Investment Management - Wal-Mart Investment Analysis - Case Study Example

Company Profile

Wal-Mart Stores, Inc. is an international company that operates many retail stores. The company was founded in 1945 and incorporated in 1969. The multinational company operates a chain of supermarkets, supercenters, discount stores, home improve stores, restaurants, apparel stores, hypermarkets, electronic stores, convenience stores and online retail stores such as samsclub.com and walmart.com.

A team of dedicated and experienced personnel governs the company. Douglas McMillon is the chief executive officer of the company while Charles M. Holley Jr. is the executive vice president. Other executives include three executive vice presidents of the company’s three segments namely: David Cheese wright as in-charge of the international division, Rosalind Gates Brewer as in-charge of Sam’s Club segment and Neil M. Ashe as in-charge of the United States division. The company stores offer a wide range of products such as meat, baby products, bakery, dairy, deli, grocery, frozen foods, alcoholic, and non-alcoholic beverages, video games, music, books, photo processing services, health and beauty aids, and electronics. The company also offers financial services through the operation of its banks. The company has its headquarters in Bentonville, Arkansas ("Growth, Profitability, and Financial Ratios for Wal-Mart Stores Inc. (WMT) from Morningstar.com", 2016).

Income Statement Items

2015

2014

2013

Sales

485.65B

476.29B

469.16B

Cost of Sales

365.09B

358.07B

352.49B

Gross Profits

120.57B

118.23B

116.67B

Operating profits

27.15B

28.88B

27.83B

Interest

2.46B

2.34B

2.25B

Net Income

16.18B

15.88B

17B

Source: Yahoo Finance

Balance sheet Items

2015

2014

2013

A/c receivables

6.78B

6.68B

6.77B

Inventories

45.14B

44.86B

43.8B

Total current assets

63.28B

61.19B

59.94B

Total Assets

203.71B

204.75B

203.11B

Total current liabilities

65.27B

69.35B

71.82B

Total liabilities

117.77B

121.92B

120.85B

Total Equity

85.94B

82.83B

82.26

Total Equity and Liabilities

203.71B

204.75

203.11B

Source: Yahoo Finance

Wal-Mart Debt Management Ratios

Debt Ratio:

Debt to Total Assets = Debt / Total Assets

In 2015; 117.77 / 203.71= 0.578

2014; 121.92/ 204.75 = 0.595

2013; 120.85/ 203.11= 0.595

The debt to assets ratio measures the leverage level of the company in relation to its assets. The debt to assets ratio was 0.595 in 2013, 0.595 in 2014, and 0.578 in 2015. This ratio has been decreasing in the three-year period implying that the company has been reducing its debt relative to the quantity of its total assets. The decrease of the company’s leverage is a good gesture of financial performance to the company’s investors. Investors and many other stakeholders are discouraged by high leverage in a company. The decrease in the leverage will therefore attract investors in the company, lowering the amount of returns that these investors will expect from the company. A decrease in this ratio over the years as indicated in trend might be brought by an increase of assets or a decrease in the company’s debt. The decrease in the debt ratio is an indication that the company is shifting from debt to equity to finance its operational activities (Fields, 2002).

Times interest earned = Earnings before Interest and Tax / Interest Expense

In 2015; 16.18/ 2.46= 6.58

2014; 15.88/ 2.41= 6.59

2013; 17/ 2.33= 7.30

The times interest earned ratios shows the easiness of the company in meeting its finance costs (Fields, 2002). This ratio is used to determine the company’s ability to meet its interest expenses using only its earnings before the deduction of interest and taxes. The company had a times interest earned ratio of 7.30 in 2013, 6.59 in 2014 and 6.58 in 2015. This implies that the company has had a decreasing trend in the ratio over three-year period. The drop in the times interest earned ratio implies that the company is currently facing a little difficulty in meeting its finance costs as compared to the past. However, the company has managed to maintain a high times interest earned ratio, which is an indication that it does not find difficulty meeting its finance cost. An increase in the ratio is an indication that the company has increased its debt over three years in question (Fields, 2002). The increase in the ratio can be due to a decrease in the company’s ratio over the years.

Wal-Mart Liquidity Ratios

Current ratio = current assets / current liabilities

In 2015: 63.28 / 65.27 = 0.97

2014: 61.19 / 69.35 = 0.88

2013: 59.94 / 71.82 = 0.84

The current ratio indicates the company’s ability to offset its current obligations with its current assets (Lee, 2004). The company had a current ratio of 0.84 in 2013, 0.88 in 2014, and 0.97 in 2015. The company has had a ratio of below one in all the three years. This is an indication that the company is not able to cover its current debt with its current assets. Failure to cover current debt with the current assets is an indication that the company has liquidity problems. The low current ratio is because of poor working capital management of the company. The company pays its debt fast while delays in collecting its receivable. The current ratio increases over the three-year period. The increase in the ratio is an indication that the company is improving its liquidity position. Improvement of the liquidity position is an indication of improvement of financial performance (Lee, 2004).

Quick Ratio = (Current assets – inventory) / current liabilities

In 2015: (63.28 – 45.14) / 65.27 = 0.278

2014: (61.19 – 44.86) / 69.35 = 0.235

2013: (59.94 – 43.8) / 71.82 = 0.225

The quick ratio measures the company’s ability to offset its current obligation with its current liquid assets (Lee, 2004). The liquid assets of the company are its current assets excluding inventory. The ratio is quite as it has followed the norm of the current ratio. The company’s quick ratio was 0.225 in 2013, 0.225 in 2014, and 0.278 in 2015. The ratio is far from reaching one, implying that the company cannot offset its current debt using its current liquid assets. The ratio has increased over the three-year period. This shows an improvement in the company’s liquidity position (Lee, 2004). The low quick ratio in the company is a result of poor working capital management, keeping of high inventory levels and overtrading.

Wal-Mart Profitability Ratios

Profit margin = (net profit / Sales) * 100%

In 2015; (16.18/ 485.65) * 100%= 3.33%

2014; (15. 88/ 476.29) * 100%= 3.33%

2013; (17/ 469.16) * 100% = 3.62%

The profit margin measures the company’s efficiency in converting revenue into actual profits (Rodgers, 2008). The net profit margin was 3.62% in 2013, 3.33% in 2014, and 3.33% in 2015. The ratio is quite low but the trend of the ratio gives a deeper insight of the ratio in this situation. The ratio has decreased in the three-year duration despite showing a decline in profitability. The decline in the profit margin is an indication of a decrease in the company’s profitability. The decrease in the ratio is a result of an increase in the company’s revenue and a decrease in the net profit (Rodgers, 2008). A decrease in the net profit is a result of the company’s increase in expenses.

Return on total assets = (net profit / total assets) * 100%

In 2015; (16.18/ 203.71) * 100%= 7.94%

2014; (15.88/ 204.75) * 100% = 7.75%

2013; (17/ 203.11) * 100% = 8.37%

The return on total assets measures the company’s ability to generate profits from the total investment of the company (Rodgers, 2008). The ratio was 8.37% in 2013, 7.75% in 2014, and 7.94% in 2015. The figures show that the ratio decreased in 2014 but increased in 2015. In Overall, there was decrease in the three-year period. The low return on assets ratio is a result of an increase in the company’s assets with a reduction in the profit. The current increase in the ratio shows an improvement in the company’s profitability (Rodgers, 2008).

Return on Equity = (net profit / equity) * 100%

In 2015; (16.18/ 85.94) * 100% = 18.83%

2014; (15.88/ 82.83) * 100% = 19.17%

2013; (17 / 82.26) * 100% = 20.67%

The return on equity ratio shows the efficiency of the company in utilizing the shareholder’s equity to generate profits (Rodgers, 2008). The ratio was 20.67% in 2013, 19.17% in 2014, and 18.83% in 2015. The decrease in the ratio is an indication that the company has reduced its profitability. The decrease in the ratio is because of the decrease in net profit and an increase in common equity.

Wal-Mart Capital Structure and Net Working Capital

A company’s capital structure describes the method of financing a company chooses to finance its operations (Rodgers, 2008). Wal-Mart’s capital structure involves both debt and equity as the company uses both to finance its operations. Wal-Mart’s Capital structure obtained from the company’s debt ratio. The company’s debt ratio is more than 0.5, implying that the company is relying more on debt to finance its operations as compared to equity. The decrease in the ratio is an indication that the company is substituting debt to equity (Rodgers, 2008).

The net working capital refers to a company’s liquidity. The term is used in showing the extent of a company’s liquid assets (Rodgers, 2008). The net working capital is determined through the subtraction of current liabilities from a company’s current assets (Rodgers, 2008). Wal-Mart’s net working capital for a three-year period is as follows:

Net Working Capital = Current assets – current liabilities

In 2015: 63.28 - 65.27 = -1.99

2014: 61.19 – 69.35 = -8.16

2013: 59.94 – 71.82 = -11.88

Wal-Mart’s net working capital has been negative throughout the three-year period implying that the company has a poor liquidity position. The company’s net working capital has increased in the in three-year duration showing that the company’s liquidity is improving.

Conclusion

Wal-Mart’ stock has been dropping constantly in the three months. The company’s stock currently sells at $60.18 while it sold for $63.20 three months ago. The drop in the stock is witnessed across the retail industry. The company’s financial performance is not good when compared with other companies in other industries. The performance is a bit better when compared with similar industry companies such as Target Corporation ("WMT Profile | Wal-Mart Stores, Inc. Common St Stock - Yahoo! Finance", 2016). I would not invest in the company because of the poor financial performance of the retail industry.