Wal-Mart Financial Statement Analysis

The Paul Merage School of Business at UC Irvine Financial Statement Analysis & Reporting let outest Quality and Asset Analysis Comp each WALMART Kian BolooriHee Jun ChungDaejune instant 1. Qualitative Analysis for the environment and the political party (1) perseverance ANALYSIS Walmart is in the snub sell merchant intentness. This indus strain started in the 1950s, grew in the 1960s, and maturate in the 1970s. With excommunication to a moderate egress limit in the 1990s, the industry had remained stagnant since the 1970s. Today, three study players in the industry ar Walmart, organize and Costco.The state of the sack sell industry is best understood finished the Porters Five Forces analysis. * Competition juicy Competition among push away rate retailers resembles that of an oligopoly in that Costco, Target and Walmart give birth a vast majority of the foodstuff address. In foregone decades, competition among the firms was minimized because they for for each one one targeted a different market segment. For example, Target focused on higher end neighborhoods eyepatch Walmart focused on rural locations. However, as the firms began to grow, they had to thrive beyond their legitimate targeted segments.As such, the firms started competing in the same locations, which intensified competition. This creator remains a dominant issue in the ignore retail industry. * Barrier to New Entrants MEDIUM-HIGH unalike other industries, the reject retailer industry does non require a particular set of adept knowledge for reinvigoratedfangled(a) entrants. However, the major players in the market discombobulate established unfaltering procurance and statistical scattering light upworks that prevent new entrants from easily establishing their own. As such, new entrants would find it difficult to establish procurement and istri just nowion lastworks while keeping be belligerent with those of Walmart, Costco and Target. * Bargaining force of Buyers LOWMEDIUM Buyers have different trains of motive depending on their location. In rural argonas, buyers have slight power. in that location is usually one force out retailer for each rural region. As such, that retailer has a virtual monopoly in that region, which allow it to extend prices, and frankincense matu symmetryn margins. On the other hand, buyers in suburban and urban markets ignore easily switch amid displace retail competitors as a solution, each discount retailer must keep its prices competitive in those markets. Bargaining Power of Suppliers LOW Suppliers to discount retailers hold little to no power. When the major discount retailers initiate affinitys with new suppliers, they typically request contracts for the new suppliers whole arsenal. As a result, the suppliers bring solely reliant on the discount retailer for their business. The discount retailer wherefore leverages this reliance by demanding dismantle prices on the inventory. A s a result, suppliers typically have to sell their inventory at low prices that result in small profit margins for them and depress inventory be for discount retailers. Threat of Substitutes LOW authoritative existing substitutes to discount retailers include supermarkets, traditional retailers, and dress shop shops. However discount retailers argon commensurate to leverage their strong distribution doughworks to offer displace prices than mevery of the substitutes. As a result, discount retailers are qualified retain business despite the existence of substitutes. (2) economic CONDITIONS The incident that there are fewer opportunities to expand in the United States has made it difficult for discount retailers to draw out emergence profits.In fact, discount retailers attempts to image new markets have resulted in community resistance. In Watts, CA, community members successfully lobbied to prevent Walmart from opening a new store in the neighborhood. disrespect these cha llenges, discount retailers have found new opportunities to amplification profits. For one, discount retailers have started converting their stores into supercenters. These supercenters feature traditional discount retail products and grocery store products in one location. in like manner, discount retailers have begun expanding their international trading ope dimensionns.For example, Walmart has partnered with companies in South Africa, China, and brazil-nut tree in piece to expand into those markets. These opportunities have already proven profitable and continue to be a focus for the major discount retail firms. (3) WALMART outline Walmarts business system is to keep damages low and pass the savings down to the customers. Walmart accomplishes this strategy through several convey. First, Walmart cuts costs in its procurement channels. Walmart cuts out the manufacturers representatives and works with suppliers directly.In doing so, Walmart make unnecessarys 3-4% on costs . in any case, Walmart is able to use its IT networks to make sure the company orders the dear about of inventory from suppliers so that the Walmart stores experience neither overstock nor stock-out. Second, Walmart keeps its labor costs low. Walmart maintains a economical culture for all employees. For example, executives at the company are prohibited from accepting meals and opens from third parties. Additionally, Walmart provides store workers with yield and benefits that are below those given by competitors.Third, Walmart invests in ways to cut distribution costs. For example, Walmart mastered the big cross-docking to transfer merchandise directly from inbound trucks to store-bound trucks without storing the skilful in its distribution centers. Through these innovations, Walmart has been able to save 3-4% on its distribution costs. Through these agent, Walmart has significantly lower its costs when compared to competitors. This point of inconsistency helped Walmart grow to force the leading discount retailer in the world. . numerical Analysis for the company and the peers (1) CASHFLOW ANALYSIS From fiscal division 2007 to fiscal year 2010, Walmart recorded solid ripening in some(prenominal) sales and net in stick with however, net increase in hard silver and interchange equivalents does not have the same growth flesh. Net currency flow is the aggregate of bills flow from operations (chief monetary officer), capital flow from investing activities (CFI), and cash flow from financing activities (CFF). As is expected, chief financial officer does course of instruction ordained in correlation with the increases to sales and income.On the other hand, CFI and CFF experienced sharp decreases. According to the common-size statement of cash flow, net CFI raft out of net chief financial officer fork outs a generally decreasing snub during the accomplishment (-71%, -76%, -46%, -44%, respectively for 2007, 2008, 2009, 2010), on the other ha nd, the destiny of net CFI change magnitude constantly (-25%, -36%, -43%, -54%, respectively for 2007, 2008, 2009, 2010), which implies that War-Mart has become throwing equal attention to investiture for the succeeding(a) growth and shareholder value recently.Having solid CFO, Walmart had cash for investing and financing without borrowing a short-run debt As a result, while Walmart experienced 9% growth in sales and 13% increase in net income in 2008 compared to the previous year, net cash decreased almost 400%. Target shows a si sea milear cash flow pattern to that of Walmart. Target has been reducing investment level and cogitate more on shareholder return and the debt repayment. On the other hand, Costco has been managing the cash flexibly over the past four years in order to sustain the firms needs for investment.Costco still concentrates on investing activities, which can be evidenced by the portion of net CFI (-72% of net CFO in 2010). According to 10-K of the year 20 10, Costco opened 13 new warehouses in 2010, which was directly related to the huge minus CFI. For Walmart, the report adjustment accruals, which is measured as the crack cocaine amidst net income and CFO, is at 40%. The method of accountinging adjustment accruals are one of indicators for earnings quality. date 40% is significant, it is smaller than that of Walmarts competitors. Changes to rate of flow assets and genuine liabilities have a large impact on the accounting adjustment accruals.For instance, Walmart had accounts receivable increased by $297 mil in 2010, which banishly impacts on cash flow, but its inventory decreased by $2,213 mil in the same fiscal year, which had a prescribed influence on cash flow from operations. Despite these changes, CFO has still maintained a growth trend. Consequently, Walmart shows a steady upward trend of exhaust cash flow, which is the difference between CFO and large(p) expenditures, during the past four years ($4. 6 bil, $5. 7 b il, $11. 6 bil, $14. 1 bil, respectively for 2007, 2008, 2009, 2010). The cash fatigued on CFI went to purchase of PPE in order to expand menstruation operations.The firm used to invest more or less 80% of CFO in PP&E in 2007 and 2008, however decreased the investment to 45% level recently. A significant level of CFF went to shareholder return, including dividends and share buybacks (e. g. $11. 4mil or 77% of net income in 2010). As such, Walmart appears to provide value to its shareholders. Similarly, Target and Costco in any case invested super in PP&E and return more than 70% of net profit to investors. To sum up, we can befool a certain pattern in cash flows of the three firms as follows, which shows that Walmart, Costco and Target are matured and generating hefty cash flow. Walmart Target Costco Accrual (NI/CFO) 58% (Gap 42%) 54% (gap 46%) 53% (gap 47%) CFO Positive,Constantly Growing Positive,Growing Trend Positive,Growing Trend CFI prejudicial (for PP&E) ostracise (f or PP&E) minus (for PP&E and short investments) CFF Negative (for shareholder returns) Negativeexcept in 2007 ($7. 6mil long-term debt in 2007) Negative (for shareholder returns) One cause of concern from Walmarts cash flow is a contradiction between Walmarts growth strategy and CFF.The high levels of dividends that Walmart gives its shareholders whitethorn limit the amount of cash the company has for expansion. CFO has remained high luxuriant to cover CFI, but this might not always be the case. As a result, Walmart may have to cut the amount of dividends it pays if it wants to continue growth during a period when CFO is decreasing. (2) EARNING choice ANALYSIS Walmarts earnings have been positive and growing each fiscal year from 2008-2010. The increase in earnings is in the main collectable to the fact that receipts had too increased in that timeframe. There has been a 7. 5% increase in raw from 2008 to 2009 and a 0. 95% increase in gross from 2009 to 2010. A large majori ty of Walmarts taxations come from its core operationsthe net sales of products that Walmart had procured from suppliers and change at its retail locations. The Net Sales form is computed as the sales less sales task and estimated sales returns. Less than 1% of total revenue is based on membership revenue. Membership revenue is from customers who purchase yearly Sams union memberships. There are several measurable features regarding the relationship between Net Income and CFO.First, the Net Income and CFO both trend positive, growing at a corresponding rate. Second, CFO is larger than Net Income each year. This is primarily due to the adjustment to depreciation and amortization. Third, the adjustment due to an increase in accounts receivable is fairly constant, and is not a significant portion of the total CFO. These features apprize that the Net Income is a good indicator of cash inflow from operations, which would be expected from a company that collects cash at point of sa le. Walmart recognizes revenue at point of sale when customers purchase products at the retail locations.Walmart recognizes revenue from gift cards plainly when the gift card is redeemed. Walmart recognizes revenue from advantages when the company performs the service however, revenue from services is a small portion of total net sales. For membership, Walmart recognizes the revenue over the period of the membership. For example, if a membership cost $120 upfront, and then $10 revenue would be recognized each month of the 12-month membership. Until its recognized, the cash collected is accounts as a liability (Deferred Membership Revenue). Expenses are dual-lane into various categories.Cost of sales is all costs related to the attainment and transport of inventory. Any currency received from suppliers, such as reimbursements for markdowns, is reduced from the cost of sales figure. Furthermore, Walmart does not include its costs of distribution facilities in its cost of sales, wh ich can make its gross profit seem disproportionally stronger than its competitors. However, these costs can be found within SGA. SGA, Advertising and Pre-Opening costs are all recognized the same period that they are spent. Walmart does not seem to participate in any earnings management.The small account receivable account suggests that sales can be seem in cash inflow, importee there is little disaster that Walmart fabricated sales figures. Furthermore, Walmart did not make any significant changes to its depreciation cycle per seconds and PPE purchase patterns, which suggests that Walmart did not try to inflate its earnings to disguise unfavorable in operation(p) performance. (3) RATIO ANALYSIS Financial ratios are a measurement of the companys overall health. In general, the financial ratios of a company are compared with those of its major competitors (cross-sectional and trend analysis) and to the companys prior periods (trend analysis). profitability proportion The ability to generate profit on capital invested is a key determinant of a companys overall value. Profitability is the net results of a human body of policies and decisions. Here, the key ratios, ROCE and ROA, were calculated to evaluate the profitability in general. Return-on-assets (ROA) has been increased to 9. 6% in 2010 from 8. 4% in 2007 (See exhibit 10-2). This high ratio indicates that Walmart generated high income with given level of its assets. Return-on-capital employed (ROCE) has also increased to 21. 3% in 2010, from 19. 1% in 2007 (See exhibit 10-1).Compared to the competitors, Walmart has the highest ROA and ROCE, which illustrates that Walmart is the most profitable company in its industry. * Activity Ratio Activity ratio measures how expeditiously a company utilizes its assets. These ratios are analyzed as indicators of ongoing operational performances on other words, how efficaciously a company uses its assets. Walmarts inventory swage in eld was 40 old age in 2010, w hich is a modest improvement from 45 old age in 2007 (See exhibit 11-1). The lower holding days of the inventory indicates that Walmart has made progress over the period in terms of inventory management.Considering the Sales growth, which increased over the periods, Walmart has effectively managed its inventory, avoiding any shortage or inadequate inventory levels. Walmart continued to set their goods in fairly low price in order to have its inventory move faster. Even though inventory turnover ratio of Walmart is less than that of Costco, Walmarts improvement in its inventory turnover is break out than that of Costco or Target. Additionally, account payable turnover little by little increased from 9. 9 days to 10. 22 days (See exhibit 11-1).The longer period of holding the forecast payable indicated it has made good use of on tap(predicate) credit facilities. * Liquidity Ratio (Short-Term) A silver-tongued asset is one that trades in an active market and can be supplely conve rted to cash. A firms liquidity position determines whether a firm has enough resources to meet its current obligations. Walmarts current ratio deteriorated from 0. 9 in 2007 to 0. 87 2010 but then is improving from 2010 to 2011 exceeding 0. 88 in 2009 level. Also quick ratio and cash ratio amend from 2009 to 2010 (see exhibit 12-1).Nevertheless, it can be a negative sign for the company to have a current ratio less than 2. 0 and a quick ratio less than 1. 0. In fact, Walmarts current ratio and quick ratio are lower than that of Costco and Target. A lower ratio indicates less liquidity, implying a greater reliance on operating cash flow and outside financing to meet short-term obligation. However, a reason for the troubling liquidity ratios is that Walmart has been apply its cash for fixed assets as part of its drive to expand. As such, Walmart can generate cash by slowing growth if it has an urgent need to pay off current obligations.Additionally, Walmarts cash modulation cycle was greatly decreased to 4. 8 in 2010 from 8. 5 in 2007 (See exhibit 11-1). It is the shortest operating cycle of its industry. A shorter cash conversion cycle indicates greater liquidity. The short cash conversion cycle implies that Walmart only needs to finance its inventory and accounts receivable for a short period of time. Its cash cycle is optimized, meaning it is able to sell inventory quickly also have less time capital buttoned up in the business process thus better for the companys bottom line. * Solvency Ratio (Long-Term)Solvency refers to a companys ability to suffer its long-term debt obligations. Solvency ratios provide information about the sex act amount of debt in the capital structure and the enough of earnings and cash flow to cover involvement expenses and other fixed charges as they come due. This is important for assessing the risk and return characteristics such as its financial leverage. Walmarts total liabilities-to-assets ratio was 0. 57 in 2010, ar ound decreasing from 0. 58 in 2009 and 2008. This means 57% of total asset are financed with debt . long-term debt-to-equity ratio was 0. 0 in 2010, again slightly decreased from 0. 52 in 2009 (See exhibit 12-1). This means 50% is the Walmarts capital represented by debt. Although the size of asset and debt far exceeds the size of its competitors, but the ratios did not show significant proportional difference between Walmart and its competitors. Interest coverage ratios, calculated by using EBIT divided by total interest expense, can be viewed as good if the number exceeds 2. 0. For Walmart, the interest coverage ratio was 11. 8 in 2010 that was improved from 10. 5 in 2007 (See exhibit 12-1).This increase indicates that Walmart has become stronger in solvency, offering greater government agency that Walmart can service its debt from operating earnings. As for evidence, Walmarts CFO-to-total liability was calculated to be 54. 5% in 2010, change magnitude from 48. 4% in 2007 (See exhibit 12-1). This is relatively high compared to its peers such as Costco and Target. 3. Conclusion base on the aforementioned analysis, including qualitative and quantitative, we would like to pause that Walmart is a company that can be extremely recommended for investors to buy.First, the industry is still attractive when it comes to high hindrance to entry, low power of buyers and suppliers, and low threat of substitution. Also for the company level, Walmart has differentiated itself successfully by commission on the lowest price. Second, Walmarts cash flows show a typical pattern for a healthy and matured firm that is, Walmart has a constantly growing positive CFO, a negative CFI for the investment in PPE, and a negative CFF for shareholder returns such as dividend and share repurchase.Also, the strong CFO generates a increasing trend of FCF (Free Cash Flow), which indicates that the company has a say-so for flexible cash management whether for the growth investment or shareholder returns. Third, Walmart appears to have quality earning. Further, there are close ties between net income and CFO in other words, both net income and CFO show positive trend and increase at a comparable rate. Also Walmart is engaged in neither manipulating earnings nor making substantial changes in accounting methods. Fourth, Walmarts ratios look good.ROA and ROCE are strong when compared to those of Costco and Target. The liquidity ratios are relatively low, but can be addressed if Walmart chooses to retain cash kind of of using it on growth. Finally, Walmarts P/E ratio on May 19, 2011 is 11. 5, which is relatively low when compared to that of Walmarts competitors (Target 11. 9, Costco 26. 3). As such, Walmart appears to be undervalued. Ultimately, the analysis on Walmarts financial statements indicates that investors would be well informed to buy Walmarts stocks.