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MT482 Financial Statement Analysis Unit 9 Assignment: Comprehensive Financial Analysis Executive Summary This paper will cover several aspects of Walmart’s ins and outs of their business. It will first cover a brief introduction of the corporation and how it became who it is today. It will also include several aspects of the company’s financial history, their financials today, and their financials looking forward to the future. Some other important points that will be discussed are the ratios between 2016 to 2019 which will help provide a future forecast on whether Walmart will continue to be a great investment to invest in. Some of these ratios include liquidity, debt, asset management, profit, and market. These ratios will showcase factual numbers and evidence of how the company has been progressing throughout the last several years. Based on these ratios, it is evident that Walmart does an excellent job at paying their debts and they are liquid. Through Walmart’s asset management ratios, Walmart performs well on selling their goods and services well and does it in an efficient manner. Also, their profit ratios indicate they do a good job at converting their sales into net income. The individual shareholders of Walmart’s stock wish for profits of the business to be at a high level to distribute dividends back to their portfolios. Those that provide credit to the company hope that Walmart continues to pay down their debts on time.
At the conclusion of this paper, their will include a final recommendation summarizing why Walmart is a good investment to make. The ratios will provide a solid persuasive argument to back up this stance. Besides the fact the number of stores the corporation has and its long standing of over 60 years in business. They also continue to expand their business to attract more and more different customers to reach a broader scope of people. With them being such a large retail giant that carries products that people need to survive and other items to provide people
Table of Contents
- Executive Summary………………………………………………………………………….2-
- Table of Contents…………………………………………………………………………….
- Introduction………………………………………………………………………………….5-
- Financial History…………………………………………………………………………….8-
- Financial Today…………………………………………………………………………......14-
- Financial Future…………………………………………………………………………......
- Conclusion…………………………………………………………………………………..
- References…………………………………………………………………………………..
Introduction Walmart stores are one of the most popular retail stores across the United States and they have a very large following across all nationalities. Just about anywhere you drive in America you will not have to drive a far distance to find one of these retail giants. They also have a very well-known online store that competes with Amazon and E-bay. The company headquarters for Walmart is located in Bentonville, Arkansas where they also opened up their first retail nearby. The company was founded in 1962 and is still expanding and growing their business today. “ Walmart’s business strategy sprung from the late 19 th century five-and-dime retail model, but it added a potent combination of operational efficiency, cutting-edge technological approaches, and an “elbows-out” competitiveness reminiscent of Gilded Age capitalism.” (The Editors of Encyclopedia Brittannica. 2023) One reason why Walmart exploded in popularity was because they had a strategy of placing stores in rural areas to avoid bigger retail competition. Once it had a foundation for doing this, they decided to expand the business to more saturated areas and they inherently received more market exposure. This strategy received a lot of criticism because it crushed local small businesses that Walmart had opened their stores in their markets. They also were one of the first companies in the retail industry to achieve” economies of scale”. This ultimately meant they were able to produce products at a lower cost even though they increased output. Walmart also expanded their business by adding private labels to their business-like Great Value, Sam’s Club and Equate. This allowed Walmart to offer store branded products at lower prices than name brand competitors. Walmart’s early years would be from 1962, the year it first started, through 1970. The owner of the business, Sam Walton, made his goal clear to target customers who were at the time
economy. By the year 2000, Walmart had almost 4000 stores across the globe and the annual sales had reached 165 billion. From 2000 to today, Walmart has continued to increase their brand. In the year 2001, Walmart’s total sales were very high and ultimately made it the largest corporation in the world. Some of Walmart’s largest competitors include Costco, Target, and Amazon. As of 2023, Walmart is also known as the largest retailer in the world and has more than 10,500 stores worldwide. Walmart not only makes a lot of money, but they provide a very large number of jobs to the workforce. It has become an American icon in both small and large towns not only in America but outside the nation as well. Looking at Walmart’s future, they tend to look at going beyond retail to expand their growth. One area they want to work on to go beyond retail is through health care. They also want to expand their reach to more customers. Walmart is looking at some of their competitors in several different areas, some including Amazon and Apple in order to gain loyalty from customers and expanding through apps to get exclusive customers to pay for subscriptions. This is Walmart+ which gives perks to their customers for paying for a subscription. They challenge themselves to always stay a few steps ahead in order to stay beyond their competition and set the standard past just the retail industry and e-commerce.
Financial History Walmart has a very thorough history, and it would be obvious to one to believe they have a strong financial history. They were able to survive in the 1960 ’s and are the largest corporation today. In order to understand the financial history of the largest corporation in the world, we need to review the financial ratios of the corporation. Below is a table that will show a breakdown of the first three ratios discussed between the years 2016 to 2018. Table 1: Liquidity and Debt Ratios
Current Ratio .7598 .862. Quick Ratio .22 .19. Total Debt to Total Assets
Let’s first look at some of the recent history with the current ratio for Walmart. The current ratio is also known as the working capital ratio. This ratios job is to help measure the capability of a business to meet its short-term obligations that are due within the year. “The ratio considers the weight of total current assets versus total current liabilities. It indicates the financial health of a company and how it can maximize the liquidity of its current assets to settle debt and payables.” (Vipond, 2023) To calculate the equation to find the current ratio it is the current assets divided by the current liabilities. A good current ratio is between 1.5 and 3.0, and if the company’s current ratio is below 1, that would mean the company’s current liabilities exceed
debt and dividing it by the total assets. When the ratio is less than 1, the current assets are higher than the liabilities. When the ratio is right at 1 this means the debt and assets are the same. Looking at the number in table 1 from 2016 to 201 8, their numbers were all slightly higher than .2. This is a good number for Walmart because it means the current assets are higher than their liabilities. A very good debt to asset ratio that makes investors feel the most comfortable is between. 3 and .6. This is not far off from where Walmart was for the three years we are looking at. Table 2: A sset Management Ratios
Inventory Turnover 8.5283 8.3923 8. 117 Fixed Asset Turnover 3.45 3.40 3. Total Asset Turnover 2.44 2.32 2. Next, we will look at and discuss the asset management ratios for Walmart between 2016 to 2018. Table 2 will be the reference point for the asset management ratios shown above. Asset management ratios are a metric that indicates how a business uses the assets that it must generate revenue. By examining these ratios, it is an additional method for one to view how a business is performing. Inventory, fixed assets, and total assets are just a few forms of asset management ratios and will be the ones discussed here. Based on the three years, Walmart has very good numbers for the asset management ratios which look great for its shareholders wanting to invest in them. Their numbers are also very consistent and not sporadic, making them stable for an individual stock to invest in.
Inventory turnover helps understand how often a company turns over its inventory by selling and restocking the products. This is all calculated through the period that is covered. The lower the inventory turnover, the slower it takes for the business to sell the products. If the inventory turnover is too high, it can indicate a risk of stock outs. To find the inventory, it is calculated by dividing net sales by inventory. Based on table 2, we can see that Walmart’s inventory turnover from 2016 to 2018 was all in the 8s. For most business sectors, a good inventory turnover is considered between 5-10 which means Walmart is in good standing. This means they do not have the products sitting too long but also are selling them too fast and have nothing on the shelves. Their score is likely good because they have been operating for so long and are able to maintain this number well. Next let’s look at the fixed asset turnover. This ratio was all in the 3’s for Walmart between the years being examined. This asset turnover helps measure the efficiency of a business in the use of its fixed assets to produce sales. It is calculated by the equation, sales divided by fixed assets. This number is considered good or bad based on the size of a company. In normal standard companies a good ratio would be between .25 and .5. Based on these numbers Walmart is well ahead of the game, although Walmart is not your average sized company, so it is harder to evaluate until we compare it to its peers. The last asset management ratio we can look at in table 2 is the total asset turnover which Walmart has consistently stayed in the mid 2 ’s for these three years. The total asset turnover “is a ratio that measures the efficiency of a company in the use of all its assets to produce sales. It gives a summary of all the asset management turnover ratios.” (Sinra, 2023) When determining if the company has a good total asset turnover, the higher the better. This is calculated by dividing the sales by the total assets. A good total asset turnover ratio in the retail
on the numbers we have found for table 3, Walmart has had a good return on assets ratio although the number has decreased in 2018, although that could just be an anomaly. Return on equity shoes the returns made on equity investments. The higher the return on equity, it could indicate to its investors that the company is a good investment. This profit ratio is calculated by dividing net income by shareholders’ equity. A good return on equity ratio may be above 15%. Anything above 30% could mean the company is doing exceptional. When looking at the numbers in table 3, we can see Walmart has been performing good in this ratio, although just like return on assets, their numbers are decreasing. Table 4: Market Ratios 2018 2017 2016 Price Earnings Ratio 19.29 13.35 12. Market to Book 3.62 2.21 2. Moving forward to the market ratios, we will look at the price to earnings ratio and market to book, this will be referred to as table 4. Thes ratios help determine where a stock stands whether it is undervalued or overvalued. The price to earnings ratio shows what the market is willing to pay for the stock of a business based on its earnings of them. The Price to earnings ratio is calculated by dividing the market value per share by the earnings per share. Based on the numbers in table 4 above, Walmart has increased year over year. The market to book ratio, also known as the price, to book ratio, is a ratio that plays the same role as the price to earnings ratio as it evaluates the stock. This is to see if the company is worth what the stock price is for the company. This is calculated as market capitalization divides
the total book value. Just like the P/E ratio, Walmart has steadily improved year over year for this ratio. A ratio under 1 means the stock is undervalued. Most investors consider a ratio less then 3 to be in good standing and the stock is undervalued. This would make it a good investment. Looking at the numbers for Walmart it may have been considered undervalued of a stock price for 2016 to 2017 but grew a sizable amount in 2018 making it valued around what it was worth. Financials Today For this assignment, the financials for today will be as 2019 due to that is what the example template has it at. Walmart will be compared to Amazon as it is one of the biggest competitors to them. Each of these businesses are doing well when asked anyone in America, these two would likely be named as 2 of the top businesses. Table 5: Liquidity & Debt Ratios 2019 Competition Amazon Current .8620 1. Quick .2189. Total Debt to Total Assets 59.49% or .5949. First, we can see that each liquid and debt ratio increased from 2018 to 2019. This is good as the higher the number the better for these three ratios. Next let’s compare the current ratio as Walmart has a .8620 and Amazon has slightly higher at 1.097. For the quick ratio Amazon also has a higher ratio of .83 compared to Walmart’s at .22. For the total debt to total assets ratio, Walmart has a much higher ratio of .59 compared to Amazon’s .23. This means that Amazon does a better job at meeting its short-term obligations than Walmart.
4.13 compared to Walmart’s at 2.81. Walmart has a much higher return on assets at 6.86% compared to Amazon’s 5.14% Lastly, Amazon has a higher return on equity at 18.67% compared to Walmart’s at 17.54%. This just goes to show how competitive Amazon is with Walmart. Regardless to say these numbers are both good and would make them both appear to be great investment opportunities. Table 8: Market Ratios 2019 Competition Amazon Price Earnings Ratio 14.92 74. Market to Book 2.58 18. First things first, when comparing 2019 to 2018, Walmart’s numbers are better as they decreased from 2018. Remember when the market to book ratio is below 3, it means it is good standing. While looking at the last table, table 8, we can see some very different numbers as Walmart has a much lower price earnings ratio of 14.92 compared to Amazon’s 74.14. Amazon also beats Walmart in the market to book ratio of having 18.05 compared to 2.58. Based on these numbers we can see that this is better for Walmart having the lower numbers. This means they have a stock price that is much more worth buying than Amazon’s. Amazon’s is extremely overvalued for the year 2019, whereas Walmart’s is under 3 for market to book making it undervalued. This means Walmart was a much better investment option for this year.
Financial Future As one could imagine knowing how successful as a corporation Walmart is, it makes a very good investment. Year after year it has a had solid return on investment. The outlook for the company continues for new ways to expand and grow. When looking at the financial numbers of annual revenue growth rate, the annual growth rate increased 6.72 percent for year 2021 after covid. Then it increased 2.43% in 2022 and then another big increase in 2023 at 6.73%. This number is calculated with the year not quite over yet. I estimated the growth rate to be 5.5% for the year 2024 due to it being in the middle of these 3 years combined. Thes estimated growth of 5.5% for the year 2024 will have a countering effect on the stock price and make the price per share increase to 184.29. I think this is a more than reasonable growth rate based on the direction Walmart is going and the way the economy is currently performing in a bull market. Also, with the rise of inflation over the last few years, I would also expect the revenue to continue to grow as the prices of goods and services have increased as a result. Another point to consider is with the ratios presented it proved that Walmart’s stock is believed to be undervalued with it having a market to book ratio under 3. This would predict it has some catching up to do to get to where it should be per price per share.
References Subramanyam, K., & Wild, J. (2013). Financial Statement Analysis ( 11 th ed.). McGraw-Hill Learning Solutions. https://purdueuniversityglobal.vitalsource.com/books/125963955X The Editors of Encyclopedia Brittannica. (2023, December 16). Walmart. Encyclopædia Britannica. https://www.britannica.com/topic/Walmart Seth, S. (2023, December 14). Quick ratio formula with examples, pros and cons. Investopedia. https://www.investopedia.com/terms/q/quickratio.asp Sinra. (2023, February 26). Asset management ratios: Definition, formula, example, more. Wikiaccounting. https://www.wikiaccounting.com/asset-management-ratios/ Vipond, T. (2023a, November 23). Current ratio formula. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/current-ratio-formula/ Walmart,Inc.(n.d.).https://www.msn.com/enus/money/stockdetails/financials/fi126.1.WMT.NYS Walmart financial ratios for analysis 2009-2023: WMT. Macrotrends. (n.d.). https://www.macrotrends.net/stocks/charts/WMT/walmart/financial-ratios
