The report unearths the past five year financial performance of Walmart Inc. using the tool of ratio analysis. Our analysis indicated that over the years, the liquidity position of the company had been fairly stable and witnessed a surge during the latest year. However, the result were not appreciable when compared to the industrial averages. In terms of profitability and solvency, Walmart have shown promising trend with appreciable run both in comparison with the industry and at intra-company levels. As for the efficiency and market ratios, the trend again provided a mixed review, where miserable inventory turnover were offset by enticing asset turnover. Similarly, while PE ratio indicated that the stock is an attractive buy, PS ratio indicated it to be overvalued one.
Therefore, summing up all the results, and to avoid any risk, we have issued a SELL recommendation for this company, as we will be more interested in witnessing the trends for the coming years, before investing in the stock.
About the report
The report is being prepared to conduct the financial analysis of Walmart Inc., world’s largest discount store chain. The sole objective of the report is to decide if the stock is worth an investment consideration. Therefore, in order to bring comprehensiveness to our work, we will putting the financial data of past 5 years under the microscope of ratio analysis while the results will also be compared with the industry averages.
About the company
Headquartered in Arkansas, United States, Walmart Stores Inc. is an American multinational retail corporation that operates more than 11000 discount based department stores and warehouse stores around the world. Walmart is world’s largest company in terms of revenue figures and is also the largest employer in the world with employee count of 2.2 million. At present, the company operates in 27 countries worldwide under different brand names, and still remains one of the most valuable company in the world.-History
Walmart was founded in the year 1962 by Sam Walton. Throughout the period of 1960’s, the company acquired new stores, primarily in the rural areas. Every Walmart store was operating on one policy-Buying at wholesale rate and selling at discount. Even today, the majority holding of the company is held by the Walton’s family where his hires controls 50 percent through their holding company, Walton Enterprises.
-Initial Public Offering
Amid the times of blockbuster growth, Sam Walton too the company on public scale, and in 1970, a registered office and distribution center was opened by the company in Bentonville, Arkansas. This was followed by an initial public offering of its stock in late 1970, where after trading over-the-counter for two years, the company was listed on New York Stock Exchange, and since then there was no seeing back for Walmart Stores. As per an estimate, since its official listing on New York Stock Exchange where it first traded at $50, the company has grown by 5275 times. In other words, an investment of $5000 in 1972, would have been appreciated to $28 million dollars according to present day stock value.
-Competitor and Market Share Analysis
Walmart is the leader of the retail industry and has attained the market share of 63.60%, with its competitor lagging behind significantly to the revenue and profit numbers. Below is the graphical representation of market share of the company, followed by a direct comparison with its core competitors in the US market, Costco and Target Corporation.
-Stock Price Performance
This is the major section of our report, where we will use the raw financial data of the company for the past five years to pour out multiple ratios relating to liquidity, profitability, solvency, efficiency and market ratios. Each ratio multiple will also be compared with the industrial averages which we sourced from the Mergent Library.
a) Liquidity Ratios
These ratios are used to analyze the potential of the company to honor their short-term obligations as and when they become due. Below discussed is the two liquidity ratios of Walmart Inc. for past five years:
-Current Ratio: Current Assets/ Current Liabilities
-Acid Ratio: (Cash +Account Receivables)/ Current Liabilities
Referring to the calculations above, we can assert that until 2014, the liquidity position of the company was more of a stable one. Beginning with the current ratio, over the years we found that the ratio multiple was fairly constant in the range of 0.87-0.89. However, it was only during the latest year reporting, the current ratio surged from 0.88 to 0.97 amid 3.42% rise in the current asset base while the current liabilities plummeted by 45.62%, fueling the surge in the current ratio.
We even tested the liquidity position of Walmart using the stringent measure of acid ratio to which we found the similar trend as after a constant run of four years at 0,20, the acid ratio multiple finally increased to 0.24 fueled by increase in cash position and significant fall in the current liabilities position. It is also noteworthy to discuss that there is a big gap between the current ratio and acid ratio of the company, signifying high proportion of inventory as part of the total current assets. However, this situation is very normal for a retail company, and investors need to worry on this concern.
It was very surprising to know that the Walmart has been consistently lagging behind the industrial averages over both the liquidity ratios. Therefore, the management of the company needs to work aggressively over the working capital position of the company.
b) Profitability Ratios
Indisputably the most important financial ratio for all the stakeholders of the company, profitability ratios allows insights into the profit margins being earned by the company from its business activities. Below discussed are the profitability ratios for Walmart Inc., followed by an extensive discussion for the 5-year trend and industry comparison:
-Net Profit margin: Net Profit/ Revenue
-Return on Equity: Net Income/ Total Equity
Referring to the calculations above, although Walmart is having significantly higher profit multiples than the industry peers, but the margins has been decreasing year-by-year. Beginning with the net profit margin, during 2011, the profit multiple was3.89% which except for a marginal improvement in 2013 has been on a declining trend. During 2015, the net profit margin of the company stood at the constant level of 3.37%.
Next, as part of profitability ratio, we calculated the Return on Equity (ROE) multiple which indicates the return earned by the company on shareholder funds. Here also, the multiple is on declining trend, and this may agitate the investors a lot, as going by the brand name and reputation of Walmart, investors will hugely dislike the ROE on downward for five consecutive years.
Although on year-to-year basis the profitability position of the company has been declining, but in comparison to the industrial averages, Walmart still have an impressive record. As for net margins, the industry has been running into net losses since years now, while Walmart is still operating in a profitable phase. Similarly, as for ROE multiple, the industry is seeing a negative trend over the period of five years, and recently generated negative returns for the investors, while Walmart is producing hefty returns for the investors.
c) Solvency Ratios
Also known as Gearing Ratios, these ratios allows the analyst to peep into the capital structure of the company, and to see the proportion of debt and equity embedded into it. Below discussed are the solvency ratios for Walmart Inc., followed by an extensive discussion for the 5-year trend and industry comparison:
-Debt/ Equity: (Short-term debt + Long-term debt)/ Total Equity
-Interest Coverage Ratio: Operating Income/ Interest Expenses
Referring to the calculations above, we can see that the trend in the debt-equity has been a wavering one with many upside-downside jumps. Beginning with 2011, the debt equity ratio of the company was 0.68, which after increasing to 0.70 in 2014, plummeted back to 0.58. It may be noted that from 2011-2014, the trend in the debt-equity ratio has been a constant one ranging from 0.67-0.70, and it was only during 2014, the ratio multiple declined to 0.58, indicating towards the low-debt financing plans of the company.
Further, in order to evaluate the interest payment ability of the company, we calculated the interest coverage ratio, and found the results to be in equal proportion of good and bad. During 2013, when Walmart reduced the debt proportion, the interest coverage ratio was found to be surging high, but the very next year, when debt-equity ratio was found to be increasing from 0.67 to 0.70, the interest coverage ratio was seen on a declining trend.
Overall, we can give a positive nod to the financial solvency of the company.
In comparison to the industrial peers, Walmart has been aggressively financed using the debt sources. Referring to the table above, we can witness that debt-equity ratio of the company has been double to that of industrial average for every year.
d) Efficiency Ratios
Also known as Asset Management Ratios, these financial multiples provides information over the efficiency of the management to use the asset base of the company to generate the revenue figures. Below discussed are the efficiency ratios for Walmart Inc., followed by an extensive discussion for the 5-year trend and industry comparison:
-Inventory Turnover Ratio: COGS/ Total Inventory
-Total Asset Turnover: Revenue/ Total Assets
Referring to the ratios calculated above, we can see a mixed results relating to the efficiency of the company. Beginning with the inventory turnover ratio of the company, we found that until 2014, the ratio multiple was declining consistently indicating that over the years it took more time for the company to sell their inventory, and as a result, capital was tied up in the inventory levels for a longer period of time. This outcome also have a negative outcome on the liquidity position of the company. Even in 2015, there was only a marginal improvement in the ratio multiple, which could not be rated as an impressive one.
Next, we calculated the asset turnover ratio of the company, and the results were completely opposite to the trend in inventory turnover ratio. Here, we found that Walmart has maintained asset turnover ratio over the years, indicating that the management has been efficiently utilizing the asset base to generate revenue figures for the company.
Even on comparison of the industrial averages with the efficiency ratios of the company, the trend is depressing for the inventory turnover ratio as the industrial peers are operating with relatively high multiple. On the other hand, Walmart do scores over its industrial peers in terms of asset turnover and has maintained comparatively high asset turnover throughout the years of our analysis.
Another important set of ratios that assist the analyst in unearthing the investment opportunity hidden in the stock. By analyzing these ratios, and comparing with industrial averages, an analyst decides if the stock is overvalued or undervalued. Below discussed are the efficiency ratios for Walmart Inc., followed by an extensive discussion for the 5-year trend and industry comparison:
i) PE Ratio: Market Price/ EPS
*For calculation, we have used year ending stock prices for each company
ii) Price-Sales Ratio: Market Price/ Revenue per share
Market Ratio Analysis
Referring to the market ratios above, we have again faced a conflicting results. As for the PE ratio of the company, the multiple has been increasing year-by-year, indicating that the investors are showing confidence in the company and are forecasting strong earning potential. The current year PE ratio of 16.05 is also on a stronger note in comparison to the industrial average of 15.90, indicating attractive investment opportunity in the stock. On the other hand, Price/ Sales ratio tells us the different story. On comparing the present year multiple of 0.54 with the industrial average of 0.49, we found that the stock is overvalued.
Therefore, our final recommendation will be based on summarized outcome for all the ratios.
Considering an uneven trend in all the ratio sections, where the company do outshines the industrial peers in terms of profitability, but lags miserably in terms of liquidity and inventory turnover. Similarly, a promising result for PE ratio, is offset by overvaluation indication by PS ratio.
Therefore, for now, we will be procrastinating our decision to invest in the stock and will be looking for next year financials, to review our investment decision.
Balance Sheet: Walmart. (2015, April 28). Retrieved from Morningstar: http://financials.morningstar.com/balance-sheet/bs.html?t=WMT®ion=usa&culture=en-US
Competitors-WalMart. (2015, April 28). Retrieved from Yahoo Finance: https://in.finance.yahoo.com/q/co?s=WMT
Historical Prices- Walmart. (2015, April 28). Retrieved from Yahoo Finance: https://in.finance.yahoo.com/q/hp?s=WMT
Income Statement-Walmart. (2015, April 28). Retrieved from Morningstar: http://financials.morningstar.com/income-statement/is.html?t=WMT®ion=usa&culture=en-US
Investment Valuation Ratios. (2015, April 18). Retrieved from Investopedia: http://www.investopedia.com/university/ratios/investment-valuation/
Profile-Walmart. (2015, April 28). Retrieved from Yahoo Finance: https://in.finance.yahoo.com/q/pr?s=WMT
Wal-Mart Stores Inc. (2015, April 28). Retrieved from http://www.encyclopediaofarkansas.net/encyclopedia/entry-detail.aspx?entryID=2135