Research Paper on "Financial Analysis: Wal-Mart"

Research Paper 6 pages (2046 words) Sources: 5

[EXCERPT] . . . .

Financial Analysis: Wal-Mart

In this analysis, I concern myself with Wal-Mart Stores -- an NYSE listed multinational corporation. Amongst other things, I will come up with a concise description of the company and its line of business. Further, in addition to evaluating the vulnerability of the retailer to current financial threats, I will also highlight the impact of the company's financial trends on its future financial performance.

Wal-Mart: Overview

Founded 51 years ago by Sam Walton, Wal-Mart's key purpose is helping "people around the world save money and live better -- anytime and anywhere -- in retail stores, online and through their mobile devices" (Wal-Mart, 2013). Currently, Wal-Mart's key competitors in the discount, variety stores industry include but they are not limited to Target Group and Costco Wholesale Corporation. Through the retail stores it operates in various formats, Wal-Mart offers for sale a wide range of products including but not limited to home decor, jewellery, books, toys, electronics, frozen foods, stationery, etc. The retailer also offers for sale products and items such as gardening tools, office and home furniture, etc. Recently, Wal-Mart launched walmart.com, an online platform that seeks to guarantee customers "the best shopping experience on the internet" (Wal-Mart, 2013). Wal-Mart likens this online retail platform to a neighborhood Wal-Mart store.

In recent times, the company has expanded to other geographic locations in an attempt to further enhance its global presence. Indeed, as Daniel (2012) points out, the retailer has had to embrace growth so as to stay ahead of the competition in today's global economy. The retailer in the words of Daniel (2012) "has 8,500 stores under 55 different banners in 15 countries and employs more than 2 million people."

It is important to note that although the profitability of the company recently took a slight dip (as per its most recent financial statements); its performance in the past has been largely impressive. This impressive performance of the company can be attributed to the talented cast of managers at the helm. The retailer's current C.E.O is Michael Terry Duke who has previously held senior positions with other major retailers such as May Department Stores (Wal-Mart, 2013). Other key officers of the company include Charles M. Holley, Neil M. Ashe and Douglas McMillion who are the retailer's CFO, CEO -- Global eCommerce, and CEO -- Wal-Mart International respectively (Wal-Mart, 2013).

Although the company continues to face immense competition from the likes of Costco and Target, Wernau (2010) describes the power of Wal-Mart as being indisputable. According to Wernau, being the largest retailer in the world, Wal-Mart is in a unique position to negotiate for lower prices from manufacturers (Wernau, 2010). This effectively gives the retailer a competitive advantage other retailers in the same industry would find it difficult to match. From a strategic management perspective, Wal-Mart utilizes what Griffin (2012) calls an overall cost leadership strategy. A company implementing this particular strategy in the word of the author "attempts to gain a competitive advantage by reducing its costs below the costs of competing firms" (Griffin, 2012). This is the strategy Wal-Mart has embraced to remain competitive.

Wal-Mart's Vulnerability to Current Financial Threats

The threats I take into consideration in this case are global competition, higher interest rates, and a recession. Unlike most of its peers in the industry, Wal-Mart is likely to successfully ride a short-term downturn in economic activity. To begin with, it is important to note that unlike some of its competitors in the discount, variety stores industry, Wal-Mart's ability to hold down the prices of the products it offers for sale is likely to see it retain customers throughout a recession. During a recession, the reduced purchasing power of consumers forces them to seek cheaper goods and services whenever they can find them. Thus when it comes to its vulnerability to a downturn in economic activity, Wal-Mart can be said to be much more resilient than its main competitors.

In regard to Wal-Mart's vulnerability to higher interest rates, it would be prudent to compute the company's debt-to-equity ratio. In basic terms, the debt-to-equity ratio seeks to measure an entity's leverage. According to Albrecht, Stice, and Stice (2010) "the higher the debt-to-equity ratio, the more debt the company has." From the onset, it is therefore important to note that a company with a significantly high debt-to-equity ratio could face challenges were interest rates to rise. This is particularly the case given that an entity could find itself having to pay additional interest for the debt. Wal-Mart's debt-to-equity ratio for the most recent financial period stands at 1.71 (See Table 1). This effectively means that Wal-Mart has been aggressively financing its growth and/or other business operations with debt. Higher interest rates could therefore have a negative impact on Wal-Mart given that the retailer would be forced to fork out additional interest for the debt it carries.

Next, in regard to Wal-Mart's vulnerability to global competition, it should be noted that the competitive strategy the retailer adopts, i.e. cost leadership strategy, as well as its financial muscle effectively insulate it from the adverse effects of intense global competition. In the past, Wal-Mart has outsmarted its competitors by charging lower prices than they can match. This it does by keeping its costs low. A June 2009 study according to Wernau (2010) concluded that when a Wal-Mart enters a specific market, similar high-volume stores in the said market report a 40% decrease in median sales. This is an indication of Wal-Mart's ability to compete effectively. For this reason, and given its huge financial resources as the third largest public corporation in the world, Wal-Mart would successfully withstand intense global competition.

Financial Performance

In this section, I will make use of a number of financial ratios to predict Wal-Mart's future performance. In so doing, I will from time to time make comparisons between the performance of Wal-Mart and that of Target. Target happens to be Wal-Mart's main competitor in the U.S. discount retail market.

Although Wal-Mart registered a slight decline in its return on equity (ROE) ratio in the latest financial period in comparison to the previous years, the company has been generating more profits using the money provided by its shareholders than Target (See Table 1 and 2). For the financial year ended Jan 30th 2010, Wal-Mart had a return on equity of 0.20. For the year ended Jan 31st 2011 and Jan 31st 2012 respectively, the company had a return on equity of 0.24 and 0.22 respectively. Target's ROE ratio for the financial year ended Jan 29th 2010, Jan 28th 2011, and Jan 27, 2012 is 0.16, 0.19, and 0.19 respectively. For this reason, Wal-Mart earns more profit per dollar of investment than Target. Further, its performance on this front has largely been consistent over time. Wal-Mart is hence likely to continue raking in an impressive return for its shareholders going forward.

The company's overall performance is also likely to continue being impressive into the foreseeable future. This is more so the case given that the retailer has a highly competent team of managers at the helm. To further reinforce my assertion in this case, I will make use of the return on assets ratio which according to Stickney, Weil, Schipper, and Francis (2009) "measures a firm's performance in using assets to generate net income independent of how the firm financed the acquisition of those assets." Thus in basic terms, the return on assets ratio measures how efficient a firm's management is in the utilization of company assets to generate earnings. From Table 1 and Table 2, it is clear that Wal-Mart's management is much more efficient than the management of Target in the utilization of assets to generate profits. With a talented team of professional corporate officers, Wal-Mart's overall performance is likely to continue being impressive going forward.

In seeking to chart Wal-Mart's current financial health and its stability going forward, it would be prudent to take into consideration its gross profit margin and debt ratio. Over the three-year period under consideration, the company has maintained a gross profit margin of 0.25. What this means is that for each dollar of sales, Wal-Mart retains $0.25 for other operating expenses. In my opinion, such a gross profit margin is sufficient and should the trend continue; Wal-Mart would not encounter any significant difficulties in the payment of its operating expenses. The fact that Wal-Mart's gross profit is relatively stable over the three-year period is also an indication of good financial health which could further be replicated into the future. The company's debt ratio also clearly indicates that Wal-Mart's level of risk is relatively low. This ratio in the words of Albrecht, Stice and Stice (2010) "represents the proportion of borrowed funds used to acquire the company's assets." Wal-Mart has a debt ratio of less than 1. For this reason, the retailer has more assets than debt. Thus in terms of debt load, Wal-Mart does not currently face any potential risks.

The retailer's current ratio for the most recent financial period clearly… READ MORE

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