Walmart Inc filed its 10-K report for the fiscal year that ended on January 31, 2019. Utilizing the various financial statements, an analysis of the company's liquidity, profitability, and solvency ratios is presented below:
Liquidity ratios
Current ratio
Current ratio = Current assets/Current liabilities
= 61897 ÷ 77477
= 0.8
Accounts receivable turnover
Accounts receivable turnover = Net sales ÷ Average accounts receivable
= 510329 ÷ ( 5614 + 6283 )
2
= 510329 ÷ 5948.5
= 8.6
Average collection period
Average collection period = 365 days ÷ accounts receivable turnover ratio
= 365 ÷ 8.58
= 42.5 days
Inventory turnover ratio
Inventory turnover ratio = cost of sales ÷ average inventory.
= 385301 ÷ ( 43783+44269 )
2
= 385301 ÷ 44026
= 8.8
Days in inventory
Days in inventory = 365 days ÷ inventory turnover ratio
365 ÷ 8.8 = 41.7
It takes approximately 42 days for Wal-Mart to sell its average inventory
Current cash debt coverage
Current cash debt coverage = Net cash from operating activities ÷ average current liabilities
= 27753 ÷ ( 78521+ 77477 )
2
= 27753 ÷ 77999
= 0.4
Solvency Ratios
Debt to asset ratio
Debt to asset ratio = total liabilities ÷ total shareholder equity
Total liabilities and equity $ 219, 295
Total equity - $ 79,634
Total liabilities = $ 139, 661
Debt to asset ratio = 139661 ÷ 219295
= 0.6
Times interest earned
Times interest earned = Earnings before taxes and interest ÷ total interest payable on debts and bonds
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= 11460 ÷ 2129
= 5.4
Cash debt coverage
Cash debt coverage = cash from operating activities ÷ average total liabilities
= 27753 ÷ ( 139661+123700)
2
= 27753 ÷ 131680.5
= 0.2
Free cash flow
Free cash flow = operating cash flow – capital expenditure
= 27,753,000,000 – capital expenditure
Capital expenditure = difference in property, plant and equipment balance + depreciation
= ((185810-185154) +10678) in millions
= $ 11,334,000,000
Free cash flow = 27,753,000,000 - 11,334,000,000
= $ 16,419,000,000
Profitability Ratios
Profit margin
Gross profit margin = ((net sales – cost of goods sold) ÷ net sales) × 100%
= (510329-385301) × 100%
385301
= 0.324 × 100%
= 32%
Asset turnover
Asset turnover = net sales ÷ average total assets
= 510329 ÷ (204522+219295)
2
= 510329 ÷ 211908.5
= 2.4
Return on assets
Return on assets = Net income (after tax profit) ÷ Total assets
= 6670 ÷ 219295
= 0.03 × 100%
= 3%
Return on common shareholders’ equity
= net income – preferred dividend
Average common stockholders’ equity
= 6670 – 6102
6102 × 2.04/share
= 568 ÷ 12448.08
= 0.00456
= 0.5 %
Interpretation of the Findings
The liquidity ratios calculated above provide a glimpse of Walmart’s ability to meet its obligations in the short term. While the company’s average collection period of 42 days and accounts receivable turnover of 8.6 times indicate an active credit collection policy, the low current ratio is indicative of Walmart’s inability to meet its current liabilities. Whenever the current liabilities exceed current assets, companies find it difficult to pay off its short term obligations (Durrah, Rahman, Jamil, & Ghafeer, 2016). In other words, the short term financial strength for companies such as Walmart, whose current ratio falls below one is poor. Similarly, Walmart’s current cash debt coverage of 0.4 is less than one indicating that the company has a low inability to cover its current liabilities from operations cash flow. The possible reasons that could lead to a low current cash debt coverage ratio include inefficient management of cash reserves and failure to generate sufficient cash from business operations. When debts exceed the cash flow, the company's liquidity is low since the liquid assets become scarce. Consequently, Walmart cannot afford to pay off all its creditors. Moreover, a low current cash debt coverage ratio indicates that the company’s financial position is poor.
Solvency ratio analysis for Walmart Inc. indicates that the company possesses the ability to stay in operations as it can meet its long term obligations. Solvency ratios compare a company’s debt to earnings, assets, and equity in an attempt to establish the ability to stay in operations in the future. The low debt to asset ratio of 0.6 indicates that Walmart possesses more assets compared to its liabilities. A low debt to asset ratio is favorable as the company can pay off its long term debts by offloading its assets when the need arises ( Zelgalve & Berzkalne, 2015 ). Based on current income, Walmart possesses the ability to cover its debt obligations in the long term since the times interest earned ratio of 5.4 is higher than one. This ratio indicates the number of times that the current income exceeds the company's annual interest expense. However, the company has weak financial flexibility as it cannot cover most of its debts using net cash or cash in hand. The cash debt coverage ratio of 0.2 is unfavorably low, implying that the company may incur issues in financial stability in the future. Even so, the positive value of the free cash flow indicates that Walmart can achieve internal growth, which could signal the best approaches to cash management.
The profitability ratio analyses for Walmart indicate that the company effectively manages its assets for profit maximization. The gross profit margin of 32% is favorable since Walmart can use not only to cover costs but also achieve competitive returns from its operations. Similarly, the asset turnover ratio of 2.4 is indicative of the company's ability to utilize its assets effectively to generate sales. For every dollar that Walmart invests in its assets, the company generates sales 2.4 times. Concerning the company's overall resources, the return on assets value shows that Walmart generates a 3% profit. Overall, Walmart is a profitable entity, but there is a need for the company to increase its overall profit margins that could be used to address other shortcomings such as the inability to meet short term objectives.
Approaches to Improving Financial Performance
Walmart could seek to improve its financial performance by adopting various activities that include offloading unproductive assets and enacting effective credit policies. From the company's current ratio analysis, it is evident that current liability exceeds assets, and this is unfavorable in the short term. By selling off unproductive assets, Walmart will increase its cash as well as liquidity level, which could enhance its ability to meet short term liabilities. Another recommendation for Walmart to increase its financial performance and, more specifically, its liquidity level is to adopt effective credit policies, including constant follow up of debtors and lowering the credit period. Such credit policy approaches facilitate faster collection of accounts receivable and money owed to the company and results in an increase in the company's assets. These financial activities will most likely impact the current ratio since current assets are likely to increase while current liabilities will reduce. The current ratio will be higher, and Walmart will be able to cover its liabilities in the short term.
Strategic marketing and proper inventory management present other approaches that Walmart could use to improve its financial performance. There is an urgent need for the company to generate more cash from its business operations to cover other costs, including short term liabilities. The specific marketing strategies that the company could use to increase its cash revenues include offering incentives to increase consumer purchase of the company's products. Doing so will increase cash flow into the business and will increase the current cash debt coverage ratio. Similarly, increasing the amount of fast-moving products and acquiring less of the slow-moving products increases the current cash debt coverage. Effective inventory management will ensure that the stock turnover rate is high, which represents proper business operations.
Another recommendation for Walmart to improve its financial operations is to adopt strategies that increase the company’s operating income and decrease operating costs. For instance, the provision of additional products and increasing the prices of goods could be used to increase the net operating income of the company. Changes in operating income are most likely to affect the cash debt coverage ratio. In cases where there is an increase in operating income, the cash debt coverage ratio will also increase ( Soewignyo & Soewignyo, 2017) . Currently, the low cash debt coverage ratio highlights issues in Walmart's financial stability, implying that the company may have problems sustaining its debt obligations in the future. The recommendation for Walmart to improve its operating income, therefore, places the company in a better position to meet its long term liabilities and also increases its operational sustainability. On the other hand, Walmart should seek to reduce its costs of operations by cutting back on unnecessary expenses. For instance, the company should utilize borrowed equipment instead of acquiring new ones if the latter does not offer a significant advantage over the former. Other approaches to reducing the operating expenses include negotiation with suppliers and vendors for discounts whenever Walmart purchases products in bulk. Consequently, a decrease in operating expenses increases the cash debt coverage ratio, which is positive for the stability of the firm.
Lastly, Walmart should seek to increase its profit margins through efficient asset management approaches that include leasing to reduce costs. While it may be recommended to improve efficiency through better utilization of assets, a more feasible approach, especially for fixed assets, would be to lease out to other businesses. Renting out equipment, for example, results in decreased costs since the company can retain only the assets that it needs for business operations. Leasing impacts the asset turnover ratio positively since loaned out items do not count as fixed assets. Consequently, the revenue generated from loaned out items increases the company's profit margins. The return on assets ratio wills also increases should Walmart lease out its unused fixed assets as doing so results in a reduction of asset costs, including that of maintenance.
References
Durrah, O., Rahman, A. A., Jamil, S. A., & Ghafeer, N. A. (2016). Exploring the relationship between liquidity ratios and indicators of financial performance: An analytical study on food industrial companies listed in amman bursa. International Journal of Economics and Financial Issues , 6 (2), 435–441.
Soewignyo, F., & Soewignyo, T. I. (2017). Basic Industry and Chemicals Subsector Cash Flow Ratios and Profitability. Journal of US-China Public Administration , 14 (6).
Walmart Inc. (2019). Form 10-K 2019. Retrieved November 24, 2019, from https://www.sec.gov/Archives/edgar/data/104169/000010416919000016/wmtform10-kx1312019.htm#s6EB4B4E54DED54A7BC64CAC319ACC3EA.
Zelgalve, E., & Berzkalne, I. (2015). The impact of debt ratios on corporate financial performance: the case of baltic listed companies. Applied Economics: Systematic Research , 9 (1), 107–125.
