Financial Performance of the US Leading Companies - Term Paper Example

?Introduction This research report analyzes one of the leading companies of United s, Wal-Mart. Wal-Mart is the leading retailer of the world and during the time of recession, the company has been able to perform well as the sales of the company did not decline but improved during this difficult time. During recession, the economic condition of United States along with many other economies suffered a lot, however few industries including retail industry of United States has been able to perform well during this time period. The report analyzes the financial performance as well as the economic indicators that could influence the company. In addition to this, the trends in the industry would be analyzed to identify pattern of the industry. The main purpose of the report would be to analyze whether Wal-Mart is profitable for investors to invest or not. Analysis The analysis part of the report would be divided into three main parts; economic analysis, industry analysis and financial analysis. Economic analysis The economic condition of United States and many other economies of the world have been deteriorated since the financial crisis of 2007. The GDP and GDP growth rate of many economies of the world decreased after the financial crisis, the unemployment level increased and the number of jobs seekers have increased drastically since 2007. In addition to this, the ratio of exports to imports have reduced therefore having a negative impact on the economies of the world. Therefore in such a difficult phase, Wal-Mart has been able to perform well and not only maintain its sales but improved the overall its sales and achieve growth. The time duration of people remaining unemployed has increased after the financial crisis. The following table indicates clearly the increase in the time people are unemployed since 2007. (Hill, 2011) With fewer jobs available in the market, the number of people quitting their jobs has reduced since 2007. The following graph shows the reduction in number of people voluntarily quitting their jobs: (Hill, 2011) After the recession, the number of people being laid-offs by private sector has increased. The following graph shows the increase in the layoffs of employees however this ratio has reduced in 2010. (Hill, 2011) Among all those who are unemployed, the ratio of youngsters aging from 25 years to 34 years is the highest. It indicates that employers are reluctant to hire fresh and new graduates and therefore this would have a negative impact in the long run on the economic condition of United States. The following graph shows the unemployment rate of different age groups since 2007. (Hill, 2011) Industry analysis The retail industry has been identified as a recession free industry as recession has not been able to make a severe impact on the industry. Instead of reduction in sales because of recession, some of the firms in the retail industry have improved their sales and achieved growth. Recession although reduced the buying power of consumers and therefore this increased the number of working hours of people so that they can earn more. However the changes in the recent years by the retailers have created several new opportunities for retailers and these retailers have capitalized on these changes to achieve growth. One of the major innovations in the recent years in the retail industry has been to introduce the concept of online shopping in the retail industry. Online retail industry is growing and it is in the growth stage of the product or industry life cycle. Therefore the sales of the industry would further grow and considering the nature of product and convenience provided by online shopping, the trend would continue for years. With changes in consumer preferences and convenience offered by online shopping, this attracted people and encouraged them to shop online. According to research conducted by Forrester Research Inc (2012) it has been found that the trend of online shopping would further increase in the years to come. In 2011, the total spending on online shopping is almost equal to $202 billion and this would grow up to $327 billion in the year 2016 therefore showing an improvement of almost 62% in five years (Internet Retailer, 2012). The ratio of online sales of retail industry to total sales of retail industry is almost 7% in the year 2011 and it would grow up to 9% in the year 2016. In addition to this the research conducted by Forrester Research Inc identified that the number of online consumers would increase from 167 million in 2012 to 192 million in the year 2016 (Internet Retailer, 2012). However, the important factor is that the spending per consumers would increase to $1,738 in 2016 from $1,207 in 2012 showing an increase of 44% (Internet Retailer, 2012). Therefore, all these statistics indicate that Wal-Mart would be able to do well in the years to come considering the trends of the market. However opening an online retail store is cheap and therefore new competitors can enter the market, but with the brand name like Wal-Mart and the quality of services it offers along with low prices offered by Wal-Mart it would be difficult for the new entrants to attract customers. Financial analysis The financial performance of Wal-Mart has been improving over the years and this indicates that the company has performed well over years (Walmart, 2011). In order to critically analyze the financial performance, the financial ratios of Wal-Mart from the year 2004 have been calculated from the annual statements of the company. The main reason to calculate the financial ratios from the year 2004 is to identify the trend and ratios of the company before the recession and after the recession. The financial ratios of Wal-Mart are below: Profit Margin: Profit Margin 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 3.67 3.57 3.3 3.44 3.55 3.59 3.6 3.53 Gross Profit Margin Gross Profit Margin 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 24.7 24.9 24.2 24 23.4 23.06 22.94 22.46 Operating Profit Margin Operating Margin 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 6.1 5.92 5.68 5.86 5.96 5.93 5.99 5.86 Return on Investment Return on Investment 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 13.66 13.52 13.3 13.14 13.28 14.11 14.78 14.91 Return on Assets Return on Assets 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 8.75 8.66 8.11 8.17 8.45 8.69 9.1 17.18 Return on Equity Return on Equity 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 22.09 21.34 20.47 20.45 21.36 21.9 22.08 20.76 Working Capital Working Capital 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 14,301 12,557 12,053 7,855 11,233 -5,002 -4,328 -3,419 Current Ratio Current Ratio 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 1.24 1.23 1.22 1.13 1.22 0.9 0.9 0.91 Quick Ratio Quick Ratio 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 0.62 0.64 0.6 0.54 0.57 0.24 0.21 0.21 Cash Ratio Cash Ratio 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 0.13 0.14 0.13 0.09 0.14 0.13 0.13 0.14 Fixed Assets Turnover Fixed Assets Turnover 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 9.56 11.13 11.61 11.19 11.22 11.82 14.2 14.99 Total Assets Turnover Total Assets Turnover 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 2.32 2.38 2.46 2.29 2.28 2.26 2.37 2.43 Debt Ratio Debt Ratio 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 62% 59% 60% 61% 59% 62% 59% 59% Debt to Equity Ratio Debt to equity Ratio 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 1.64 1.42 1.51 1.54 1.47 1.6 1.43 1.42 Interest Coverage Ratio Interest Coverage Ratio 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 12.75 12.74 11.98 12.22 13.44 15.81 17.33 18.06 Earnings per Share EPS 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart $4.18 $3.73 $3.35 $3.15 $2.93 $2.68 $2.41 $2.07 Dividends per Share DPS 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 1.21 1.09 0.95 0.88 0.67 0.6 0.52 0.36 Payout Ratio Payout Ratio 2011 2010 2009 2008 2007 2006 2005 2004 Wal-Mart 28.90% 29.20% 28.40% 27.90% 22.90% 22.40% 21.60% 17.40% Analyzing the Financial Ratios The financial performance of Wal-Mart has been improving. The profitability ratios show improvements over the years. Also the company has been improving in how it is utilizing its total assets as well as fixed assets. Also the earnings per share and dividend per share have been improving though the payout ratio is around 28% to 29% since 2008. The company also has been maintaining a consistent level of debt around 58% mark. Also the interest coverage ratio indicates that the company has sufficient earnings to meet its financial obligations. Forecasting the earnings of Wal-Mart Earnings per share The earnings per share of Wal-Mart have growth with a rate of 11.3% and 12.1% in the years 2010 and 2011 respectively (Walmart, 2011). Therefore to forecast the earnings per share of 2012, the average of these two growth rates have been taken and it has been multiplied by the EPS of 2011 to find out the estimated EPS of 2012. EPS $4.18 $3.73 $3.35 Growth 12.1% 11.3% Average 11.7% EPS 2012 $4.67 Price to Earnings ratio The P/E ratio of the company is 14.70 and the earnings per share of the company is $4.18 therefore the price of the shares of Wal-Mart would be $61.45. Technical Analysis The price movement of Wal-Mart shares for the last two years can be found in the graph below: (Yahoo!, 2012) This shows that there has been an upward movement of the price of Wal-Mart. the lower section of the graph above shows the volume of the stocks and it can be found that when the price of the Wal-Mart shares was relatively low from August to September 2011 the volume of the shares increased and this has been the pattern that when the prices are reduced slightly the volume increases. This shows that the investors have trust and believe that the shares of Wal-Mart can be profitable Conclusion and Recommendations The analysis shows that Wal-Mart has been performing well over the years and it would continue to do so. The financial ratios indicate that the financial results of the company would continue to improve in the years to come despite of the economy recovering from recession. The recession has not been able to impact the growth and sales of Wal-Mart. therefore Wal-Mart would a profitable option for investors to invest and yield good and stable returns. References Hill, T. (2011). The Economic Recession: Impact on Employment Trends and Retirement Patterns. Towers Watson, Retrieved June 8, 2012 from http://www.towerswatson.com/united-states/newsletters/insider/5086 Internet Retailer. (2012). E-retail spending to increase 62% by 2016. Retrieved June 8, 2012 from http://www.internetretailer.com/2012/02/27/e-retail-spending-increase-45-2016 Walmart. (2011). Financial Report. Retrieved June 9, 2012 from http://www.walmartstores.com/sites/AnnualReport/2011/financials/2011_Financials.pdf Yahoo!. (2012). Wal-Mart Stores Inc. Retrieved June 9, 2012 from http://finance.yahoo.com/echarts?s=WMT+Interactive#symbol=wmt;range=2y;compare=;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; Yahoo!. (2012). Wal-Mart Stores Inc. Retrieved June 9, 2012 from http://finance.yahoo.com/q?s=WMT Read More