Financial Position of Wal-Mart - Case Study Example

Accounting Table of Contents Project 2- 8 Ratio 10 Project 3- 13 References 16 About Walmart Established in 1962 by Sam Walton, Walmart has become the most heralded name in the global retail industry. The company has been listed as the number one globally according to a survey of the Fortune magazine. The company has its operations located in 15 different countries and is known by different names. Initially the company was formed with a view to help customers save on their purchase. Over time, this has become the underlying business philosophy of the company that has earned a global brandname for itself. Walmart Inc. is listed on the NYSE from 1972. According to data revealed from the New York Stock Exchange, the company is traded under the ticker symbol of WMT. Currently it yields a price earnings ratio of 15.48 with a beta coefficient of 0.24. With 3,810,170,000 of outstanding shares, the company has a market capitalization of USD 202.47 billion. Project1- (Wal-Mart, 2009). Overview of the financial position The performance of Wal-Mart has improved steadily over the last three years. In the year 2007 the company reported an annual turnover of $344759 million which has risen to $401211 million in the year 2009. This marks an increase of nearly 16 percent. The operating cost of the company has remained stable at approximately 95 percent for the last three years. This shows that the operating efficiency of the company has remained stable over the years. Wal-Mart has been successful in managing the operating costs of the company. There has been a rise in the interest cost on debt of the company that has moved up from $1549 million in 2007 to $1896 million in 2009 which is a rise of nearly 22 percent. This is due to the rise in the debt component of the company. The net income of the company has steadily moved up over the years. In 2007 the company reported a net income of $11284 million that increased to nearly $13400 million in 2009, an increase of nearly 18 percent. The cash position of the company has improved significantly over the previous year. Cash and cash equivalents of the company was $5569 million in 2007 and this increased to $7275 million at the end of the financial year 2009. Project 2-       (in million $)     2009 2008 Industry Current Assets     48949.0 48020.0   Current liabilities     55390.0 58478.0   Current Ratio     0.9 0.8 1.1             Net Credit Sales     401244.0 374307.0   Average Accounts Receivable     3905.0 3642.0   Accounts Receivable Turnover     102.8 102.8 115.7             Cost of Sales     306158.0 286350.0   Inventory     34511.0 35159.0   Inventory turnover     8.9 8.1 7.3             Total Debt     98144.0 98906.0   Total equity     65285.0 64608.0   Debt-Equity ratio     1.5 1.5 0.71             Net Income     13400 12731   Total equity     65285.0 64608.0   Return on equity (%)     20.5254 19.705 10.5             Price     $53.24 $53.24   Earning per share (EPS)     $3.40 $3.13   Price-earning ratio     15.6588 17.0096 16             Earning per share     $3.40 $3.13     (Msn, 2010). Ratio Current Ratio: The current ratio represents the ability of a company to meet its short term liabilities out of its current assets. Investors view current ratio as a measure of the liquidity condition of a company. As per the theories this ratio should be 2:1 which means the company retains current assets which are double the amount of current liabilities, but the bench mark varies from industry to industry. Wal-Mart’s current ratio has improved in 2009 as compared to 2008, hence the company has enhanced its liquidity position and the risk associated with short term solvency reduced. On comparing with industry benchmark, it appears that Wal-Mart has lower liquidity position and management should take this into consideration. Accounts receivable turnover ratio: Generally all companies have a policy of selling a part of its products on credit. This makes the company due for payments from borrowers. This ratio indicates the efficiency with which a company can collect payments. A higher credit period results in a high volume of bad debt, therefore the management should consider both benefit and the risk associated with its credit policy. Wal-Mart’s account receivable turnover ratio showed no change in 2009 as compared to 2008. After taking the industry’s benchmark into consideration it appears that Wal-Mart has lower receivable turnover ratio which means the company needs to enhance its receivable policies. Inventory Turnover Ratio: Inventory is the stock of goods that a company holds. It is the time period of a product from the time it is manufactured till the time it is sold. Inventory turnover ratio demonstrates how fast inventory is converted into sales. A higher value of turnover means the company retains stock for longer phase of time and as a result its requirement for working capital goes high. Wal-Mart’s inventory turnover ratio increased in the year 2009 in comparison tp the previous year which means company’s ability to manage its stock has improved. When this ratio was compared with the industry benchmark it seems Wal-Mart’s inventory management policies are better because Wal-Mart’s inventory turnover ratio is higher than the industry’s benchmark. Debt to Equity ratio: Debt to equity ratio reflects the capital structure of the company. It provides a comprehensive picture of how much of the total capital of the company is from the owners and how much has been invested by external investors. A high debt component makes the capital structure risky as the company has higher obligations. Wal-Mart has a Debt to Equity ratio of 1.5 in both the financial years (2008 & 2009) where as the Debt – Equity ratio in the industry is almost half of that. Therefore it can be concluded that the company retains higher financial leverage and it is more susceptible to financial risk. However on the other side when economic conditions will improve the Wal-Mart will have better profitability as compared to the industry. Return on equity: RoE indicates the return that shareholders of the company receive on their investments. A high RoE is good for the company since it will entice other investors to put their funds in the company. This can result in a upward movement of the price of the company’s share in the market. Wal-Mart’s RoE has improved in the year 2009 which reflects that more investors will be interested in investing in the company and its stock price will increase. As compared to the industry benchmark, Wal-Mart’s RoE is almost double hence the company has a firm position in the industry. Price Earnings ratio: PE ratio is an indicator of the amount of money an investor has to spend to generate a unit of income by trading in the common stock of the company. While investing in a company, the investors consider PE ratio as one of the vital factor. In 2008 the company had a PE ratio of 17 which declined marginally as in 2009 it was 15.65. Such fall was due to the economic crisis which affected all the nations and disturbed the economy. After comparing the PE ratio of Wal-Mart against the industry it was found that industry has a PE ratio slightly higher than the company. This may affect the market position and stock prices of the company, but as soon as economy will revive performance of Wal-Mart will improve. Project 3- 1) The address of the company’s principal office is- 702 S.W. 8th Street, Bentonville, Arkansas. 2) Their state of incorporation is Delaware. (SEC Filings, 2010). 3) The end of the current financial year is on 31 January, 2011. 4) Ernst and Young LLP is the external auditor of the company. 5) The executive of Wal-Mart receives highest pay in the retail industry and their pay structure comprises of Basic salary, Performance-based incentives, Discretionary cash bonus and Stock options and other income. The company offered share based compensation to its executive officers and other associate of the company of $302 million in the year 2009. The UK subsidy of Wal-Mart also offered two stock option plans to its colleagues which together resulted in 34 million shares of common stocks. Executive vice president, Brian C. Cornell was granted an annual base salary of $800,000 by the Compensation, Nominating and Governance Committee and was eligible for annual cash incentive which was 160 percent of the base salary. Mr. Cornell will receive a bonus of $1,000,000 in two installments (payable in March 2010 and March 2011). (Yahoo Finance, 2009). 6) The independent directors of the company include: Committee: Audit Christopher J. Williams Chairman of the Board of Directors and Chief Executive Officer of The Williams Capital Group, L.P. (also part of Committee: Executive) Aida M. Alvarez Former Administrator of US Small Business Administrator James I. Cash Jr. Retired James E. Robison Professor of Business Administrative at Harvard Business School Arne M. Sorenson Executive Vice President and Chief Financial Officer of Marriott International, inc. Committee: Strategic Planning and Finance James W. Breyer Partner of Accel Partners (venture capital firm) M. Michele Burns Chairman and Chief Executive Officer of Mercer LLC Roger C. Corbett Retired Chief Executive officer and Group Managing Director of Woolworths Limited Jim C. Walton Chairman of the Boards of Directors and Chief Executive Officer of Arvest Bank Group, Inc. Committee: Compensation, Nominating and Governance Linda S. Wolf Retired Chairman of the Board of Directors and Chief Executive Officer of Leo Burnett Worldwide, Inc. Douglas N. Draft Retired Chairman of the Board of Directors and Chief Executive Officer of The Coca-Cola Company Allen I. Questrom Retired Chairman of the Board of Directors and Chief Executive Officer of J. C. Penney Company, Inc. Committee: Executive H. Lee Scott, Jr. Chairman of the Executive Committee of the Board of Directors of Wal-Mart Stores. Former Present and Chief Executive Officer of Wal-Mart Stores, Inc. (also part of Committee: Equity Compensation) Michael T. Duke President and Chief Executive Officer of Wal-Mart Stores, Inc. (also part of Committee: Equity Compensation) S. Robson Walton Chairman of the Board of Directors of Wal-Mart Stores, Inc. (also part of Committee: Equity Compensation) Christopher J. Williams Chairman of the Board of Directors and Chief Executive Officer of The Williams Capital Group, L.P. Committee: Equity Compensation Gregory B. Penner General Partner at Madrone Capital Partners (Wal-mart, 2010). References Msn. (2010). Key Ratios. Financial Results. Retrieved February 11, 2010 from http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=ManagementEfficiency&Symbol=WMT SEC Filings. (2010). Annual Filings. Retrieved February 11, 2010 from http://investors.walmartstores.com/phoenix.zhtml?c=112761&p=irol-sec Wal-Mart. (2009). Annual Reports. Retrieved February 11, 2010 from http://media.corporate-ir.net/media_files/irol/11/112761/ARs/2009_Annual_Report.pdf Wal-Mart. (2010). Committee Information. Retrieved February 11, 2010 from http://investors.walmartstores.com/phoenix.zhtml?c=112761&p=irol-govcommcomp Yahoo Finance. March 09, 2009. Change in Directors or Principal Officers, Financial Statements and Exhibits. Retrieved February 21, 2010 from http://biz.yahoo.com/e/090309/wmt8-k.html Read More