Accounting (walmart) slp module 3 - Essay Example

Corporate analysis (Wal-Mart) Introduction In 1962, Sam Walton opened the first Wal-Mart in Bentonville, Arkansas as a single store. This store grewin the next three decades as the acknowledged powerhouse of the U.S. retailing industry. To identify any cost decision(s) made in Wal-Mart, be they relevant or non-relevant, I will barely study the corporate analysis of this retail business. I will try to look at how Wal-Mart managed their revenue, cost and capital employed.Strategic cost management First, I will use the Du Pont analysis to see how Wal-Mart made decisions on their return on equity (ROE).

Formula: (sales/assets)*(PAT/sales)*(assets/equity) =ROE, where PAT is profit after tax.Financial Ratios20042005200620072008Operating efficiency (sales/assets)2.112.021.941.961.94Asset use efficacy (PAT/sales)3.5%3.6%3.6%3.24%3.36%Financial leverage (assets/equity)2.012.012.122.022.03ROE14.8%14.6%14.7%12.8%13.3%Conclusion: the company was not able to improve her margins as her operating efficiency declined. But, both asset utilization and financial risk were almost constant except in 2006 when the latter plummeted which helped to see her ROE nose-diving in 2007.

Next, I will look into the return on capital employed (ROCE) in Wal-Mart for the five years under study.20042005200620072008Revenue$258681$284310$312101$348650$378799EBIT$15025$17300$18713$20497$21996TCE$80734$93604$106698$118221$133413ROCE18.6%18.5%17.5%17.3%16.5%Amounts are in million. EBIT (earnings before interest and taxes); TCE (total capital employed). As could be realized, ROCE is impacted by capital turnover (sales/TCE) and operating profitability (EBIT/sales) which all settles down to ROCE being (EBIT/TCE).

Thus, Wal-Mart took decisions which impacted their, capital turnover, making it to decrease every year, from 3.2 in 2004 to 2.84 in 2008. As for her operating profitability of sales, an increase was realized between 2004 and 2005, (5.81% to 6.08%) but it started declining in 2006 (6.0%) and in 2007 and 2008 it was 5.88% and 5.81% respectively. With this trend of events, Wal-Mart’s ROCE kept on declining as she employed more capital. Thus, the question now to answer is; due to the cost decisions taken in Wal-Mart, is her financial health improving or failing?

Cash pile is not really growing year after year. This is not promising.Total debt rose just slightly every year which was good and there was enough cash every year to pay off the short-term debts.Inventory rose every year but thanks to rising sales between 2004 to 2007, inventories appears to be under control. But this was not the case in 2008 whereby inventory increased with sales declining. But, how many times a year did Wal-Mart sell out her inventory? Here, Wal-Mart had a promising trend as the number keeps on increasing.

Account receivables grew 61.7% between 2004 and 2008, which was faster than sales which only grew 31.7% between 2004 and 2008. Thus, money owed to Wal-Mart was increasing faster which was not a decision as her working capital is impacted negatively. BibliographyFinancial statements assessed on the 11th of May 2008 at, http://finance.google.com/finance?fstype=bi&q=NYSE:WMT.Fools School Wal-Mart’s balance sheet assessed on the 11th of May 2008 at http://www.philly.com/philly/business/personal_finance/1210977.html.