Financial ratio analysis

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Financial Ratio

Analysis

Basic Accounting (FNBE0145)

Assignment 1Sharon Chow Ci Yung (0313387)

Lee Pui Sun (0314584)

FNBE JAN INTAKE 2013 Names of group members: Sharon Chow Ci Yung, Lee Pui Sun

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Report content

Brief history of Walmart 3 – 6

Profitability Analysis of Wal-Mart

(Year 2012 – 2013)

7 – 8

P/E Ratio 9

Investment Recommendation 10

Appendix 11-15

References 16-17


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Brief History of Walmart

Founder of Walmart

Sam Walton was the founder of Walmart. He was born in 1918 in Kingfisher,

Oklahoma. He made the products low in prices to save the living cost of his customers.

He had become famous in the market. He died in 1992, after receiving the Medal of

Freedom.

Origin of Walmart

It was in Roger, Arkansas. The store was called the Wal-Mart Discount City store and

located at 719 West Walnut Street.

1960’s

The first Walmart store had been opened by Sam Walton in Roger, Ark. The Walton

family owned 24 stores, and made $12.7 million in his Walmart sales. Then, the

company has formally comprised as Wal-Mart Stores, Inc.


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1970’s

Walmart had become a widely traded company. The company had sold their first

stock at $16.50 per share. Walmart also opened the first distribution center and Home

Office in Bentonville, Ark. Walmart had been included on the New York Stock

Exchange, and they owned 51 stores that had already recorded sales of $78 millions.

Sam Walton introduced the Walmart career to a Korean manufacturing facility due to

their inspiration from them. Then, Walmart Foundation has been set up.

1980’s

Walmart had become the fastest company that reached $1 billion in annual sales (276

stores, 21000 employees). Sam’s Club was opened in Midwest City, Okla. To fulfil the

promise to associates after the company had got a pre-tax profit of 8% for the previous

fiscal year, Sam Walton did a hula on Wall Street. Walmart installed the largest private

satellite communication system in the U.S., linking the company's operations through

voice, data and video communication. The first Walmart Supercenter opened in

Washington, and David Glass had promoted as CEO.


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1990’s

Walmart went global, opening a Sam’s Club in Mexico City through a joint venture

with Cifra (Mexican Retail Company). They received the Medal of Freedom, and Sam

Walton declaimed the company’s mission of saving people money. Walmart expanded

into Canada with the purchase of 122 Woolco stores. They had also opened one in

China.

2000’s

Walmart made a shopping online in U.S. They made a major commitment to

environmental sustainability, announcing goals to create zero waste use only renewable

energy and sell products that sustain people and the environment. The first store of

Walmart had been opened in India. They had also started a global commitment to

sustainable agriculture. Walmart surpassed 10,000 retail units around the world.

Walmart had the first Walmart Express stores in Arkansas. Walmart celebrated 50 years

of helping people save money.


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Walmart’s Logo Timeline

1962 – 1968

1968 – 1981

1981 – 1992

1992 – 2008


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2008 – Present

Profitability Analysis of Walmart (Year 2012-2013)

Profitability Ratio 2012 2013 Interpretation

Return on Equity

(ROE)

(24398/73504)x100%

=33.19%

(25737/76749.5)x100%

=33.53%

During the 2012-2013 period, the ROE increased from 33.19% to 33.53%. This means the business is making a higher return on its investment.

Net Profit Margin

(NPM)

(24398/443854)x100%

=5.5%

(25737/466114)x100%

=5.52%

During the 2012-2013 period, NPM increased from 5.5% to 5.52%. This means the business is getting better in controlling its overall expenses.

Gross Profit Margin

(GPM)

(26558/443854)x100%

=5.98%

(27801/466114)x100%

=5.96%

During the 2012-2013 period, GPM decreased from 5.98% to 5.96%. This means the business is getting worse in managing its cost of goods sold (COGS).

Selling Expense Ratio (SER)

(28422/443854)x100%

=6.40%

(29625/466114)x100%

=6.36%

During the 2012-2013 period, the SER decreased from 6.40% to 6.36%. This means the business is getting better in controlling its selling expense.

General Expense (28422/443854)x100% (29625/466114)x100% During the 2012-2013 period,


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Ratio (GER) =6.40%

=6.36%

the SER decreased from 6.40% to 6.36%. This means the business is getting better in controlling its general expense.

Financial Expense Ratio (FER)

(28422/443854)x100%

=6.40%

(29625/466114)x100%

=6.36%

During the 2012-2013 period, the SER decreased from 6.40% to 6.36%. This means the business is getting better in controlling its financial expense.

Working Capital (59940/71818): 1

=0.83:1

(54975/62300):1

=0.88:1

During the 2012-2013 period, the working capital of the business increased from 0.83:1 to 0.88:1. This means the business’ ability to pay off current liabilities with current assets is getting better. However, it does not satisfy the minimum 2:1 ratio.

Total Debt (121367/203105)x100%

=59.76%

(117645/193406)x100%

=60.83%

During the 2012-2013 period, the total debt of the business increased from 59.76% to 60.83%. This means the total debt of the business has increased. In addition, its debt level is higher than the 50% limit.

Stock Turnover 365/(322488/42258.5)

=43.76 days

366/(335127/38575.5)

=42.13 day

During the 2012-2013 period, the stock turnover decreased from 43.76 days to 42.13 days. This means it takes less time to sell its stock.

Debtor Turnover 365/(466114/6352.5)

=4.97days

366/(443854/5513)

=4.55 days

During the 2012-2013 period, the debtor turnover decreased from 4.97 days to 4.55 days. This means it takes less time to collect debt from its debtors.

Interest Coverage 2064+25737 2160+24398 During the 2012-2013 period,


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2064

=13.47 times 2160

=12.30 times

the interest coverage decreased from 13.47 times to 12.30 times. This means the business’ ability to pay back the interest is getting worse. However, it did satisfy the minimum ratio of 5 times.

P/E Ratio

=

=

=15.72 times

Walmart’s current share price is $79.25 per share. It’s earning per share for the year

2013 is $5.04. This means Walmart’s price/earning ratio is 15.72 ($79.25/$5.04).

Therefore, if an investor invested on Walmart by buying its shares, the investor will

need to wait for 15.72 years to recoup his investment.


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Investment Recommendation

During the 2012-2013 period, Walmart’s Gross Profit Margin decreased from 5.98% to

5.96% which means it is getting worse in managing its cost of goods sold. Although

during the 2012-2013 period Walmart’s Working Capital increased from 0.83:1 to 0.88:1

but it still does not satisfy the minimum 2:1 ratio. Moreover, Walmart’s total debt

increased from 59.76% to 60.83% which means its total debt has increased and

exceeded the 50% limit.

On the other hand, Walmart’s price/earning ratio is 15.72 ($79.25/$5.04). A

conservative investor will normally pay no more than price/earning of 15 for a share that

he or she likes and Walmart’s is higher than 15.


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To conclude, although Walmart does demonstrate good financial profitability but it is

not financially stable and its shares are not available at a cheap price. Therefore, it

would not be wise to invest on Walmart.

Appendix


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Figure 1.0 Walmart’s P&L Statement for the year 2012


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Figure 1.1 Walmart’s Balance Sheet for the year 2012


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Figure 1.2 Walmart P&L Statement for the year 2013


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Figure 1.3 Walmart’s Balance Sheet for the year 2013


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Figure 1.4 Walmart‘s net income per common share for the year 2013


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References

Arlan, J., (2010, July 6). $100,000 Walmart Grand Opportunity. Retrieved on 19th,

November, 2013 from http://www.regionalfoodbank.org/Food-Bank-Blog/tag/oklahoma/

Frank, T.A., (2006, April 1). A Brief History Of Wal-Mart. Retrieved on 24th, October,

2013, from http://www.corpwatch.org/article.php?id=13796

Hayes, T. C., (1992, April 6). Sam Walton Is Dead At 74; the Founder Of Wal-Mart

Stores. Retrieved on 19th, November, 2013 from

http://www.nytimes.com/1992/04/06/us/sam-walton-is-dead-at-74-the-founder-of-wal-

mart-stores.html?pagewanted=all&src=pm

Shiling, C. G., (2011, October 7). Social Media and the NLRB (Part 3): Discipline and

Discharge – The Breadth of Concerted Activity. Retrieved on 2nd, November, 2013, from

http://blog.mclane.com/?p=768

Unknown. Wal-Mart; Sam Walton. Retrieved on 31st, October, 2013, from

http://corporate.walmart.com/our-story/heritage/sam-walton

Unknown, Wal-Mart; Annual Reports. Retrieved on 1st, November, 2013, from

http://stock.walmart.com/annual-reports

Unknown, 50 years of helping customers save money and live better. Retrieved on 1st,

November, 2013, from

http://www.walmartstores.com/sites/annual-report/2012/WalMart_AR.pdf


http://www.walmartstores.com/sites/annual-report/2012/WalMart_AR.pdf

http://stock.walmart.com/annual-reports

http://corporate.walmart.com/our-story/heritage/sam-walton

http://blog.mclane.com/?p=768

http://www.nytimes.com/1992/04/06/us/sam-walton-is-dead-at-74-the-founder-of-wal-mart-stores.html?pagewanted=all&src=pm

http://www.nytimes.com/1992/04/06/us/sam-walton-is-dead-at-74-the-founder-of-wal-mart-stores.html?pagewanted=all&src=pm

http://www.corpwatch.org/article.php?id=13796

http://www.regionalfoodbank.org/Food-Bank-Blog/tag/oklahoma/

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Unknown, Wal-Mart Stores Inc. (WMT). Retrieved on 20th, November, 2013, from http://finance.yahoo.com/q?s=WMT


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

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Financial ratio analysis