PA 2 Paper - Financial Management

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Running head: WALMART FINANCIAL ANALYSIS 1

WALMART FINANCIAL ANALYSIS 2

Wal-Mart financial analysis

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Any investor in the business, must measure how his/her business is performing financially. It is a dream of every investor to stay in the business and make good profits thus every effort put into the business works towards this business goal of continuity and profitability (Tracy, 2012). For this reason the investor must ensure that his business is healthy financially and to be sure, a financial analysis must be done. This analysis will help the investor evaluate his business to determine whether the business is solvent and profitable or otherwise. This analysis is done using ratios like profitability ratios, liquidity ratios, leverage ratios etc.

Wal-Mart Company is an American company that deals with retailing of different merchandise like food staff, clothing, toys etc. it was founded in 1950 by Sam Walton in Bentonville (Tracy, 2012). The company has its operations in different countries globally. It is a listed company in NYSE trading in many shares in the market. The following are financial analysis of the company for the year 2020.

i) Debt ratio

Debt ratio shows how much the company’s assets are financed through debt. A higher percentage shows that the company is highly leveraged. It is express as a percentage (Drake & Fabozzi, 2012). A ratio that is greater than 100% indicates that most of the company’s assets are funded through debts in other words the company has more debts as compared to assets. It is calculated as shown:

i) Debt ratio

Debt ratio= Total debts/Assetsx100

Total debt = (236495-81552) =154,943

Total assets=236495

Debt ratio = 154,943/236495x100 = 65%

In the year 2020 Wal-Mart Company had more assets than debts thus its risk level was low.

ii) Debt to equity ratio

The debt to equity ratio indicates how the company is able to finance its debt using the owner net worth. It also shows how stable a company is in terms of financing its debt through equity (Drake & Fabozzi, 2012). The ideal ratio is believed to be between 1 and 1.5. However, the ratio varies from one industry to another depending on the operations. A ratio of 2 would be good for a company in manufacturing industry. It is calculated as shown.

Debt to equity ratio= total debt / equity

154,943/81552

= 1.8

This means that Wal-Mart need to reduce its borrowing as it is already highly leveraged.

iii) Return on assets

The ratio indicates how the company’s assets were used to generate profits (Tracy, 2012). A higher number shows how efficient the management is in terms of using the company’s assets to ensure the company remains profitable. Return on asset is calculated as a percentage of net profit to total assets’

ROA = Net profit/ total assets

14881/236495 x100

= 6.3%

This means that Wal-Mart Company earned $6.3 cent for every dollar invested in 2020.

Iv) Return on equity

A good ratio is between 10% and 14%. However it is important to know the ROE for the other competing companies. In this case it the best ROE should be the same or slightly higher than the competing companies’ (Tracy, 2012). A higher ROE of a company compared to its peer indicates that the stock of a company is likely to grow. It is calculated as shown.

ROE= Net income/ total equity

=14881/81552x100 =18.24%

In 2020 Wal-Mart Company had a very good Return On equity above the recommended. For an investor this ratio is enticing.

v) Current ratio

It is a liquidity ratio that indicates how well the company is able to meet its short term obligations. It shows the number of time a company is able to settles it short term debts (Tracy, 2012). A very high ratio will indicate that a company is holding too much idle cash. The ideal ratio is 2. It is calculated as below.

Current assets/current liabilities

=61806/77790 =0.79

This ratio is not very good for Wal-Mart as it is below 1, it means that Wal-Mart does is not liquid enough to finance its short term obligations.

vi) Quick ratio

It is also a liquidity ratio; it involves the assets that are easily convertible to generate cash (Tracy, 2012). It indicates the number of times an entity can pay its short term debts using its most liquid assets. The ideal ratio is 1, however, the greater the number the more the company is able to cater for its short term debt.

Quick ratio= Current asset – closing stock/Current liability

61806-44435=17,371

= 17371/77790 =0.2

This shows that Wal-Mart Company is at risk of not being able to meet its current obligation

vii) Inventory turn over

This shows the number of times a company is able to convert its inventory into cash (Tracy, 2012). This ratio helps the company make better decision on pricing, marketing, producing and purchasing. This will reduce over stocking and may help in reducing the storage cost.

Inventory turnover= COS/ average stock

Average stock = Opening stock + closing stock/2

44435+44269/2= 44,352

394605/44,352 =9 times

This means that the company turned its stock into cash or sales 9 times

viii) Days in inventory

This ratio show how many days the stock remained in the company (Tracy, 2012). A better ratio indicates few days that the stock remained in the business. It is calculated as below.

Average stock / COS X365

44,352/394605x365=41 days

This means that Wal-Mart holds it stock for 41 days

ix) Accounts receivable turn over

This ratio show how many times the company was able to collect the accounts receivable. In other word the number of times a business entity is able to convert its credit sales to sales.

Accounts receivables turn over = Credit sales/ Av debtors

Average debtors = opening debtors + closing debtors /2

6283+6284/2=6283.5

6284/6283.5=1

This ratio indicates a very low turn ratio as it is below 7.8 which is the most preferable ratio.

x) Accounts receivable cycle in days

This show how long the business allowed its debtors to pay the debts (Quiry et al., 2011). The longer the period may put the business in liquidity risk. A shorter period is better.

Receivable cycle = average debtors/credit sales x365

=6283.5/6284 x365= 364

This means the company gave its debtors 364 days to pay their debts. This ratio is not very healthy.

xi) Accounts payable turnover

This ratio shows that the business entity is more efficient when the rate at which the firm pays its creditors is high (Ittelson, 2009,). It shows the number of times the business paid its creditors.

Accounts payable turnover = credit purchases/ average creditors

46973+47060/2=47016.5

46973/47016.5= 0.99

This means that the company was not able to pay its creditors on time.

xii) Accounts payable cycle

This indicates the period in which the creditors allowed the business to pay for the supplies ("Basics of financial statement analysis," 2019). When this period is slightly higher than accounts receivable cycle it enables the company have a better circulation of cash in the business.

Accounts payable cycle = Av Creditors / credit purchasex365

47061.5/46973x365=365 days

The time taken to pay the debtors is equal to the time taken to pay the creditors

xiii) Earnings per share

This ratio shows how well a company is able to reward its shareholders. When the ratio is higher it means that the company is profitable and worth investing in. it is calculated as below

EPS = Net profit/ outstanding shares

14881/81552

=0.2

This ratio is not enticing to the investors.

xiv) Price to earnings ratio

This ratio shows a share’s market value as compared to its peer (Drake & Fabozzi, 2012,). When this ratio is high it means that the share price may be overvalued. A low ratio indicates that the share may be undervalued. It is calculated as under.

PE = share price/ earnings per share

0.7/0.2=0.3

This ratio shows that the stock was overvalued.

xv) Cash conversion cycle

This ratio show the time an entity requires to makes sales the time taken to collect its debts and time taken its bills. A steady CCC shows a good sign.

CCC= DIO + DSO –DPO

CCC=41+364-365=40

xvi) Working capital

This ratio shows the business liquidity. A good working capital is a sign that the company has a potential of future growth (Drake & Fabozzi, 2012). When the currents assets are more than the current liabilities then the company is able to pay its obligations.

Working capital = Current asset- current liabilities

61806-77790= -15,984

It means that this company is almost going to bankruptcy.

xvii) DuPont Identity

This analysis shows the factors that affect Return on Equity (Collis, 2016). These factors are profit margin; equity multiplier and asset turn over. This analysis helps the mangers to identify the cause of declining or rising of ROE, from the three factors.

DuPont = G.P x asset turn over x equity multiplier

G.P.M= G.P/ sales

Equity multiplier = total assets/ equity

236497/81552 = 2.9

20568/519926x100= 4%

0.04x0.063x 2.9= 7.3

Conclusion

From the analysis performed above, we realize that in the year 2020, Wal-Mart Company did not have very good liquidity (Tracy, 2012). This may be a serious problem as it may lead to the company’s insolvency. This problem could be attributed to the many days the stocks are held within the business and the many days that debtors stay with the money. It is therefore important for the company to improve in these areas to increase its liquidity.

References

Basics of financial statement analysis. (2019). Financial Statements. https://doi.org/10.24053/9783739880143-73

Collis, J. (2016). Introduction to financial accounting. Financial Accounting, 1-14. https://doi.org/10.1007/978-1-137-54023-2_1

Drake, P. P., & Fabozzi, F. J. (2012). Analysis of financial statements. John Wiley & Sons.

Ittelson, T. R. (2009). Financial statements: A step-by-step guide to understanding and creating financial reports. Red Wheel/Weiser.

Quiry, P., Vernimmen, P., Dallocchio, M., Fur, Y. L., & Salvi, A. (2011). Corporate finance: Theory and practice. John Wiley & Sons.

Tracy, A. (2012). Ratio analysis fundamentals: How 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis.net

Wal-Mart link

(n.d.). 403 Forbidden. https://s2.q4cdn.com/056532643/files/doc_financials/2020/ar/Walmart_2020_Annual_Report.pdf