Running head: FINANCIAL OPERATIONS ANALYSIS 1

Financial Operations Analysis

Wal-Mart Stores Inc.
ENTER YOUR NAME

ENTER YOUR UNIVERSITY NAME

ENTER THE DATE

For full set of answer, Please mail me at alkamurarkaa@gmail.com

Also for any other projects help please mail me. I can help in any courses Finance, Management,
Strategy, Marketing, Human Resources, Organization Behavior, Economics, Excel, Dissertation, CAPSIM,
Online Test and any other kind of projects.
FINANCIAL OPERATIONS ANALYSIS 2
 FINANCIAL OPERATIONS ANALYSIS 3

List of Contents

Project Outline................................................................................................................................................................3

Project Overview........................................................................................................................................................3

Company Overview....................................................................................................................................................3

Data Collection...........................................................................................................................................................4

Overview of the Analysis...........................................................................................................................................4

Conclusions................................................................................................................................................................6

About the Company........................................................................................................................................................8

Financial Operation Analysis..........................................................................................................................................9

Ratio Analysis.............................................................................................................................................................9

Growth and Margins (Brigham & Houston.10ed).................................................................................................9

Capital structure and coverage ratio (Brigham & Houston.10ed)........................................................................11

Liquidity Ratio (Brigham & Houston.10ed)........................................................................................................11

Asset Turnover and Return Ratio (Brigham & Houston.10ed)............................................................................12

Cash Flow and Capex Ratio (Brigham & Houston.10ed)....................................................................................13

Dividend Payout Ratio and share purchase (Brigham & Houston.10ed)............................................................13

Common Size Analysis.............................................................................................................................................14

Valuation Ratios........................................................................................................................................................15

Conclusions...................................................................................................................................................................17

Exhibit 1: Income Statement.........................................................................................................................................18

Exhibit 2: Balance Sheet...............................................................................................................................................19

Exhibit 3: Cash Flow Statement...................................................................................................................................20

Exhibit 4: Ratios...........................................................................................................................................................21

Exhibit 5: Dividend History..........................................................................................................................................22

Exhibit 6: Share buy-back program..............................................................................................................................22

Exhibit 7: Common Size Analysis................................................................................................................................23

Exhibit 8: Valuation Ratios...........................................................................................................................................24

References.....................................................................................................................................................................25
 FINANCIAL OPERATIONS ANALYSIS 4

Project Outline
Project Overview

The project seeks to conduct financial operation analysis of Wal-Mart Stores Inc. to

evaluate financial health of the organization. While doing such analysis, various critical financial

parameters are identified and determined using companys financial statements over the annual

periods. Financial statements of last five years are used to conduct trend analysis and establish

view on the same. Ratios analyses are used as a tool to identify and evaluate companys

profitability, liquidity, growth and returns. Further common size financial analysis is also

conducted using last five years income statement to support the trend analysis. Lastly, critical

valuation ratios are also studied over last 10 years and are compared with industry average to

comment on valuation trends in case of Wal-Mart.

Company Overview

Founded by Sam Walton, the first Wal-Mart store was opened in Rogers, Arkansas in the

United States on July 2, 1962 to enable consumers save money and live better. The company

Wal-Mart Stores Inc., headquartered in Bentonville, Arkansas, was incorporated in 1969 and was

first publicly traded on New York Stock Exchange in 1972. The company is an American

Multinational Company that has various formats of retail department stores and warehouse

stores. It operates its retail stores through three segments: Wal-Mart U.S, Wal-Mart International

and Sams Club. The store format includes discount stores, supermarkets, supercenters,

hypermarkets and cash and carry among others besides it sell through its retail websites

www.walmart.com and www.samsclub.com. Since inception, Wal-Mart today, as on July 22,

2015, serve more than 260 million customers and members every week through their more than
 FINANCIAL OPERATIONS ANALYSIS 5

11,400 retail stores in 27 countries and e-commerce websites in 11 countries. Wal-Marts retail

stores sell anything and everything that meets consumer requirement from their daily

convenience to their luxurious aspiration based on local as well as global trends.

Data Collection

In conducting financial operation analysis of Wal-Mart Inc. data has been collected

through various legitimate sources. Web resource www.morningstar.com has been used as a

prime source for collecting financial information like income statement, balance sheet and cash

flow statement. Last five years financial statement has been taken for the purpose of this study.

Besides, valuation ratios of last ten years have taken from same web resource to comment on

Wal-Marts valuation. Other web resources like Wal-Mart website have been used for collating

other qualitative and quantitative information. Course book and other reference books have been

used for gaining insights on several concepts on ratios and applying them in the study.

Overview of the Analysis

Last five years of financial statements have been used to conduct analysis and build

conclusions. Entire analysis was conducted under three broad headings viz. Ratio analysis,

Common size analysis and Valuation analysis.

Ratio analyses were further broken into multiple parts viz. Growth and margins, Capital

structure and coverage ratios, Liquidity ratios, Asset turnover and return ratios, Cash flow and

capex ratios, and Dividend payout ratio and share buy-back. Under each part multiple ratios are

analyzed to evaluate Wal-Mart financial health from various angles and hence consensus was

build based on a comprehensive study.

FINANCIAL OPERATIONS ANALYSIS 6

Under Growth and margins Year-after-year growth of revenue, gross profit, EBITDA,

operating income and net income is studied over last five years. Besides, based on past

data cumulative annual growth rate (CAGR) analysis is also conducted comparing 4-Yr

CAGR vs. 3-Yr CAGR vs. 2-Yr CAGR vs. 1-Yr growth. Linkage of growth with profit

margins has also been established with focus on gross margin, EBITDA margin,

operating margin and net margin.

Under Capital structure and coverage ratio Ratios like debt-to-total capital and debt-

to-equity have been studied. Also analyzed and commented upon is the proportion of

short term debt as % of total debt. Interest coverage ratio is also analyzed to evaluate

company position to honor its fixed liability obligations.

Under Liquidity ratios Ratios like current ratios and quick ratios are studied. Further

working capital management analysis performed based on receivable days, payable days,

inventory days and overall working capital cycle or cash conversion cycle.

Under Asset turnover and return ratio Under this part gross and net asset turnover

ratios were identified and analyzed to judge asset utilization capability and further

linkage was established to comment of company performance based on return on assets,

equity and capital employed.

Under Cash flow and capex ratio Cash from operations, capital expenditure and free

cash flow (FCF) as % of sale have been studied to determine companys ability to

generate FCF.
 FINANCIAL OPERATIONS ANALYSIS 7

Under Dividend payout ratio and share buyback Study was conducted to analyze the

dividend payout and share buyback policy and companys ability to reward its

shareholders.

Second major study involves Common size analysis which used last five years income

statement to analyses major line of cost and income as % of sales to assess trends.

Last part of the study involves Valuation analysis based on three critical ratios price-to-

earnings, price-to-book and price-to-sales and Wal-Mart performance is compared to headline

index S&P500 to ascertain premium or discount at which Wal-Mart trades vis--vis market. Last

10 years and trailing twelve months of data have been used for conducting this analysis to

evaluate the current performance of Wal-Mart stock.

Conclusions

Overall study resulted in following conclusions:

1. Lower growth in revenues led to decline in growth in profitability except in financial

year 2015 wherein better growth in revenues resulted in better profitability growth.

Aggressive stance on e-commerce and continuous drive for addition of retail square

feet have helped Wal-Mart to report growth in the past and maintain in future.

2. Rising cost of sales is a matter of concern which is hurting growth as well as margins.

3. Wal-Mart has been able to optimize its business operations more appropriately in

2015 which led to fall in borrowings. Overall liquidity position is improving over last

three years especially in 2015. However, the current ratio still hovers around closer to
FINANCIAL OPERATIONS ANALYSIS 8

1 time which requires improvement to reduce burden on short-term borrowings and

increase profitability.

4. Lower growth and hence lower profits have affected return on assets and capital

employed which are declining year-after-year. Decline in profit margins have led to

consistent fall in return on equity and hence loss to shareholders.

5. Wal-Mart is rewarding its shareholders with consistent but growing dividends and

through share buy-back schemes. Higher free cash flow with not very aggressive

capital expenditure may lead to higher dividend payout or launch of more aggressive

share repurchase program in future bringing more rewards to shareholders.

6. Despite better performance in 2015, Wal-Mart stock is trading at multi-year discount

to S&P 500.
 FINANCIAL OPERATIONS ANALYSIS 9

About the Company

Founded by Sam Walton, the first Wal-Mart store was opened in Rogers, Arkansas in the

United States on July 2, 1962 to enable consumers save money and live better. The company

Wal-Mart Stores Inc., headquartered in Bentonville, Arkansas, was incorporated in 1969 and was

first publicly traded on New York Stock Exchange in 1972. The company is an American

Multinational Company that has various formats of retail department stores and warehouse

stores. Since inception, Wal-Mart today, as on July 22, 2015, serve more than 260 million

customers and members every week through their more than 11,400 retail stores in 27 countries

and e-commerce websites in 11 countries. The company is one of the largest employers in the

U.S. and Canada by employing 1.3 million people in the United States who are part of its global

resource pool of 2.2 million people.

Wal-Mart operates its retail stores through three segments: Wal-Mart U.S, Wal-Mart

International and Sams Club. The store format includes discount stores, supermarkets,

supercenters, hypermarkets and cash and carry among others besides it sell through its retail

websites www.walmart.com and www.samsclub.com. Wal-Marts retail stores sell anything and

everything that meets consumer requirement from their daily convenience to their luxurious

aspiration based on local as well as global trends. In addition it also provides financial services

and related products besides operating banks that offers consumer financing programs.

The company reported US$ 485.6 billion of sales in financial year ending January 31,

2015 and net profit of US$ 16.4 billion. Market capitalization of Wal-Mart as August 8, 2015

was US$ 229.5 billion. The company follows the financial year cycle of February to January.
 FINANCIAL OPERATIONS ANALYSIS
10

Financial Operation Analysis

Ratio Analysis

Growth and Margins (Brigham & Houston.10ed)

Wal-Mart revenues during the financial year ended 2015 were US$ 485.65 billion

reporting a year-on-year growth of 1.96% or nearly 2%. Growth in revenues has been declining

consistently past four years barring previous years from 5.95% in 2012 to 4.97% in 2013 to

1.56% in 2014 before rising to 1.96% in 2015. Also the cumulative annual growth in revenues

have also seen continuous decline with 4-Yr CAGR in revenues at 3.58% declined to 2.81% in

case of 3-Yr CAGR and further down to 1.74% in case of 2-Yr CAGR reflecting the declining

trend in revenue growth. However, during these periods, the company has added US$ 63.80

billion worth of new sales including US$ 9.35 billion in 2015. Better growth in 2015 was driven

by higher growth in e-commerce sales which grew much faster the market globally at 22% over

2014. The company plans to focus more aggressively on this distribution channel and plans to

invest over US$ 1.20 to US$ 1.50 billion in 2016.

Lower growth in revenues also led to decline in growth in profitability except in previous

year wherein better growth in revenues resulted in better profitability growth. Year-on-Year

growth in gross profit declined from 4.94% in 2012 to 4.34% in 2013 to 1.33% in 2011 before

improving to 1.98% in 2015. Similarly growth in EBITDA, from 4.39% in 2012, went into

negative territory to 1.72% in 2014 before recovering back to positive growth of 1.60% in 2015.

Similarly operating profit also saw decline in growth from 3.98% in 2012 (went up to 4.68% in

2013) to negative 3.34% in 2014 before recovering back to positive growth of 1.02% in 2015.

During this period Wal-Mart added US$ 3.05 billion in EBITDA including US$ 0.57 billion in
FINANCIAL OPERATIONS ANALYSIS 11

2015 and US$ 1.61 billion in EBIT including 0.28 billion in 2015. Decline in growth in

profitability was also influenced by decline in profit margins driven by higher cost of sales

leading to lower gross margins and hence lower profits. Gross margin has declined consistently

since 2011 from 25.3% to 24.8% in 2014 except in 2015 when it was equivalent to 2014. Similar

trend was witnessed in EBITDA margin, EBIT margin and net margin where margin decline

through 2011 to 2014 and remained nearly unchanged in 2015 over 2014.

The increase in 2015 sales was driven by 3.0% year-on-year growth in retail square feet,

positive comparable sales in the US and higher sales (faster than market growth) through e-

commerce channel. Higher growth in 2014 was attributed to 3.1% growth in year-on-year growth

in retail square feet, higher e-commerce sales, benefit from acquisition made in 2013 and

positive comparable club sale at Sam Club store. (Exhibit 1 & 4)

Wal-Mart U.S stores accounts for ~60% of overall sales and contribute over 75% to

operating income followed by Wal-Mart International and Sams Club. Wal-Mart U.S also

generates highest operating margin followed by two respectively. Wal-Mart (2015)

Source: Annual Report 2015, Management Discussion and Analysis of Financial Condition and

Results of Operations
 FINANCIAL OPERATIONS ANALYSIS
12
Wal-Marts aggressive stance on e-commerce and continuous drive for addition of retail

square feet have helped them to report growth in the past and maintain in future.

Capital structure and coverage ratio (Brigham & Houston.10ed)

Capital structure of Wal-Mart comprises of 38.2% debt (short as well as long term debt

plus capital leases) and 61.8% common equity. In other words, debt-equity ratio of the company

was 0.62 times in 2015. The ratio has improved over 2012 when it was 0.75 times and 0.73 times

in 2011. Moreover, the ratio improved substantially over previous year 2014 when it was at 0.74

times. It seems that the Wal-Mart has been able to optimize its business operations more

appropriately in 2015 which led to fall in borrowings by US$ 6.06 billion (US$ 5.37 billion in

short-term borrowings and US$ 0.69 billion long-term borrowings) in 2015 over 2014. Short-

term borrowings, as a % age of total debt have reduced to 13.5% in 2015 vs. 22.0% in 2014 and

24.4% in 2013 (It was 12.3% and 12.0% in 2011 and 2012 respectively). Although the interest

coverage is healthy but the decline in profit margins and lower growth has reduced the interest

coverage from 12.35 times in 2013 to 11.03 times in 2015. (Exhibit 2 & 4)

Source: Please refer Exhibit 4

Liquidity Ratio (Brigham & Houston.10ed)

Wal-Mart current ratio improved in 2015 and reached closer to 1.0 vs. 0.88 in 2014, 0.83

in 2013, 0.88 in 2012 and 0.89 in 2011. Improvement in current ratio was driven by better

management of supplier which reveals from the fact that payable days has reduced to 38.4 in
 FINANCIAL OPERATIONS ANALYSIS
13
2015 against 38.8 in 2011 and 39.9 in 2012. Quick ratio has also shown consistent improvement

over last four years with 0.28 times in 2015 against 0.24 times in 2014, 0.22 in 2013, and 0.23 in

2012 (0.27 times in 2011). The company working capital cycle days were on consistent rise since

2011 which they reduced by nearly 1 full day in 2015 which is significant in retail industry and

commendable given the size and scale of the organization. Debtors are majorly year end digital

transactions pending payments from vendors and hence debtor days are not significant in this

industry. Overall the liquidity position measured by current and quick ratios and working capital

cycle have shown improving trend over last three years especially in 2015. (Exhibit 4)

However, despite better performance in last three years in terms of liquidity management,

the current ratio still at closer to 1 times which the management should work upon to improve in

order to reduce short-term fund management pressure and further reduce short-term borrowings.

Asset Turnover and Return Ratio (Brigham & Houston.10ed)

Return on assets (RoA) has been on a continuous decline driven by decline in growth in

profitability. RoA has declined from 9.1% in 2011 to 8.0% in 2015. However financial year 2015

saw improvement over 2014 by 20 basis points. Similarly return on capital employed (RoCE)

has also followed a similar declining trend with 21.4% in 2015 against 21.8% in 2014 and 22.8%

in 2011. (Exhibit 4)

Consistent decline in net margins have also impacted return on equity (RoE) which

decline from 23.9% in 2011 to 20.1% in 2015 (21.0% in 2014). Some decline has been arrested

by continuous improvement in net asset turnover from 3.91 times in 2011 to 4.16 times in 2015

(4.04 times in 2014) showing effective utilization of organizations assets to generate more sales.
 FINANCIAL OPERATIONS ANALYSIS
14
However, the consistent fall in return on equity is a matter of concern which management

should address more effectively and rapidly.

Cash Flow and Capex Ratio (Brigham & Houston.10ed)

Wal-Mart is generating cash from operation in the tight range of 5.0 to 5.5% of sales

except 2015 when the ratio went up to 5.9%. To understand it better, the company has been

generating US$ 23 26 billion of cash from operation year-after-year with 2015 being an

exception of this trend when the cash from operations went to as high as US$ 28.56 billion.

The companys spending on capital expenditure as % of sales has been on declining trend

year-after-year from 3.0% of sales in 2011 to 2.5% in 2015 (2.8% in 2014). In absolute terms

Wal-Mart has been spending US$ 12 to 13 billion every year towards addition of new stores and

corporate and support needs with 2015 being the year with lowest spending of US$ 12.17 in last

five years. Outlook for 2016 is not different where the management has given the guidance of

spending US$ 11.6 to 12.9 billion for adding 26 to 30 million retail square feet.

Wal-Mart has generated free-cash flow of US$ 16.39 billion in 2015, highest in last five

years driven by highest cash from operations and lowest capital expenditure in last five years. As

% of sales, the free cash flow is typically in the range of 2.4 to 2.7% of sales with exception

being 2014 when it fell down to 2.1%. Financial Year 2015 saw this ratio moving up to 3.4% of

sales. (Exhibit 3 & 4)

Dividend Payout Ratio and share purchase (Brigham & Houston.10ed)

Last 42 years, Wal-Mart has been consistently rewarding its shareholders by way of

regular dividends. Payout ratio has been on a continuous rise over last 10 years which is

consistent with lower growth generated internally by the management. Although year-after year
 FINANCIAL OPERATIONS ANALYSIS
15
growth in dividend per share has been erratic with no clear trends but between financial year

2006 and 2015 dividend per share has increased at CAGR of 13.80% per annum which is

remarkable and indicates a sign of good governance practice. (Exhibit 5)

From time to time Wal-Mart is also rewarding its shareholders by way of returning

surplus cash in the form of share buy-back. Last three year data from 2015 annual report

indicates that between 2013 and 2015 the company has returned US$ 15.30 billion worth of cash

to its shareholders through buy-back scheme. Further the company currently has an active share

repurchase program of US$ 15 billion including US$ 1.02 billion used in 2015 which has no

expiration date or other restrictions limiting the period of purchase. (Exhibit 6)

Higher free cash flow with not very aggressive capital expenditure may lead to higher

dividend payout or launch of more aggressive share repurchase program in future bringing more

rewards to shareholders.

Common Size Analysis

Common size analysis was performed on last five year income statement of Wal-Mart to

analyze the trend of various key financial metric. (Exhibit 7)

The analysis shows Wal-Marts Leadership Team effectiveness towards superior

management of organizations profit and loss account. We came across negligible deviation in

almost every key elements of income statement whether costs or profits. Cost of sales accounts

for nearly th of sales and has been in the vary range of 74.7% to 75.2%. However, cost of sales

has shown increasing trend in last five years with this ratio being consistently higher over

previous year except in 2015 when it was same as 2014 at 75.2%. Other operating expenses are

in the similar tight range of 17.1 to 17.3% of sales. Hence EBITDA results in the range of 7.5 to
 FINANCIAL OPERATIONS ANALYSIS
16
7.9%. However, caution is invited over last two years results where EBITDA was 7.5% of sales

declined from 7.9% in 2011 and 7.8% in 2012 and 2013 driven by increase in cost of sales. Costs

like depreciation, interest expenses, and minority interest all remained at nearly constant level as

% of sales except tax provision which has seen decline year-after-year with 1.80% in sales in

2011 vs. 1.64% in 2015. Accordingly net income remained in the range of 3.4 to 3.9% with last

two showing the lowest level at 3.4% of sales.

Rising cost of sales is a matter of concern which as explained earlier is hurting growth as

well as margins.

Valuation Ratios

Analysis of three metric Price-to-earnings (P/E), Price-to-book (P/B) and Price-to-sales

(P/S) ratio have been done to understand Wal-Mart valuation trends vis--vis performance of

benchmark indices S&500 in order to arrive discount or premium at which Wal-Mart has been

trending vs. headline market. (Exhibit 8)

Last 10 years of data and trailing twelve months (TTM) ratios have been taken from

www.morningstar.com. (Valuation Ratios)

In last ten years, Wal-Marts average P/E ratio was 15.6 times with highest at 18.2 times

in 2005 and lowest at 13.3 times in 2010. Wal-Mart has been traditionally been trading at

discount to S&P500 with average discount of 1.4%, highest being 18.8% in 2013 and lowest

being at 50.5% premium in 2008. Based on TTM performance as on August 8, 2015, the stock

performance has deteriorated with P/E falling to 14.6 below its average and discount increasing

to 24% surpassing its previous highs of 2013.

 FINANCIAL OPERATIONS ANALYSIS
17
Average P/B ratio was 3.3 times with highest at 3.9 times in 2005 and lowest at 2.9 times

in 2010. The stock has always been trading at a premium to S&P500 when P/B is considered

with average premium of 39.4%, highest being at 100.0% in 2008 and lowest being at 11.1% in

2007. Based on TTM performance as on August 8, 2015, the stock performance, measured by

P/B ratio, has also deteriorated with P/B ratio declining 3.0 times (near to its lowest) and

premium falling to all time lower levels at 7.1%.

Average P/S ratio was 0.5 times and moves in tight range of 0.5 to 0.6 times. The stock

has always traded at a discount to S&P 500 with average discount rate of 59.9%, highest being

70.6% in 2013 and lowest being 33.3% in 2008. However, as per TTM performance, the stock

has breached its previous highs and currently trades at a steep discount of 72.2% to headline

index.

Based on above understanding, attention is invited that Wal-Mart is trading at multi-year

discount to S&P500 despite better performance in 2015.

 FINANCIAL OPERATIONS ANALYSIS
18

Conclusions
Overall study resulted in following conclusions:

1. Lower growth in revenues led to decline in growth in profitability except in financial

year 2015 wherein better growth in revenues resulted in better profitability growth.

Aggressive stance on e-commerce and continuous drive for addition of retail square

feet have helped Wal-Mart to report growth in the past and maintain in future.

2. Rising cost of sales is a matter of concern which is hurting growth as well as margins.

3. Wal-Mart has been able to optimize its business operations more appropriately in

2015 which led to fall in borrowings. Overall liquidity position is improving over last

three years especially in 2015. However, the current ratio still hovers around closer to

1 time which requires improvement to reduce burden on short-term borrowings and

increase profitability.

4. Lower growth and hence lower profits have affected return on assets and capital

employed which are declining year-after-year. Decline in profit margins have led to

consistent fall in return on equity and hence loss to shareholders.

5. Wal-Mart is rewarding its shareholders with consistent but growing dividends and

through share buy-back schemes. Higher free cash flow with not very aggressive

capital expenditure may lead to higher dividend payout or launch of more aggressive

share repurchase program in future bringing more rewards to shareholders.

6. Despite better performance in 2015, Wal-Mart stock is trading at multi-year discount

to S&P 500.
 FINANCIAL OPERATIONS ANALYSIS
19

Exhibit 1: Income Statement

 FINANCIAL OPERATIONS ANALYSIS
20
Exhibit 2: Balance Sheet
 FINANCIAL OPERATIONS ANALYSIS
21
Exhibit 3: Cash Flow Statement
 FINANCIAL OPERATIONS ANALYSIS
22
Exhibit 4: Ratios
 FINANCIAL OPERATIONS ANALYSIS
23

Exhibit 5: Dividend History

Exhibit 6: Share buy-back program

Source: Annual Report 2015, Management Discussion and Analysis of Financial Condition and
Results of Operations
 FINANCIAL OPERATIONS ANALYSIS
24
Exhibit 7: Common Size Analysis
 FINANCIAL OPERATIONS ANALYSIS
25
Exhibit 8: Valuation Ratios
 FINANCIAL OPERATIONS ANALYSIS
26
References

1. Wal-Mart (2015). Annual Report for the financial year 2015.

2. Cash Flow Statement

http://financials.morningstar.com/cash-flow/cf.html?t=WMT&region=usa&culture=en-US

3. Balance Sheet

http://financials.morningstar.com/balance-sheet/bs.html?t=WMT&region=usa&culture=en-US

4. Income Statement

http://financials.morningstar.com/income-statement/is.html?t=WMT&region=usa&culture=en-

US

5. Valuation Ratios

http://financials.morningstar.com/valuation/price-ratio.html?

t=WMT&region=usa&culture=en-US

6. Brigham & Houston (10ed). Fundamentals of Financial Management. Chapter 3

Analysis of Financial Statements