Wal-Mart Capital Structure Analysis
Gail Bethea
Presentation Outline
Comparison of key financial ratios
Strategies for improvement Adjusting capital
Credit, cash, and inventory sources
Keys to attracting investors
Trend analysis Recommendations to buy or sell
Cost of capital calculations
Analysis of methods Best approach for Wal-Mart
Financial Ratios (underperforming)
Liquidity Ratios Wal-Mart
Working Capital/Total Assets Current Ratio
1/31/04
1/31/03
1/31/02
Liquidity Ratios Industry
Working Capital/Total Assets Current Ratio
1/31/04
1/31/03
1/31/02
-0.03
-0.02
-0.01
0.21
0.18
0.13
0.92
0.94
1.02
1.72
1.49
1.61
Quick Ratio Interval Measure
0.21
0.16
0.19
Quick Ratio Interval Measure
0.76
0.56
0.51
11.70
8.60
10.58
43.54
59.32
31.78
Financial Ratios (underperforming)
Net Working Capital to Total Assets Ratio
Difference between current assets and current liabilities.
Negative performance increases Wal-Mart’s debt.
Current Ratio
Current assets divided by current liabilities.
Below preferred 2:1 ratio.
Might be misleading in Wal-Mart’s case.
Financial Ratios (underperforming)
Quick Ratio
Current Assets – inventories divided by current liability
Wal-Mart is dependant upon inventory sales to pay debt.
Interval measure ratio
Liquid assets relative to company outgoings
Wal-Mart unable to operate beyond 12 days without inventory sales to support.
Recommendations
Cash
Increase the accounts payable period by 20.5% or decrease inventory by 25%
Both recommendations impact vendors/suppliers
Optimal choice is to reduce inventory period Avoid increasing debt
Increase the time it takes for Wal-Mart to pay its accounts payable to 45 days instead of 33 days
May reduce the amount of cash needed for operations
Recommendations
Marketable Securities
Predict future cash needs Purchase marketable securities
Mature in one day to one year
Evaluate risk as well as time to maturity, penalties Excess cash allowed to earn interest for maximum amount of time
Allows Wal-Mart to obtain maximum returns
Recommendations
Inventory
Markdown to account for shrinkage, customer demand, seasonal fluctuations.
Moves inventory to decrease inventory and increase revenue.
Markdowns may result in loss, but can then be written off.
Recommendations
Sources and uses of short term financing
Delay accounts payable Obtain unsecured bank loans Sell short term debt to investors Obtain short term loan from accounts receivable
Expensive due to high interest
Attracting Investors
2004 Price earnings ratio Earnings per share
Dividend yield Common stock share price
2003 29.58 $1.81
0.7% $53.54
2002 35.06 $1.49
0.7% $52.24
2001 46.72 $1.41
0.7% $53.26
2000 42.16 $1.20
0.6% $50.59
25.63 $2.03
0.97% $52.02
Valuation and Investment
Price earnings ratio
Downward trend for past 5 years
Wal-Mart not meeting expectations, causing stock prices to drop
Should not be used as determining factor to sell stock
High P/E ratio could indicate stock is overvalued
Valuation and Investment
Earnings per share
portion of a company’s profit dedicated to each outstanding share of common stock
Can be manipulated, so investor beware
High or low quality
EPS for Wal-Mart is low quality
Does not reflect negative operating results and overstates the “true” (cash) operating results
Valuation and Investment
Dividend yield