Ratio Analysis of Walmart Inc.

The purpose of this paper is to analyse the ratios and stock movement of Walmart Inc.  The firm is a multinational corporation based in the United States and is listed in the New York Stock Exchange. Walmart Inc. is engaged in retail and wholesale operations through a chain of supermarkets, grocery stores, hypermarkets and supercenters. Some of its main competitors within and outside the United States are; Amazon, Alibaba, Lowe’s, Home Depot, Costos and Ikea among others.

 According to the annual report (2017), the firm has e-commerce websites in 11 countries. It operates 11,695 stores globally in 28 counties. The revenue in 2017 was $ 485.9 billion and the operating cash flow was $31.5 billion. Walmart Inc. has been profitable for the last 5 years since 2013. From the table below, the operating profit has been fluctuating over the years but the firm still remains profitable. In the five years, the highest net income was in 2013 at $ 27,725 billion and the lowest was in 2017 at $ 22,764 billion. Therefore, the firm is able to meet its operating expenses and retain 3% of the sales as net income.

Table 1. Adopted from Annual Report 2017

Year

2013

2014

2015

2016

2017

Operating Profit

27725

26872

27147

24105

22764

% change

-3.08%

1.02%

-11.21%

-5.56%

The table below shows the dividend per share over five years. The highest DPS was $2 in 2017 and the lowest was $1.59 in 2013. Therefore, the firm is generating a return to its shareholders.

Table 2. Adopted from Annual Report 2017

Year

2013

2014

2015

2016

2017

DPS

1.59

1.88

1.92

1.96

2

Part A

 This part deals with stock movement and trends in 2017. The table below shows that the highest opening share price in January 2017 was $97.61, the highest low was $96.14 and the highest adjusted close was $97.0388.  The lowest in each category was in December. The lowest opening price was $ 66.46, the lowest closing was $70.93 and the lowest adjusted closing stock price was $ 68.3025.

The high prices in January and low prices in December can be explained by the January effect hypothesis. In December, investors engage in tax loss harvesting activities to offset the capital gains in that particular year. Investment and mutual funds managers purchase the shares and stocks of well-performing individuals and institutional investors in December and eliminate the poor and low performing stocks in a process known as window dressing ((Brigham et al. 20). The investors use the cash bonuses received in December to make purchases and investments in January raising the share prices. Some believe that the first month of the year is an excellent period to begin an investment project alongside the New Year’s resolutions.

Table 3. Adopted from Finance.yahoo.com

Open

High

Low

Close

Adjusted Close

High

97.61

100.13

96.14

98.75

97.0388

Low

66.46

69.63

65.28

70.93

68.3025

Ratio Analysis

Liquidity Ratios

            Ratio analysis is the quantification and comparison of the financial aspect of the financial statements of a firm such as the balance sheet. The current ratio is the quotient of short term (current) assets to short term liabilities (current liabilities) (Weygandt and Kieso 137). In 2017, the ratio was 0.86.  As such, the current assets are 0.8 times the current liabilities. However, the ratio is still below the recommended mix of 1:1. Therefore, the firm may not be able to meet its dues and maturing obligations promptly. The working capital is poor.

The quick (acid test) ratio excludes inventory from the calculation. The acid test ratio is 0:21. The ratio indicates that Walmart Inc. has over-invested in stock. An over-investment in inventory worsens the working capital and liquidity position as a big proportion of cash is held in stock and cannot be quickly converted into cash. The company should maintain an optimal mix and ratio of current assets to liabilities to improve cash flow and liquidity position.

Efficiency Ratios

The fixed assets turnover is the ratio of revenue to the total non-current assets. The ratio is 3.44 times which shows that the non-current assets are well used to generate revenue (Wahlen and Bradshaw 29). The total assets turnover is the ratio of revenue to total fixed and current assets. In 2017, the ratio was 2.44 times which is higher than the industrial Standard and Poor 500 (S&P 500) of 1.99 times in the same year. Therefore, we can conclude that the efficacy level in the utilization of both current and non-current assets in revenue generation is high.

Profitability Ratios

The total debt to total assets ratio measures the percentage or extent of assets that are financed using debt. The percentage of assets acquired through debt is 60.87%. The ratio is high which is an indication that Walmart Inc. is using more debt than equity to finance assets acquisition.  Debt is always cheaper than equity. However, debt repayment may be affected by inflation and the firm may end up paying more than it borrowed. Therefore, the firm should maintain an optimal capital mix to enhance sustainable growth.

The gross profit margin is the ratio of gross profit to sales. As such, the profit margin in 2017 was 25.65%. Therefore, the percentage of sales that remains after paying the production costs in the profit margin. The margin is very low compared to the industrial averages of 52.72% which is two times the margin of the entity. The return on total assets measures the efficiency with which a firm uses the sum of fixed assets and net working capital (capital employed) to generate a return to its shareholders (Warren and Jones 123. The ratio is 6.86% which is slightly lower to the industry average of 8.52%.

The return to equity is the ratio of net profit after tax to owners’ equity. It measures the efficiency with which a firm use non-owner funds to generate returns to its owners. The ratio is 17.54% which is lower than the industry average of 26.13%. Price to earnings ratio is measured by dividing the share price and the earnings per share. The share price used is the stock price in December 2017. The P/E ratio is 22.15 times which is low compared to the industry average of 27.44 times. The market to book ratio is given by the ratio of market capitalization to the net book value. The difference between total assets and liabilities yields the net book value. The ratio is 3.7 times which is low compared to the industry average of 4.5 times.

Conclusion

            In summary, we can conclude that Walmart Inc. has been performing well financially in last five years. However, there a decline in operating profit in 2016 and 2017. The efficiency ratios are higher than the industry averages. However, profitability and liquidity ratios are low compared to the industrial averages which mean that the management is not very effective in generating returns to the shareholders. Therefore, a new management team with more skills, experience and competence should be hired to improve the ratios. Alternatively, a new business model may be adapted to enhance business re-engineering and restructuring.

Works Cited

Annual report 2017. http://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR-(1).pdf

Brigham, Eugene F., et al. Financial Management: Theory and Practice, Canadian Edition. Nelson Education, 2016.

Wahlen, James, Stephen Baginski, and Mark Bradshaw. Financial reporting, financial statement analysis and valuation. Nelson Education, 2014.

Warren, Carl S., and Jeff Jones. Corporate financial accounting. Cengage Learning, 2018.

Weygandt, Jerry J., Paul D. Kimmel, and Donald E. Kieso. Financial & managerial accounting. John Wiley & Sons, 2015.

Appendix 1: Ratio Analysis

Current ratio

0.861956

Quick ratio

0.218787

Fixed assets turnover

3.442587

Total assets turnover

2.443722

Total debt to total assets

60.87%

Profit margin on sales

25.65%

Return on total assets

6.86%

Return on common equity

17.54%

Price/earnings ratio

22.15497

Market/book ratio

3.760251

Appendix II: Stock Chart