Financial Ratios Analysis of Wal-Mart - Research Paper Example

23 September Wal-Mart Wal-Mart is one of the leading retail giants in the United s of America. In the recent years, it has spread in many international countries including China, Japan, and India and so on. This company recorded a sale of $ 279 billion in the fiscal year of 2014, reflecting the magnitude and volume of this company; at the same time, this international retail giant served more than 140 million shoppers weekly only in the United States of America (Wal-Mart Annual Report 7). In order to assess the financial health of this company, five different types of ratios have been computed: profitability, leverage, solvency, assets turnover and market ratios. Each dimension separately assesses and evaluates the financial performance and financial position of the company. And the purpose of this assessment is to decide whether the shares of this company should be purchased based on its current performance which is reflected by these ratios provided below. Profitability Ratios Graph 01: Return on Equity Source: (Author’s own calculation) Graph 02: Return on Assets Source: (Author’s own calculation) Graph 03: Return on Sales Source: (Author’s own calculation) Leverage Ratios Graph 04: Common Equity Leverage Source: (Author’s own calculation) Graph 05: Capital Structure Leverage Source: (Author’s own calculation) Graph 06: Debt to Equity Ratio Source: (Author’s own calculation) Graph 07: Long Term Debt Ratio Source: (Author’s own calculation) Solvency Ratios Graph 08: Current Ratio Source: (Author’s own calculation) Graph 09: Quick ratio Source: (Author’s own calculation) Graph 10: Interest Coverage Source: (Author’s own calculation) Graph 11: Accounts Payable Turnover s Source: (Author’s own calculation) Asset Turnover Ratios Graph 12: Receivables Turnover Source: (Author’s own calculation) Graph 13: Inventory Turnover Source: (Author’s own calculation) Graph 14: Fixed Assets Turnover Source: (Author’s own calculation) Graph 15: Total Assets Turnover Source: (Author’s own calculation) Market Ratios Graph 16: Earnings per share Source: (Author’s own calculation) Graph 17: Price/Earnings Ratio Source: (Author’s own calculation) Graph 18: Dividend Yield Ratio Source: (Author’s own calculation) Graph 19: Stock Price Return Source: (Author’s own calculation) Summary Profitability Ratios The company profitability is constantly deteriorating. The graph 01, which highlights the return on equity, demonstrates that the company has experienced a decrease of more than 1 per cent since 2012, highlighting that the financial and operational performance are not generating results for the company and it is becoming very challenging for the current management to increase return on equity. Similarly, return on assets has also fallen from 8.11 to 7.83 in 2014. In other words, the company management is not utilizing their assets in way to increase their productivity and their performance as well. At the same time, the figure 03, which displays return on sales, also highlights decreasing trend for sales over the mentioned period. This also validates that the company is not using its current and fixed assets in a way to increase their sales over these years instead the profitability ratios highlight that the company management is struggling to retain its financial position and performance instead of focusing on those strategies which increase the potential of the company to experience rise in the sales. Leverage Ratios Leverage ratios highlight that the company uses more debt for financing its business requirements. For example, debt to equity ratio demonstrates that the company has been substantially leveraged over these years. In the year of 2012, 2013, 2014, 1.55, 1.48, 1.51 debt to equity ratio has been respectively recorded by the company. As a result, it can be deduced that the real owners of Wal-Mart, who are shareholders, will not be given enough and attractive returns and dividends as the company has already taken so much debt for satisfying its current and long term business needs. Since it is a norm that the financial cost, which is interest amount given to the debt providers, will be considerably higher in the coming years, buying this type of share will be risky financial decision. In addition, it is important to mention that the debt to equity ratio is not decreasing over these years instead it has tendency for going upward, reflecting that the company management has been more inclined to avail debt rather than putting more focus and effort for improving the financial and operational performance of the company. Solvency Ratios The solvency position is not healthier as well. The graph 08, 09, 10 and 11 clearly depicts the extent of company’s solvency for the last three years. For example, graph 10 demonstrates that the interest coverage ratio has been increasing over these years and this tendency clearly validates the previous assessment made in the above paragraphs. Currently, 11.2 interest coverage ratio is considerably higher when it is compared with the industry averages and with the statistics of previous years. In other words, the company uses operating income for paying its financial cost in the shape of interest to the debt providers. At the same time, the graph 11 highlights that the accounts payable turnover is also increasing, reflecting that the company delays paying amount to suppliers and other creditors. In other words, the company also faces the liquidity problems over these years and due to this problem, it has been more relying on the external but heavy borrowings for meeting its financial cost and other obligations Asset Turnover Ratios These ratios are also decreasing over these years. However, the receivables turnover is decreasing, this demonstrates that the company has not been giving leeway to credit purchasers and consequently it emphasizes to receive receivables within minimum available time. Similarly, fixed assets turnover is also increasing as well. However, despite this increase, the current level of fixed asset turnover is not up to the industry benchmark. As a result, the provided results clearly signify that the fixed assets and total assets have not been utilized to a maximum extent and due to this under utilization of assets, the company has not been increase its sales revenue which is the main financial indicator reflecting the overall financial and operational performance of the company. Market Ratios The market ratios are not financially impressive for attracting new investors. Earnings per share are not attractive enough over these years and this can be supported by the fact that the earnings per share have been diminished more than the level of 2012, reflecting that the share price and financial performance are truly reflecting the overall current and future financial health of the company. At the same time, price/earnings ratio has been less attractive as it has improved slightly. In 2012, the price/earnings ratio was 13.52 and this reached 15.24 in 2014, recording a growth of around 2 per cent in two years. In other words, one per cent growth annually has been experienced by the share price of Wal-Mart from 2012 to the financial year of 2014. At the same time, the dividend yield ratio is also struggling over these years. In 2012, it was 2.38 per cent and in 2014, it touched the mark of 2.52 per cent, demonstrating an unimpressive increase over these years. Simultaneously, the exhibition of stock price return is not different from the performance of previous ratios as it has experienced a substantial decrease from 2012 to the year of 2014; and this decrease was more than 9 per cent in a period of two years. Decision Based on the above financial ratios analysis of Wal-Mart, it is justifiable to recommend that the Wal-Mart shares are not attractive for the purpose of investment. Works Cited Wal-Mart Annual Report. Wal-Mart Annual Report 2014. 2014. Print. Appendices Read More