Financial statement analysis for Walmart.docx

Final Term ProjectACC 503 Financial ReportingTable of ContentsCompany Overview 3Industry Analysis .3Financial Analysis . 4Liquidity and Solvency Analysis . 4Efficiency Analysis . 6Profitability Analysis . 7Market Value Analysis 9Recommendation 9 Appendix (Financial Statements from latest 10-k) n10Bibliography .16Company OverviewSam Walton, a visionary leader with goals of great value and customer service founded the first Wal-Mart in 1962 in Rogers, Arkansas. With their slogan of “saving people money so they can live better,” Wal-Mart is leading the world as the largest retailer employing over 2 million employees and is currently ranked #2 on Forbes Fortune 500 company list "Fortune 500 2012: Fortune 1000 Companies 1-100." CNNMoney. Cable News Network, n.d. Web. 28 Nov. 2012. <. Wal-Mart has 10,524 stores to date, broken up into three different business segments Wal-Mart US stores (3,971 stores), Sams Clubs (620 stores), and Wal-Mart International (5,933 stores in 26 countries) "Unit Counts & Square Footage." Wal-Mart Corporate. N.p., n.d. Web. 28 Nov. 2012. <. The Wal-Mart U.S. segment includes the Company's mass merchant concept in the U.S. operating under the "Wal-Mart" or "Wal-Mart" brand, as well as . The Wal-Mart International segment consists of the Company's operations outside of the U.S. The Sam's Club segment includes the warehouse membership clubs in the U.S., as well as "WMT Form 10-K." Form 10-K. N.p., n.d. Web. 28 Nov. 2012. <http:/www.sec.gov/Archives/edgar/data/104169/000119312512134679/d270972d10k.htm>. Looking at the revenue, the international business segment has been steadily growing in the past 3 years while the Sams Club segment has been relatively even.Revenue by Business Segment ibid  2012 2011  2010 (Dollar amounts in millions)Net SalesPercentNet SalesPercentNet SalesPercentWal-Mart U.S.264,186 59.5%260,261 62%259,919 64%Wal-Mart International125,873 28.4%109,232 26%97,407 24%Sam s Club 53,795 12.1% 49,459 12% 47,806 12% Net Sales 443,854   418,952   405,132  Industry AnalysisWal-Mart can be classified in a few different industries, the discount/variety stores according to Yahoo "Wal-Mart Stores, Inc. Company Profile - Yahoo! Finance." Wal-Mart Stores, Inc. Company Profile - Yahoo! Finance. N.p., n.d. Web. 28 Nov. 2012. <. The reason being Wal-Mart operates many different types of stores that falls into multiple categories. In Wal-Mart Stores U.S, there are Wal-Mart Discount Stores, Wal-Mart Supercenters, and Wal-Mart Markets. Their primary competitors to their discount stores are Kmart, Target, Zellers, and Meijer. Their main competitors for their Sams Club stores are Costco and BJs. Financial AnalysisLiquidity & Solvency Short-term liquidity problems arise when operating cash inflows dont match outflows. Wal-mart gets their goods from supplier on credit, promising pay back in 30 or 60 days. The operational flow of their stores beings with the goods shipped to warehouses. Then, the goods are sent to Wal-mart stores, sold to shoppers, who pay Wal-mart by cash or charge card. If the receivables from customers arent collected on time, Wal-mart could find themselves short of cash to pay off to employees, suppliers, and others. Current Ratio is used to evaluate a companys short-term liquidity. The current ratio is an indication if the company has the ability to pay back their short-term liabilities within 30 or 60 days. If the ratio is lower than 1, the company may not be in a great financial condition. It provides a measure to how liquid the company is in converting some of their assets into cash. Wal-Marts current ratio for 2012 is 0.88, and has been around that range for the last 5 years. Wal-Mart20122011201020092008Current assets54,97552,01248,03248,94948,020Current liabilities62,30058,60355,54355,39058,478Current ratio0.880.890.860.900.80Looking at Wal-Marts competitors, we see that they are in a better position to convert their assets into cash. While Wal-Marts current ratio is lower than two of its main competitors, there are other ratios to consider when looking at their financial health. Current RatioCompetitors20122011201020092008Wal-Mart 0.88 0.89 0.86 0.90 0.80 Costco 1.10 1.14 1.16 1.11 1.07 Target 1.15 1.71 1.63 1.66 1.60 A more short-run reflection of liquidity is quick ratio (current assets-inventories)/current liabilities). Taking no account of inventory, the rest of assets could turn into cash in a shorter time. The higher the quick ratio, the faster the company pays off their obligations. Wal-Mart Stores Inc.'s quick ratio deteriorated from 2010 to 2011 and from 2011 to 2012 as shown from the chart below.Wal-Mart20122011201020092008Current Assets54,97552,01248,03248,94948,020Inventory40,71436,43732,71334,51135,159Current Liabilities62,30058,60355,54355,39058,478Quick Ratio 0.23 0.26 0.27 0.26 0.22 Again, comparing Wal-Mart to its competitors, it is also less liquid when comparing the quick ratio to its competitors Costco and Target.CompetitorsQuick Ratio 20122011201020092008Wal-Mart 0.23 0.26 0.27 0.26 0.22 Costco 0.48 0.55 0.56 0.49 0.45 Target 0.47 0.78 0.81 0.85 0.89 Long-term debt to assets ratio provides information about the amount of long-term debt in a companys financial structure. The debt ratio will be higher if a company relies on borrowing long term debt. A company with a higher debt to assets ratio will be a greater solvency risk. Wal-marts long-term debt to assets was around 20% over the past 5 years. This says about 20 cents of each dollar was financed using long-term debt. Generally speaking, retailers always have a lower long-term debt to assets ratio, because they borrow more short-term debt than long-term debt.Wal-Mart20122011201020092008Long-Term Debt 44,07040,69233,23131,34929,799Total Assets193,406180,782170,407163,429163,514Long Term Debts to Assets ratio 0.23 0.22 0.20 0.19 0.18 Interest coverage ratio is used for identifying companys ability to generate inflow to make principal and interest payments. It is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period. Wal-marts interest coverage ratio shows that operating profit is about more than 12 times larger than interest expense. This means Wal-Mart is generating more than enough profit to cover the interest payments that they owe. Wal-Mart20122011201020092008EBIT26,55825,54224,00222,76721,952Interest Expense2,1602,0041,8841,9001,794Interest Expense Coverage Ratio 12.29 12.75 12.74 11.98 12.24 EfficiencyInventory turnover ratio tells us how efficiently the company manages their inventory. Wal-mart has a very larger inventory turnover ratio due to the number of stores they own and time it takes to refill its warehouse. This chart below tells you that Wal-Mart refills their warehouse roughly every 9 days.  Wal-Mart20122011201020092008Cost of goods sale335,127314,946304,106306,158286,350Average inventory38,57634,57533,61234,83534,422Inventory turnover 8.69 9.11 9.05 8.78 8.32 Compared to their competitors, Wal-mart is on par with Target, and is more efficient than Costco.CompetitorsInventory Turnover 20122011201020092008Wal-Mart 8.69 9.11 9.05 8.78 8.32 Costco 12.64 12.67 12.31 11.94 12.80 Target 8.82 8.87 9.10 9.69 9.35 Assets turnover tells us how efficient the company uses their assets to earn profit. It is calculated by dividing sales by average assets. The rule of thumb is that the higher ratio, the better ability of the company to generating revenue. For Wal-Mart from 2008 to 2011 the asset turnover ratio increased, and then decreased slightly back to its 2008 level.  20122011201020092008Net sales443,854418,952405,132401,244374,307Average assets187,094175,594166,918163,472163,514Assets turnover 2.37 2.38 2.43 2.45 2.38 Compared to Target, Wal-Mart is doing a better job with its assets, but is slightly behind its other competitor CostcoCompetitorsAsset Turnover 20122011201020092008Wal-Mart 2.37 2.38 2.43 2.45 2.38 Costco 3.68 3.52 3.40 3.35 3.60 Target 1.50 1.54 1.47 1.47 1.42 Profitability Return on Assets ratio is one of the powerful tools which are used to evaluate profit performance. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Investors can use it to see how effectively Wal-mart is using its assets. The higher the ROA number, the better, because the company is making more money using fewer assets. Wal-Mart's ROA improved from 2008 to 2011 but then decreased from 2011 to 2012.Wal-Mart20122011201020092008EBI16,45415,95914,92713,75313,290Average assets186,984175,459166,900162,891157,551ROA8.80%9.10%8.90%8.40%8.50%Compared to its competitors, Wal-Mart is doing a more efficient job using its assets to create profit.CompetitorsReturn on Assets 20122011201020092008Wal-Mart8.80%9.10%8.90%8.40%8.50%Costco6.34%5.78%5.69%5.09%6.37%Target6.28%6.68%5.59%5.02%6.39%ROI is to measure a firms efficiency of investment. As we can learn from these figures, Wal-mart is making good use of the money investment Wal-Mart20122011201020092008ROI18.60%19.20%19.30%19.30%19.50%Gross profit margin is used to assess a firm's financial health by looking at the proportion of money left over from revenues after accounting for the cost of goods sold. Wal-Mart Stores Inc.'s gross profit margin first went up from 2008 to 2010, and then decreased from 2010 to 2012.Wal-Mart20122011201020092008Gross profit margin24.50%24.80%24.90%24.30%24.10%Comparing Wal-Mart to its competitors, it sits in the middle of the pack between Target and Costco.CompetitorsGross profit margin 20122011201020092008Wal-Mart24.50%24.80%24.90%24.30%24.10%Costco12.40%12.60%12.80%12.70%12.40%Target30.86%30.87%30.26%29.53%32.56%Market Value Price to Earnings ratio is calculated by taking the price per share divided by the earnings per share. Generally you would want a lower P/E ratio, and when comparing Wal-Marts P/E ratio we see that it is in line with the industry average, and that it is also close to the S&P 500. P/E Ratio2012Wal-Mart14.6Target13.9Costco24.8Industry Average15.3S&P 50014.9Dividend Yield is another metric that investors use to determine if the company is good to invest in. Generally companies that are not in good financial health will not give out dividends. Looking at Wal-Marts dividend history, it has increased its dividend pay-out every year in the last ten years "WMT Dividend History." NASDAQ.com. N.p., n.d. Web. 28 Nov. 2012. <, and that alone makes it a solid investment.Dividend Yield2012Wal-Mart2.20%Target2.10%Costco1.10%Industry Average1.90%S&P 5002.20%RecommendationOverall Wal-Mart is an attractive company to invest in because it leads the industry with over $443 billion dollars in sales. Looking into some of the liquidity ratios there is a slight concern as Wal-Mart is less liquid than its competitors Target and Costco. However when looking at profitability measures Wal-Mart has solid gross profit margins, strong return on investment numbers, and higher return on assets ratios than its competitors. Also, Wal-Marts PE ratio is in line with the industry average and the S&P 500, and it offers an attractive dividend payout that has been increasing year over year. Wal-Mart is a solid buy with a stock price of $70.48 as of 11/28/2012.Appendix (Financial Statements from Latest 10-k "WMT Form 10-K." Form 10-K. N.p., n.d. Web. 28 Nov. 2012. <http:/www.sec.gov/Archives/edgar/data/104169/000119312512134679/d270972d10k.htm>.)WAL-MART STORES, INC.Consolidated Statements of Income $ 000,000,00$ 000,000,00$ 000,000,00   Fiscal Years Ended January 31, (Amounts in millions except per share data)  2012  2011  2010 Revenues:    Net sales  $443,854   $418,952   $405,132  Membership and other income   3,096    2,897    2,953                  446,950    421,849    408,085  Costs and expenses:    Cost of sales   335,127    314,946    304,106  Operating, selling, general and administrative expenses   85,265    81,361    79,977               Operating income   26,558    25,542    24,002  Interest:    Debt   2,034    1,928    1,787  Capital leases   288    277    278  Interest income   (162)   (201)   (181)              Interest, net   2,160