This paper seeks to evaluate Wal-Mart’s financial performance over the past two years using financial ratios. The ratios to be used include profitability, liquidity, and solvency ratios.
As to profitability, Wal-Mart appeared to have shown no improvement in 2009 compared to 2008. However, it was more profitable compared with the average competitors in the industry. Comparative gross margins, operating margins, net profit margins, and return on assets for 2009 and 2008 came out the same. It was only the return on equity of Wal-Mart which slightly declined from 54% in 2008 to 53% in 2009. This almost the same profitability for the last two years happened despite the increase in revenues by 7% which was also incidentally higher than the industry average of 0.28%. Wal-Mart’s profitability ratios have performed better than the industry in terms of gross margin, operating margin, net profit margin, return on equity, and return on assets.
Surprisingly, despite the lack of increase in profitability ratios, the company’s liquidity improved in 2009 compared to 2008. Liquidity measures the capacity of a company to meet its currently maturing obligations using the current ratio and the quick asset ratio and Wal-Mart may be asserted to be liquid The quick ratios of Wal-Mart improved from 0.16 in 2008 to 0.20 in 2009 while the current asset ratios improved from 0.82 in 2008 to 0.88 in 2009. See Appendix A. This would mean that the improvement was not caused by improvement in operation by either financing or financing activities of the company in 2009. As per investigation of the cash flow statements for the last two years, cash from operating activities increased in 2009 compared with 2008, and cash outflow from investing activities decreased in 2009 compared with 2008 (Reuters.com, 2009b).
Wal-Mart’s reported current ratio of 0.88 in 2009 is still higher than the industry average of 0.80 and a quick ratio of 0.20 in 2009 is however lower than the industry average of 0.58. See Appendix A. This indicates that Wal-Mart is still more liquid than average competitors although, in terms of hard cash, the company is less liquid as against competitors.
Although the company may not be considered theoretically liquid as its ratios are below 1.0, that fact the other average competitors could not also attain a better liquidity position indicates that Wal-Mart is not in a disadvantage position.
As to solvency, WAL-MART has shown a slight improvement from a debt to equity ratio of 1.53 in 2008 to 1.50 in 2009. Despite such slight improvement, the company showed an inferior position compared with the industry of 1.01. See Appendix A. As contrasted with earlier ratios, the lower the debt-equity ratios, the better it is for a since its means less exposure to risks. When applied to Wal-Mart, this means that the company has more debt obligations to equity investment from owners while competitors in the industry have just less. Wal-Mart’s solvency refers to the company’s long-term capacity to keep up its stability over the long term. Compared with liquidity which refers to the short-term, a company must as well be able to survive and grow over the long term.
To conclude, since Wal-Mart has better profitability and liquidity but inferior solvency than the industry average, it would mean that the company has chosen to strengthen its short-term position rather than longer-term using fund operating and by slowing down in capital investments as supported by the decreased in capital investments. For investment purposes, Wal-Mart is therefore still a good investment option.
Appendix I – Summary of Financial Data and Ratios vs. Industry Average
Wal-Mart (2009).Annual Report for 2009 of Wal-Mart. Web.
Reuters.com (2009a). Financial Ratios of the Industry.
Reuters.com (2009b) Cash Flow Statement of the past five years.