361779612.

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Financial Analysis of Wal-Mart, Inc

Wal-Mart

Your Name:

Name of School:
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Abstract:

This study is aiming to analyze some financial ratios and policies adopted by Wal-Mart,

Inc. so as to decide whether the company represents a good investment opportunity. In

the study, I have analyzed some of the commonly used liquidity, solvency, and

profitability ratios as well as some stock information as well as the capital structure of the

firm to be able to arrive at a sound investment decision.

Ratio and Working Capital Analysis:

Wal-Mart enjoys high liquidity ratios as evident by the attached excel sheet. It even

enjoys a working capital deficit due to an efficient use of cash in funding operations and

in providing returns to shareholders.i

The low quick ratio is due to the fact that as a retail store, Wal-Mart has to maintain high

inventory levels which mean that most of its funds is tied in inventory. This, however is

not a bad sign since Wal-Mart enjoys a small inventory turnover ratio which means that

the company is effectively managing its inventory.

The companys Long-term Debt to Equity is much lower than the industry average which

shows that the company relies more on equity financing rather than debt financing. This

is a good indication because the companys borrowing needs are mostly short term to

manage working capital, this means that the company does not need to rely on long-term

debt to finance its operations. Maintaining this ratio at such a lower level is a
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conservative policy so that the companys solvency (ability to meet long-term

obligations) does not get affected.

Wal-Marts Net Profit Margin as well as the Return on Equity ratios are within the

industry average; and since both ratios measure the companys profitability, then the

company is profitable which is evidenced by the high P/E ratios for both years. Since the

P/E ratio measures investors expectations about the firm, then Wal-Mart is a good

investment.

The Gross Profit Margin is 24.4%, and 24.36% for 2006, and 2007, respectively, while

the Net Profit Margin is 3.24%, and 3.36%, for 2006, and 2007, respectively. This means

that the Operating Expenses for Wal-Mart are very high, but this is normal for the retail

industry. Stores such as Wal-Mart depend on huge sales volume and lower net profit

margins.

A Horizontal Analysis of Wal-Marts financial statements shows that the company is

starting to rely more on debt since the Debt Ratio is 0.59, and 0.6 for 2006, and 2007,

respectively. The increase in debt ratio, however is not significant and is not a cause of

concern. The companys Current Ratio has dropped from 0.9 in 2006 to 0.81 in 2007,

and the Quick Ratio has dropped from 0.2 in 2006 to 0.16 in 2007, but again this is not a

cause of concern because Wal-Marts operating and cash cycles are currently optimized

(evidenced by the negative conversion cycle in both years.

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The operating cycle represents the length of time involved in purchasing raw materials,

manufacturing the product, and distributing (selling) the product. The cash conversion

cycle represents the net time interval between the collection of cash receipts from sales

and the cash payments for the various resources used by the firm. The operating cycle is

equal to the sum of the inventory conversion period and the receivables conversion

period. The cash conversion cycle is equal to the operating cycle less the payables

deferral period.

Wal-Marts Operating Cycle has decreased from 49.52 to 48.34 in the years 2006, and

2007, respectively; which indicates a growth in sales that is higher than the growth rate of

inventory- a positive sign. The Cash Conversion Cycle is negative in both years which is

an indicator of the high liquidity of the company as it enjoys a short receivable period and

a long payable deferral period. This shows that the company is efficiently managing its

resources.

Capital Structure:

Wal-Marts capital structure consists of both Debt, and Equity.

The following schedule is obtained from the companys annual report and lists the

maturities as well as interest of Long-term Debt:

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Equity is in the form of Common Stock shares that sell at a current price of $57.14, with

a 52-week average selling price of $51.02.

Last Years annual dividend is $0.52, Growth Rate is expected to be 10.1% (Taken from

the companys annual report), and therefore the cost of equity is approximately 1%

The After Tax Cost of Debt (Both Short and Long term) is 1.4%, and the Tax Rate is

34.2%.

The Weight of equity is 0.4, and the Weight of debt is 06.

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Therefore, the Weighted Average Cost of Capital is approximately 1.24% (please see the

attached excel sheet for calculations)

Findings:

Based on the above, as well as the ratio analysis (please see the attached excel sheet),

Wal-Mart seems to enjoy an optimal capital structure which minimizes the weighted

average cost of capital. This is indicated by a lower than industry average debt to equity

ratio, where Wal-Mart Debt-To-Equity ratio was 0.5 and 0.52 in 2006, and 2007

respectively, while the industry average is 0.73. I could not find the industry average for

the Debt-to-Total Assets ratio, but judging from the debt-to-equity ratio figures

mentioned above, I presume that Wal-Mart enjoys a better debt ratio than the industry

average. This shows Wal-Mart to enjoy a higher than industry averages solvency ratios;

which means that Wal-Mart is less risky than the average industry as it is able to meet its

long-term obligations as they become due.

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In its opening statement of the annual report, Wal-Mart says:

Around the world, Wal-Mart continues to put major emphasis on balancing returns

and growth. We are focused on prioritizing capital spending to the projects that

produce the highest returns. We want to improve our Companys return on investment,

or ROI, improve our comparable store sales and improve our working capital

productivity. The outcome is a focus on the most capital efficient opportunities and a

continued focus on the customer.ii

And I believe that their efforts are proving to be successful which is obvious from the

working capital deficit, as well as the return on equity ratio which is within the industry

average.

The efficient working capital management is obvious if we check Wal-Marts current

assets. The Receivables Conversion Period (Time taken for credit sales to mature into

cash) was 2.97, and 3.52 days which is a very low ratio, but this is explained in the

annual report where Wal-Mart says:

Accounts receivable consist primarily of receivables from insurance companies

resulting from our pharmacy sales, receivables from suppliers for marketing or

incentive programs, receivables from real estate transactions and receivables from

property insurance claims. Additionally, amounts due from banks for customer credit

card, debit card and EBT transactions that take in excess of seven days to process
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are classified as accounts receivable.iii

The company therefore does not offer credit to its customers while many of its

competitors do, this might have resulted in lost sales, but it certainly allows for less risk

to the companys operations. This is because as per the report above, the credit customers

are mainly insurance companies which are probably the safest credit customers.

Inventory represents 71.7%, and 73.93% in 2006, and 2007, respectively, and although it

seems that the companys funds are mostly tied in inventory, this is typical of the variety

stores industry especially when the inventory turnover ratios were 0.13 and 0.12 in 2006,

and 2007, respectively. These low ratios shows that Wal-Mart turns its inventory pretty

fast and this is again supported by the low inventory conversion periods where it was

46.55 and 44.82 (an improvement) in 2006, and 2007, respectively, while the Payables

Deferral Periods for the same years were 60.07, and 56.41. This proves Wal-Mart to be

efficiently managing both its inventory and accounts payable. In this, Wal-Mart says:

Cash flows provided by operating activities supply us with a significant source of

liquidity. Our cash flows from operating activities of continuing operations were $20.2

billion, $17.7 billion and $15.2 billion in fiscal 2007, 2006 and 2005, respectively. The

increases in cash flows provided by operating activities for each fiscal year were

primarily attributable to improved income from continuing operations and improved

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management of inventory procurement resulting in accounts payable growing at a

faster rate than inventory.iv

Wal-Marts management is obviously engaged in trying to provide the highest returns to

its shareholders; this is exemplified in their statement about Long-term Debt:

We plan to refinance existing long-term debt as it matures and may desire to obtain

additional long-term financing for other corporate purposes. We anticipate no

difficulty in obtaining long-term financing in view of our credit rating and favorable

experiences in the debt market in the recent pastv

In the report, management continues to explain their capital structure policy stating that:

In fiscal 2007, we paid dividends of $2.8 billion, made $15.7 billion in capital

expenditures, paid $1.7 billion in cash to repurchase shares of our common stock,

received $7.2 billion from the issuance of long-term debt, repaid $5.8 billion of long-

term debt and repaid $1.2 million of commercial paper (net of issuances).vi

From the above, we can see that Wal-Mart is looking for ways to increase returns to

shareholders, in that they are refinancing old long-term debt so as to benefit from the

declining interest rates, they are also engaged in Treasury Stock purchase so as to

decrease the amount of outstanding shares. This action of reducing outstanding shares

would increase the earnings per share as well as dividends.

Finally, by examining the companys financial statements, we can see that sales is

increasing at a slow rate (Sales have increased by 8.65% from 2006 to 2007), but this

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small percentage increase in sales is coupled with a higher increase in Net Income which

increased by 12.82% for the same period. This shows that Wal-Marts management is

efficiently managing its costs so as to increase the bottom line income to its stockholders.

Recommendation:

I believe that Wal-Mart represents a good investment because although the companys

return on equity is within the industry average, Wal-Mart seems to be a less risky

investment, this is supported by a lower Beta coefficient of 0.05vii, and the high Price

Earnings ratios as well as the companys expected growth rate (10.10%) are an indication

of the companys strength. Investors have faith in the companys management and

operations which is reflected in the Price Earnings ratio. I also believe that the expected

growth rate is easily achievable by a company such as Wal-Mart and this is evidenced by

the percentage change in Earnings per share from 2006 to 2007 (15.54%) which is

coupled with a 7.52% percentage increase in the Return on Equity over the same period.

The company is also efficiently managing its assets to provide a better return on

investment, this is exemplified in the working capital management as well as turnover

figures.

Finally, I can see that Wal-Marts management is trying to professionally manage the

eternal trade-off between Risk and Return. From all the above, it is clear that the

management is

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focusing on increasing returns to shareholders while at the same time professionally

managing the risk whether it is a systematic or unsystematic risk.

i
http://walmartstores.com/Media/Investors/2007_annual_report.pdf
ii
Ibid
iii
Ibid
iv
ibid
v
ibid
vi
ibid
vii
http://finance.yahoo.com/q?s=WMT

References for Kohl Dep.. stores

1) Balance Sheet
http://finance.yahoo.com/q/bs?s=KSS&annual

2) Income Statement:

http://finance.yahoo.com/q/is?s=KSS&annual

3) Cash Flow Statement:

http://finance.yahoo.com/q/cf?s=KSS&annual

4) Annual Report:

http://www.kohlscorporation.com/InvestorRelations/sec-filings.htm

5) Companys website:

http://www.kohlscorporation.com/InvestorRelations/Investor01.htm

Notes:

Please note that Kohl do not pay dividends (an important point), you can read about that ib the pdf file, search for
we have never paid a cash dividend