Financial Analysis of WalMart - Case Study Example

Financial Analysis- Wal – Mart of XXXX XXXX Submitted By: XXXX Number: XXXX Number of words: 536 words (Excluding Bibliography) History of Wal – Mart: Wal – Mart was introduced in 1962, with an aim of becoming the leaders in the retailing sector. The American public corporation was opened by Sam Walton, a business man in Arkansas. Walton opened the first Wal – Mart Discount City store in Rogers, Arkansas. Since then with the efforts and strong strategies the company has come to become the world’s largest retailers. Wal – Mart currently stands on the top of the list of the Fortune 500 companies (CNN Money, 2008). The company has been able to gain the position of the largest retailer and is thrice as big as its closet competitor. The company was started with the mission of providing its customers with best products and services at reasonable prices. The company’s signature states its main aim and clearly highlights what the company has to offer to its customers – ‘Save Money. Live Better’. Wal – Mart’s focuses on its main values – Respecting individuals, Service to the customers and Striving for excellence (Wal-mart, 2008). Wal – Mart has over 971 discount stores, 2447 supercentres, 132 neighbourhood stores and 591 Sam’s club in the US at present. The company has seen immense growth and is spread over 14 countries with a total of almost 2.1 million employees. The company’s profits have been enormous. Wal – Mart has recorded revenues of over $378,799 million as of the year end January 2008. The company’s revenues have increased by almost 8.6% over that in 2007, and the profit of the company is recorded at $12,731 million for 2008, an increase of almost 7.3% over 2007. The company mainly earns its revenues from the United States; however it does face a lot of competition from both the local as well as the global retailers (Money Central, 2008). The growth of the company shows good strategic planning and good financial planning. Wal –Mart has not faced any issues of liquidity since 2002, when its current liabilities exceeded its current assets. The company has also proved its stability in working by giving back to the shareholders and ensuring the shareholders receives a good return on the investments made within the company. Also the company’s revenues as well as the profits have seen a continuous growth and constant increase over the years. The next section will deal with financials of Wal – Mart. The section will provide a financial analysis of the company and will include detailed discussion of the cost of debt, cost of capital, cost of equity, CAPM and also the weighted Average cost of Capital of the company. Financial Analysis: This section as discussed above will provide a clear view of the company’s current financial standing. a) Cost of Debt: The cost of debt of a company is the rate that companies pay on the current debt. This can be calculated both before as well as after tax. Every company uses a number of forms of debt financing like bonds, loans, etc. These debts require paying back with a certain percentage as interest. This interest rate is referred to as the cost of Debt of the company. This is a very important aspect of the finances of any company as it provides the investors with a clear view of the riskiness of the company. A company with high cost of debt is more risky than a company with a lower cost of debt. Wal – Marts cost of debt has been calculated to be 3.64. This is very beneficial for the company as the lower the cost of debt of a company the better is the performance of the company. With this low cost of debt of the company it is clear that the company does not have a number of debts to be re paid and this shows that the company operates on its own funds more than the borrowed funds (Galvan, and Muniz, 2006). b) Cost of Capital: The cost of capital of a company is the return that is required to make a capital budgeting project worthwhile, i.e., the returns that are required from the investments to ensure that they are useful and beneficial to the company. In short the Cost of capital expresses how companies can raise money. The options being stock issue, borrowing or even a combination of the two. This is the return the company can receive if the company invests in other possible investments. The cost of Capital for Wal Mart has been calculated to be 7.72%. This is a good return that can be expected for the investment made and this allows the company to earn good returns on its investments (Galvan, and Muniz, 2006). c) Cost of Equity: in simple words, the cost of equity of a company is the return that the stockholders of a company expect from the company. This is normally calculated using the formula: This also represents the compensation that the market demands for bearing the risk of the ownership and for owing the asset. The cost of equity for the company has been based on the CAPM model. After calculation the common equity of Wal Mart has been calculated to be 7.7245%. This is considered as a good return for the company and meets up to the shareholders expectations. This also signifies the good performance of the company. d) CAPM: The Capital Asset pricing Model describes the relation between the expected return and the risk. This relationship is used in the pricing of the risky securities. This is generally calculated using the following formula: e) Weighted Average Cost of Capital: The average of the current costs of the sources of finance employed by the company is the WACC of the company (Investopedia, 2008). The main aim of using this is so that firms can increase the market price of its stock in the long run by accepting the projects with higher returns than the weighted average cost of capital. This is generally calculated using the following formula. Ko = Ke . (Ve / Vo) + Kd. (Vd/Vo) Where, Ko = WACC Ve = Market value of equity Vd = Market value of debt Vo = Total Market value of Firm (Ve + Vd) The WACC of Wal – Mart is 7.0377. This signifies that the company is performing well, as the possible returns on other projects can be higher than the WACC. Also this signifies the average cost of the finances of the company and this percentage is relatively a low number for the size of the company (Galvan, and Muniz, 2006). Conclusion: The concepts that have been discussed above allow for a better understanding of the financial standing of Wal – Mart. The company is very successful and has a number of stores across the country. The company has been growing at a continuous and very quick rate. With plans of the company to move into India as well, the finances and the controlling costs are now in complete focus. It is also noted that the company has lost a slight control on the finances due to the rising fuel costs and interest rates. Wal Mart yet continues to be a good investing option and the company will be able to stabilise itself. The figures clearly show that the company is quite stable with just a little instability due to current crisis in the country. The figures however prove the company to be stable, and to definitely show constant growth in the future. Bibliography CNN Money, 2008, ‘Fortune 500: Our Annual Ranking of America’s Largest Corporations’, 5 May 2008, Accessed on 05 January 2009, Retrieved from http://money.cnn.com/magazines/fortune/fortune500/2008/full_list/ Galvan, C. N., and Muniz, L., 2006, ‘Cost of Capital of Wal – Mart: A financial Analysis’, 7 December 2006, Accessed on 5 January 2009, Retrieved from http://business.fullerton.edu/finance/yunpark/Files/fin332/Project/Cost%20of%20Capital%20of%20Walmart_Muniz%20and%20Galvin.pdf Money Central, 2008, ‘Wal-Mart Stores Inc: Financial Statement’, Accessed on 5 January 2008, Retrieved from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=wmt Wal-Mart, 2008, ‘About – us’, Accessed on 5 January 2009, Retrieved from http://walmartstores.com/AboutUs/ Appendix All the calculations have been retrieved from Galvan and Muniz, 2006. 1. Cost of Debt Calculations: 2. Cost of Equity: (using CAPM Model) 3. Weighted Average Cost Of Capital Read More