Accounting Assignment: Walmart Financial Analysis

Walmart Financial Analysis
Student’s Name
Institution Affiliation
Walmart Financial Analysis
Introduction
On July 2, 1962, Sam Walton, a renowned business man launched Walmart, which has become the largest and among the well performing stores in the retailer industry. The company has the widest market coverage with over 11,100 stores in 27 countries compared to its competitors. According to the S&P 500 Index, the Wal-Mart features among the top ten company’s dues to its market cap of over $275 billion (Walamrt , 2016). In the financial year 2012, the company recorded a strong financial performance and increased its revenue by a significant margin of 5.9% to $443.9 billion (Walamrt , 2016). As at 2016, the company had generated net turnover of approximately $483 billion. In addition, Wal-Mart’s operating income increased by 4% to $26.6 billion. Notably, the company’s earnings per share has remain steady between 5.00 and 4.3 over the last three years. However, the company faces some stiff competition from other large players in the industry such as Costco, Kroger, Best Buy and Target. Despite the intensive competition, the company has remained a big player in the market due to its large economies of scale, wide market coverage and good business-level strategy. Walmart has growing and expanding pattern and it’s dominating the industry due to its witty approaches comparatively to competitors. The company financial performance has experienced intermittent progress over the years. Therefore, to demonstrate this, the paper seeks to analyze, Walmart key financial ratios in compassion with its major competitors, namely Target and Costco to summarize the financial statements and investigate the company performance trend based on its 10K reports for the last three financial years.
Financial Ratios
Profitability Analysis ()

Walmart

Costco

Target

Profitability Ratios

2014

2015

2016

2014

2015

2016

2014

2015

2016

Gross Margin %

24.82

24.83

25.67

12.56

13.02

13.32

29.80

29.39

29.53

Profit Margin %

3.46

3.37

3.5

1.83

2.05

1.98

2.77

-2.25

4.56

Operating Margin

5.6

5.6

5.0

2.86

3.12

3.09

6.70

6.25

6.65

Return on Asset %

7.86

8.02

7.29

6.50

7.20

7.10

4.25

-3.82

8.26

Return on Equity %

21.00

20.76

18.15

17.78

20.74

20.71

12.02

-10.82

24.95

Basing on the profitability ratio analysis over the three years, Walmart is far much better than Costco Wholesale but not better than Target Corp. Walmart gross margin for the fiscal year ending in 31 December 2016 was 25.67 percent. This ratio represented an increase from 24.82 and 24.83 percent in the year 2014 and 2015 respectively (Guru, 2017). The norm of the industry is 26 percent; therefore it is fair to say that Walmart’s operating performance is indicated by the gross margin is to some extent below the industry and this implies that the operation efficiency of Walmart. In relation to the operating margin, the company recorded a margin of 5.0 percent in the 2016, and this represented a significant drop from the 5.6 percent both in 2014 and 2015. However, the industry norm is 8.3 percent, thus the company profitability as indicated by the operating margin is not superior to the industry norm hence reflecting the company’s operating inefficiency. This is the same with Costco and Target but the latter performance appeared somewhat closer to the industry norm.
Building on the Return on Assets (ROA), the company’s ROA for the fiscal year ending 31 Dec 2016 was 7.29 percent (Guru, 2017). This percentage represented a decrease from 7.82 and 8.02 percent in the two subsequent years. Despite the reduction, Walmart performance can be termed as efficient as its ROA has remained above 6.5, which is the industry required norm. In comparison, Costco also appears to be operating efficiently a ROA of above 6.5 over the last three years, On the other hand, Target appeared to have struggled in the fiscal year 2014 and 2015 as its ROA was below 6.5. Lastly, Walmart’s Return on Equity (ROE) for the fiscal year ending 2016 was 18.15, lower than the ROE for Target and Costco in the same (Nasdaq, 2017). The 2016 ROE for Walmart was a representation of a drop from 21.00 and 20.76 percent in 2014 and 2015 respectively.
Liquidity Ratios ()

Walmart

Costco

Target

Liquidity Ratios

2014

2015

2016

2014

2015

2016

2014

2015

2016

Current Ratio

0.88

0.97

0.93

1.12

1.01

0.98

0.91

1.16

0.94

Quick Ratio

0.24

0.28

0.24

0.63

0.18

0.40

0.26

0.46

0.44

Cash Ratio

0.13

0.18

0.17

1.44

1.05

0.92

0.05

0.17

0.20

Net Working Capital

-2,823

2295

2117

665

547

-1010

2524

176

490

From the table, Walmart has the best liquidity position compared to both Costco and Target. However, as much many of the ratios shows the company is operating efficiently, its growth seems to be stagnating This is indicated by the Walmart‘s quick ratio of 0.24, which has remained steady for the last 3 years (Marcilla, 2014). Although, it is hard to tell whether the company is overleveraged, the unchanging situation of the quick ratio is an indication that the company has not improved on maintaining and growing of sales, speed of honoring its liabilities when the fall due as well as no improvement in the speed of converting receivables into cash. On the other hand, for both Costco and Target, they demonstrate an increasing quick ratio, which is an indication that they are improving on their speed in honoring financial obligations as well as the speed of collecting receivable.
In relation to the change in working capital, Walmart had a negative working capital in the fiscal year 2014 but later improved in 2015 and 2016. As much as the Walmart’s working capital looks almost two fold in values compared to that of Target, the negative record amount on 2014 is an indication that the company had faced problems to meet its obligations as their current assets against current liabilities was in deficiency. Similarly, Costco also exhibits similar problems with a worst performance in 2016 fiscal year with a negative working capital of -1010. Target Corporation seems to have a better liquidity the both Walmart and Costco because it has been recording positive working capital.
As at 2016, Walmart had a current ratio of 0.93, and indication that the company faces problems to meet its current obligations. However, low values of the current ratio does not indicate that Walmart has a critical problem. In such a situation, can still overcome this problem by borrowing the prospects to meet current obligations. The recommended current ratio is 1, therefore, as at 2016, all Walmart, Costco and Target recorded a current ratio that is below the industry norm, and this suggests that they are unable to pay their liabilities when they fall due without borrowing (Guru, 2017). For example, the company many find it difficult to clear with creditors who are expecting to be paid in the next 12 months. Sometimes, the issue of low current ratio tend to scare away potential prospectors who are always concerned on companies’ financial positions. In other words, Walmart is not in good financial health, however, it does not mean the company is on the verge of going bankrupt as there are other alternative ways accessing financing. Concisely, all the liquidity ratios suggest that Walmart is not healthy financially.
Valuation and Growth Ratios ()

Walmart

Costco

Target

Years

2014

2015

2016

2014

2015

2016

2014

2015

2016

Earnings per Share

4.88

5.05

4.57

4.65

5.37

5.33

- 2.56

5.31

4.70

Price-Earnings Ratio

15.30

16.97

14.49

25.98

26.08

30.35

18.45

00.00

13.64

Dividend Pay-out Ratio

0.39

0.39

0.43

0.29

0.28

0.38

0.98

0.50

0.41

Dividend Yield Ratio %

2.00

2.01

2.79

1.06

1.64

1.07

0.60

0.60

0.56

Book Value per Share

23.59

25.22

25.47

28.11

24.24

27.61

25.29

21.86

21.52

Market Cap (in Millions)

241440

274315

209830

52994

61335

70918

36352

47126

43613

Basing on the historical data, the valuation and growth ratios gives a clear status on Walmart’s financial health. To begin with the earning per share (EPS) ratio with non-recurring items, the ratio tells the amount of earnings per outstanding share of the Walmart stocks as well as the power of the company (Nasdaq, 2017). During the last 12 months, the company’s average EPS and growth rate was -4.20 percent per annum. Over the last 3 years, Walmart has recorded an average EPS and growth rate was -3.30 percent. Benchmarked with the two major competitors. Target and Costco, the former has recorded an average EPS and growth rate of 2.90 percent in the past 3 years whereas the latter had an average EPS and growth rate of 4.80 percent per year within the last 3 years (Walmart, 2015). This is an indication that Walmart stock values is struggling in the market and experience a stunted growth due to its lowest growth rate as compared to competitors. However, a company’s EPS is not a better indicator of its earnings power since it can be manipulated easily by adjusting the amortization and depreciation rates or the non-recurring items. Therefore, to establish the accurate Walmart’s earning power, the EPS is compared with the company’s cash flow per share over long term. In this case, Walmart’s cash flow per share was 3.09, 5.05 and 4.95 against the EPS 4.88, 5.05 and 4.57 in the fiscal years 2014, 2015 and 2016 respectively (Walmart, 2016). Therefore, the EPS in 2016 was slightly lower than cash flow per share in the same year and this suggestion that Walmart’s stock values is not lucrative.
Considering the price earnings (PE) ratio, a function that is used in the valuation if stocks and tell if it is undervalued or overvalued (Brunn, 2012). Importantly, the PE ratio measure how long it takes for the company to earn the value they paid for its stock. Also the PE tells on how much will common stocks’ investors pay for per dollar of their current earnings. From the historical information, Walmart’s PE ratio declined from 16.97 to 14.49 in 2015 and 2016 respectively, and even declined in the onset of 2017. This is also a good signings that the both the company and the investors earning may take lesser period in 2016 and 2017 than in 2015 and 2014. According to study by Elroy Dimson, Paul Marsh, and Mike Staunton of Princeton University (2012), a lower PE ratio is more attractive than a higher PE ratio as long as long as the PE ratio value is positive. In addition, the stock with similar PE ratio and faster growth rate is similarly attractive,
Under the dividend pay our ratio, a function that determines the proportion of the earnings that is distributed is distributed to its owners after a significant portion is set aside for the next financial year (Böhm, 2011). Within the last 12 months, Walmart recorded a dividend per share growth a rate of 2.0 percent and 2.10 percent with the last 3 years. The dividend payout ratio was 0.36, 0.36 and 0.43 in the past 3 years respectively (Guru, 2017). This shows the company had steady dividend payout ratio in 2014 and 2015 but increased in 2016 and 2017. This suggest that Walmart stocks performance has been improving and greater deal for investors compared to that of Target and Costco which are constantly changing and declining.
Examining the dividend yield ratio, a function that determines on how Walmart pays out its dividend to the owners’ depending on the share price value. In 2015, the company suffered a loss on its market value of up to 25 percent. Walmart’s underperformance based on the drop in the market value was triggered by its drop in dividend yield that only trend up in 2016 and 2017 (Nasdaq, 2017). However, after the increment in the yield, Walmart has only managed to a 4 percent increase in its annual dividend. The dividend yield improved in 2016 and 2017 due to a significant drop in the stock prices. Therefore, the improvement is a good sign for the company and investors as it boots the dividend record and creates attractive stocks for income investors (Nasdaq, 2017).
Lastly, the company’s market capitalization is the actual worth of the company, which is determined by multiplying the share prices to the number of outstanding shares. From the historical data, Walmart market cap increased from 241,440 to 274,315, and later dropped to 209,830 in 2016. This is an indication that the company’s real price is dropping a sign of lack of growth. Compared to Costco, both Walmart and Target exhibit a declining market capitalization and this as a cautious signal for investors.
Leverage Rations

Walmart

Costco

Target

Years

2014

2015

2016

2014

2015

2016

2014

2015

2016

Debt Ratio

0.22

0.21

0.22

0.15

0.15

0.12

0.26

0.31

0.30

Equity Ratio

0.37

0.40

0.40

0.37

0.32

0.36

0.36

0.34

0.32

Debt-Equity-Ratio

0.74

0.62

0.59

0.41

0.58

0.43

0.78

0.91

0.99

Interest coverage

11.51

11.03

9.46

28.50

29.23

27.23

4.24

5.14

8.09

Leverage ratios refers to the financial functions that measures how balances its equity and debt to spearhead the operations. The tool specifically a tool that checks on how the debt source of capital mixes with the company’s equity capital to meet general business operations and meeting its financial obligations (Corona, 2014). Debt ratio is a function that measures the portion of the company assets that is financed by debt which is computed dividing total liability against total assets. Based on the historical data (Walmart, 2016). Walmart long term debt to assets ratio decline to 0.21 in 2015 and the recent data also show a decline from 0.22 to 0.21 in 2017. This is an indication that Walmart is progressively becoming independent and less reliance on debts to finance their assets and grow their condition. Similarly, the two competitors are displaying the same trend, suggesting that all players within the the industry are aiming to become less dependent on debt capital.
Equity ratio refers to a ratio function that measures the proportion of a firm’s assets that is owned by shareholders out of the total assets This calculated by dividing the shareholders tangible equity equity against the a company’s total assets. For the quarter of 2017, Walmart’s equity ratio was 0.39, and this a decline according to the historical data, whereby the company recorded higher equity ratio of 0.40 in both 2015 and 2016 fiscal years (Marcilla, 2014). On the other hand, Costco and Target presented fluctuating trends during the past 3 years. Notably, all the three rivals have had an equity ratio between 0.32 and 0.40, which is within the industry mean of 0.39 and median of 0.42.
Debt to Equity ratio is defined as the ratio function that assess a company’s capital structure to measure its financial levera...