Wal-Mart Evaluation

Wal-Mart Evaluation Report

Axia College of University of Phoenix

Wal-Mart Evaluation
Analyzing Wal-Mart's annual report provides a positive outlook on Wal-Mart's
financial health. Given the specific ratios and its comparison to other companies in the
same industry, Wal-Mart is leading and more than likely continue its dominance. Though
Wal-Mart did not lead in all numbers, its leadership and strong presence of the market
cements the ongoing success. The review of the current ratio, quick ratio, inventory
turnover ratio, debt ratio, net profit margin ratio, ROI, ROE, and P/E ratio all indicate an
upbeat future for the company. The current ratio, which is defined as current assets
divided by current liabilities, is a measure of how much liabilities a company has
compared to its assets. Wal-Mart in the year of 2007 had a current ratio of .90, and as of
January 2008 it had a current ratio of .81. The quick ratio, which is defined as current
assets minus inventory divided by current liabilities, is a measure of a company's ability
pay short term obligations. Wal-Mart in the year of 2007 had a quick ratio of .25, and as
of January 2008 it had a ratio of .21. Both the current ratio and quick ratio are a measure
of liquidity. Wal-Mart is not as liquid as its competitors such as Costco or Family Dollar
Stores Inc. I believe the reason why Wal-Mart is not too liquid is because they are
heavily investing their profits for expansion and growth. Management claims in their
financial report that holding their liquid reserves in other currencies have helped WalMart hedge against inflationary pressures of the US dollar. The next ratio to look at is the
inventory ratio which is defined as the cost of sales divided by average inventory. In the
year of 2007, Wal-Marts inventory ratio was 7.68, and as of January 2008 it was 7.96.
Wal-Mart has a lot of sales therefore it doesnt have too much a problem of holding too
much inventory. Its competitors have similar ratios though they dont have as much sales
as Wal-Mart. Wal-Marts ability to sell at lower prices for same quality, gives them the

Wal-Mart Evaluation
edge against its competition. As of the year 2007, Wal-Mart had a debt ratio of .58, and
as of January 2008, it had a debt ratio of .59. The debt ratio is calculated by dividing the
total debt by its total assets. Wal-Mart has a lot more assets than it does debt so Wal-Mart
is not overleveraged. Wal-Mart far exceeds their competition in comparison of assets.
The Wal-Mart is the 800 pound gorilla in this industry and looks to remain that way. The
next ratio to look at is the net profit margin ratio, which basically measures the return of
sales. Wal-Mart had a 4% net profit margin ratio in the year 2007, and had a net profit
margin ratio of 3% as of January 2008. The industry average is similar so the
comparisons between the competitors remained flat. The ROI or also known as return on
assets compute the efficiency of an investment. Wal-Mart had an 8% in the year of 2007
and as well as of January 2008. Wal-Mart had one of the highest ROIs in the industry;
however the most important of the number is its consistency. Wal-Mart is the most
consistent than its competitors when comparing ROI. The return on net worth or also
known as the return on stockholders equity gives a clear picture of the performance of
Wal-Mart and in the year 2007, it had a ROE of .19 and as of January 2008, it had a ROE
of .19. Wal-Marts dependable profits make it a great company. It was able to get a close
to 20% return for its shareholders. The final ratio that solidifies Wal-Mart impressive
performance is the P/E ratio. It is calculated by dividing the market price per share and
the current earnings per share. Wal-Mart had a P/E ratio of 17.89 in 2007, and as of
January 2008 it had a 16.28 P/E ratio. In general, a high P/E suggests that investors are
expecting higher earnings growth in the future compared to companies with a lower P/E.
Wal-Marts ability to turn their inventory into cash is remarkable. They have the
shortest operating cycle of its industry. By adding the inventory conversion period and

Wal-Mart Evaluation
receivable conversion period, one would get the operating cycle. Wal-Mart had 49.36
days for its operating cycle as of January 2008. A very similar computation of WalMarts bottom line is its cash conversion cycle. It is calculated by subtracting the days of
payable deferral period from the operating cycle. The number of days for Wal-Mart to
turn its resource inputs into cash is about 12.36 days. There cash cycles are much
optimized and the best among its competitors. It spells success given they are able to sell
their inventory very quick. The shorter the cycle, the less time capital is tied up in the
business process, and thus the better for the company's bottom line. Wal-Marts system is
very efficient because of their superb capability to need less working capital given their
short cash cycle.
Below is the list of long term debt with maturity dates and yield to maturity.

Wal-Mart Evaluation
Wal-Mart sells only common stocks with a current selling price of 58.62 per share. It had
a 52-week average price between high 40s and low 50s.
The average cost of capital for the year 2007 was 5.3% and as of January 2008
was 4.0%. These numbers are very impressive given how Wal-Mart borrows very
cheaply. The primary reason why Wal-Mart is able to do so is because Standard & Poors
rates Wal-Marts long term debt as AA. Wal-Mart is a good credit risk, meaning
bondholders are safe in terms of Wal-Marts ability to repay. Their strong recognized
brand helps its sales, and I believe along with their great management, Wal-Mart is in no
trouble to pay its creditors because it has a strong history of paying its obligations and the
cheap borrowing rates reflect that.
Wal-Mart's stellar performance has created optimism for those invested in WalMart whether it be a shareholder, bondholder, employee, management, and as a
consumer. I believe Wal-Mart is a great buy however I'd wait for the stock to dip a little
lower. The current economic conditions in America especially, Wal-Mart might suffer
because consumers in America will be less inclined to spend as much money. Though
they are still going to grow because Wal-Mart has expanded its operations in emerging
markets such as Asia, it will be able to bounce back. Its long term growth and outlook is
still positive however stock prices will probably take a dip in the near future as America's
economy begins to decline and contract. Wal-Mart still however gathers hundreds of
millions of customers and growing. Their mission of providing low prices will help
attract customers who want most out of their money.
Many analysts agree that Wal-Mart will perform well into the future and a look at WalMart's revenue and market cap compared to its competitors, Wal-Mart surpasses ahead.

Wal-Mart Evaluation
With the right system and leadership in place, Wal-Mart may even monopolize their
market as a retailer. It sells a diversified range of products such as foods, consumable
goods, clothing, pharmacy, gasoline through distributors, photo processing, video rental
stores, and just about everything else might need. Wal-Mart has become the one stop
shop for a person and it has provided quality as well as quantity. They will continue to be
its leader in providing a unique service of diversified goods with a combination of low
prices and customer satisfaction.
Wal-Mart has given a lot of value to its customers however the same couldn't be said
to its workers. The labor force of Wal-Mart has complained about lack of benefits and
low pay. Things are slowly changing as the CEO of Wal-Mart shared in Wal-Mart's
annual report that employees will be given more incentives such as health care benefits.
There also has been much controversy that Wal-Mart has discriminated against female
workers. The CEO of Wal-Mart, Lee Scott has told in the annual report Wal-Mart has
been constantly promoting women especially in the company's growing market of China.
Wal-Mart has better positioned itself for opportunities in all aspects and has become
more aware of people's needs within the business and out.
In analyzing investments and businesses, numbers tell the story. The eight ratios
analyzed were all good or above average in its industry. The current ratio was good
however not the best in the industry. I believe the primary reason why it has more current
liabilities than it does current assets is because the capital used to buy wholesale products
and sell retail are used heavily to keep business booming. Many customers are constantly
shopping in Wal-Mart, and this need has to be met with enough inventories. The quick
ratio which measures short term obligations, suggests that Wal-Mart is capable to pay its

Wal-Mart Evaluation
creditors and has above average number than the industry. The inventory ratio proves
Wal-Mart is the best as it sells a lot more products than its competitors. The inventory is
always moving because Wal-Mart sets its prices to sell. The debt ratio of Wal-Mart is
good but not the best however has done better than most of its competition. Wal-Mart has
a larger net worth and market cap than any of its competitors. There net profit margin
ratio is good however is not performing than it should. I believe the problem is that they
price it too low. Wal-Mart can raise prices to prove this ratio however their volume of
business makes up for this. Their ROI on its assets as well as their ROE is consistent
unlike its competition. As Wal-Mart gains more market shares, I believe they will
dominate its competitors beyond what it is now. The P/E ratio is not too low or high as it
suggests that Wal-Mart is poised for more growth especially as business is expanded to
other markets. Wal-Mart is a great company with very little blemishes, as its management
and leadership make small but important changes to improve its bottom line.

Wal-Mart Evaluation
References

Moyer, C. (2007). Fundamentals of Contemporary Financial Management (2nd ed.).

Thomas-Southwestern, OH

_____. (n.d.) Annual Reports. Retrieved August 3, 2008, from

http://www.annualreports.com/

______. (n.d.) Thomson One. Retrieved August 3, 2008, from

http://tabsefin.swlearning.com

_____. (n.d.) Wal-Mart. Retrieved August 3, 2008, from

http://finance.yahoo.com/q?s=wmt