Individual Analysis

Whole Foods Market Inc. (WFMI)

Accounting 451 - February 09, 2011
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Contents
Balance Sheet...........................................................................................3

Income Statement....................................................................................4

Introduction..............................................................................................4

NOPAT.......................................................................................................4

NOA...........................................................................................................5

RNOA.........................................................................................................6

NOPM........................................................................................................6

NOAT.........................................................................................................6

2nd Level Analysis.......................................................................................7

Credit Risk.................................................................................................8
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Balance Sheet
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Operating Items highlighted in green

Income Statement

Operating Items highlighted in green

Introduction
The following analysis provides insight into the performance of Whole Foods Market Inc. for the past
two years. The analysis consists of several metrics that cover a broad range of operational and structural
data. This information is required for full analysis of the company against its competitors in the retail/
grocery industry. The analysis begins with the calculation of NOPAT and NOA.

NOPAT
Net operating profit after tax is calculated by subtracting tax on operating profit from net operating
profit before tax. For WFMI NOPAT increased substantially for the year 2010 over 2009. The large
difference appears to be from an increase in sales revenue.
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NOA
NOA

decreased by approximately 10%. The large decrease is related to the company’s large decrease in cash

.
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RNOA
NOPAT $ 425,453 $ 270,384
Average NOA $ 2,807,040 $ 2,569,104
RNOA 15.2% 10.5%

NOPM
NOPAT 425,453 270,384
Sales 9,005,794 8,031,620
NOPM 4.7% 3.4%

NOAT

RNOA increased sharply (almost 5%) between the two years. WFMI makes $.152 for every dollar of NOA
versus only $.105 in the prior year. The difference is most likely attributed to the large increase in sales
which in turn increased NOPAT for the year 2010.

NOPM increased also, however not quite so dramatically. NOPM increased slightly over 1% with
climbing sales revenue and its higher NOPAT.

NOAT increased slightly as well. The increase is not significant. The company is ahead of the corporate
average. The grocery industry requires high turnover rate for inventory.

Overall, the company seems to have done well in increasing sales as well as profit margin. The company
is well above the average for grocery store profitability.
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2nd Level Analysis

The second level analysis

reduces NOPAT and NOPM by sales

to show

how the company has changed in performance. There are no noticeable changes from year to year other
than the changes in sales and cash.
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Credit Risk
The following section analyzes the credit risk of the company based on several ratios and the Altman
bankruptcy model. The analysis begins with liquidity ratios.

Liquidity

Liquidity refers to the company’s availability of cash, more specifically how much cash WFMI has and
how much cash it can generate in the short term. Because the current ratio is greater than 1, we see
that WFMI is liquid in the near term. I.e., the company has positive net working capital.

The quick ratio, unlike the current which focuses on current assets likely to be converted to cash if
necessary, identifies a company’s ability to meet short term liabilities without liquidating inventory
below current market prices. The increase in liquidity in both ratios, confirms the company is safely
liquid.
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Solvency

Long Term solvency identifies patterns in a company’s use of debt to finance its non operating
operations. Companies finance at least a portion of their operations with debt because debt is
normally less expensive than equity financing. Solvency measures a company’s ability to meet
its debt obligations. Liability to Equity measures how much debt the company uses as a source
of financing vs. equity. The company has decreased this ratio substantially in the past year.
WFMI has a very low liabilities to debt ratio compared to the corporate average of 1. When
compared across its industry, the company is well below the average 3. This means that WFMI
does not use as much debt in the structuring of their business. The next solvency ratio is Long
Term Debt to Equity. This ratio separates long term from short term debts and focuses on the
amount of long term debt relative to short term debt which can be paid with current assets.
WFMI decreased this ratio in the past year which increases its creditworthiness.
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Coverage
Coverage Ratio
Times interest earned -13.46 -7.81
Cash from ops to total debt 1.15055495 0.795037
Free op cash flow to total debt 1.65535937 1.220632

Coverage analysis compares the company’s operating cash flows to interest and principal
payments. Cash from operations to total debt measures the company’s ability to generate cash
to meet its debt payment requirements. This ratio is used to determine whether a company can
repay the principal on its debt in the short term. For WFMI, the ratio is increasing year over
year. This is directly related to the company’s decrease in cash reserves. The increase indicates
weakness in credit as the company may have problems meeting requirements. The free
operating cash flow to total debt measures the amount of cash, after capital expenditures, that
a company has available to cover its debt. WFMI increased its free operating cash flow to total
debt ratio in the past year. This means WFMI has sufficient cash flow to meet requirements and
reflects the company has improved its situation
over the prior year.
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Altman bankruptcy model

The Altman Bankruptcy Model measures the likelihood of a company to enter bankruptcy and
assigns a score by analyzing several key factors. The model uses four variables, each related to
some measure of financial strength. The data is then summed to derive its Z score which is then
compared to a range prepared by Altman. Z scores less than 1.8, signal that the company is in
financial distress. A company in this range has high potential for bankruptcy in the near term. If
greater than 3.0, the company is healthy. Risk of bankruptcy is low in this range. Score falling
between 1.8 and 3 are considered to be in the “grey area” and are not reliably measurable with
Altman’s model. WFMI is safely above 3 and therefore at very low risk of bankruptcy.

Summary
In summary, WFMI has excellent credit and continues to improve its operating effectiveness as it
conducts business.
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Works Cited

1. WFMI_10k.htm." U.S. Securities and Exchange Commission (Home Page). Sept.

2010. Web. 04 Feb. 2011.

2. "WFMI Income Statement | Whole Foods Market Inc. Common Stock Stock -

Yahoo! Finance." Yahoo! Finance - Business Finance, Stock Market, Quotes,

News. Web.

3. "WFMI Balance Sheet | Pall Corporation Common Stock Stock - Yahoo!

Finance." Yahoo! Finance - Business Finance, Stock Market, Quotes, News. Web.

4. Easton, Peter Q, and Robert Halsey. Financial Statement Analysis & Valuation.
2nd ed. 2009. Print.