no

trouble to pay its creditors because it has a strong history of paying its obligations and the

cheap borrowing rates reflect that.

   Wal-Mart's stellar performance has created optimism for those invested in Wal-Mart

whether it be a shareholder, bondholder, employee, management, and as a consumer. I

believe Wal-Mart is a great buy however I'd wait for the stock to dip a little lower. The

current economic conditions in America especially, Wal-Mart might suffer because

consumers in America will be less inclined to spend as much money. Though they are

still going to grow because Wal-Mart has expanded its operations in emerging markets

such as Asia, it will be able to bounce back. Its long term growth and outlook is still

positive however stock prices will probably take a dip in the near future as America's

economy begins to decline and contract. Wal-Mart still however gathers hundreds of

millions of customers and growing. Their mission of providing low prices will help

attract customers who want most out of their money.

   Many analysts agree that Wal-Mart will perform well into the future and a look at

Wal-Mart's revenue and market cap compared to its competitors, Wal-Mart surpasses

ahead. With the right system and leadership in place, Wal-Mart may even monopolize

their market as a retailer. It sells a diversified range of products such as foods,

consumable goods, clothing, pharmacy, gasoline through distributors, photo processing,

video rental stores, and just about everything else might need. Wal-Mart has become the

one stop shop for a person and it has provided quality as well as quantity. They will

continue to be its leader in providing a unique service of diversified goods with a
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combination of low prices and customer satisfaction.

   Wal-Mart has given a lot of value to its customers however the same couldn't be said

to its workers. The labor force of Wal-Mart has complained about lack of benefits and

low pay. Things are slowly changing as the CEO of Wal-Mart shared in Wal-Mart's

annual report that employees will be given more incentives such as health care benefits.

There also has been much controversy that Wal-Mart has discriminated against female

workers. The CEO of Wal-Mart, Lee Scott has told in the annual report Wal-Mart has

been constantly promoting women especially in the company's growing market of China.

Wal-Mart has better positioned itself for opportunities in all aspects and has become

more aware of people's needs within the business and out.

   In analyzing investments and businesses, numbers tell the story. The eight ratios

analyzed were all good or above average in its industry. The current ratio was good

however not the best in the industry. I believe the primary reason why it has more current

liabilities than it does current assets is because the capital used to buy wholesale products

and sell retail are used heavily to keep business booming. Many customers are constantly

shopping in Wal-Mart, and this need has to be met with enough inventories. The quick

ratio which measures short term obligations, suggests that Wal-Mart is capable to pay its

creditors and has above average number than the industry. The inventory ratio proves

Wal-Mart is the best as it sells a lot more products than its competitors. The inventory is

always moving because Wal-Mart sets its prices to sell. The debt ratio of Wal-Mart is

good but not the best however has done better than most of its competition. Wal-Mart has

a larger net worth and market cap than any of its competitors. There net profit margin

ratio is good however is not performing than it should. I believe the problem is that they
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price it too low. Wal-Mart can raise prices to prove this ratio however their volume of

business makes up for this. Their ROI on its assets as well as their ROE is consistent

unlike its competition. As Wal-Mart gains more market shares, I believe they will

dominate its competitors beyond what it is now. The P/E ratio is not too low or high as it

suggests that Wal-Mart is poised for more growth especially as business is expanded to

other markets. Wal-Mart is a great company with very little blemishes, as its management

and leadership make small but important changes to improve its bottom line.
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                                      References



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(Internet from 10/11/05)

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(Internet)

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(Publications)

Acumen PI- Title: SAP case study., Date: 2004-06-28

								
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