VIEWS: 603 PAGES: 7 POSTED ON: 3/28/2010
Financial Evaluation of Wal-Mart (Your Name Here) February 12, 2009 Name of School Name of Class Name of Professor 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. Wal- Mart 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.