Walmart

For the fourth year in a row, Wal-Mart is number one on Fortune magazine's annual list. Holding the top spot on the Fortune 500 is a distinction that many companies strive to obtain. However, does size equal financial growth and stability? This paper will research Wal-Mart's financial situation through analyzing its many different financial ratios.

Methodology

For the purpose of this research, all ratios, and pertaining data was retrieved from Mergent Online. The industry used for comparison was obtained by the North American Industry Classification System (NAICS), which replaced the U.S. Standard Industrial Classification (SIC). (http://www.census.gov/epcd/www/naics.html) This peer group reported by NAICS via Mergent includes 25 companies (including Wal-Mart and its subsidiary Costco); other companies on the list are BJ's Wholesale Club Inc., Hills Stores Co., and Target Corp. This group does not include every retailer in the world nor in the U.S. However, it shall serve as a proportional segment of the total industry, which will operate as an unbiased point of reference to be considered the industry average.

Profitability

Wal-Mart continues to grow in virtually every category. In 2000, Wal-Mart recorded $156.2 billion in net sales; this number has steadily increased each year to the $256.3 billion reported in the 2004 annual report. Over $100 billion increase in net sales in only 5 years. However, an increase in net sales means absolutely nothing if it does not manifest into a profit for the company.

In Figure 1, you can see Wal-Mart's profit margin ratio trend for the past 5 years.

Figure 1

As seen in Figure 1, Wal-Mart's profit has stayed around 3.25 over the period. In layperson's terms, this means the net income is approximately 3.25 times more than the net sales. This level is exceptional when compared to the industry average. Over the period, Wal-Mart's profit margin has been three times that of the industry.

Important in determining a company's profitability is its efficiency. In order to determine a company's efficiency, we must look at the return on assets, which is shown below, in Figure 2.

Figure 2

Operating efficiently is imperative to maintaining a profit. Wal-Mart has proved it is operating efficiently by its consistent level of return on assets. While the industry flutters back and forth with inconsistent results, Wal-Mart maintains a return on assets ratio of nearly 8:1. In an economy, which has been relatively unstable over the past 5 years, Wal-Mart offers its employees, stockholders and potential stockholders a level of consistency.

When considering purchasing stock in a company, consistency is very appealing. Even more appealing than general consistency, is consistent return on equity. "Perhaps the most important goal in operating a company is to earn net income for its owner(s). The return on common stockholders' equity measures the success of a company in reaching this goal". (Wild, 2000) By analyzing the data from Figure 3, we can compare the return on equity rates of Wal-Mart to the industry.

Figure 3

Omitting the results from the year 2000, which are inflated due to abnormal reporting by two companies, will more accurately depict the industry's status. Including data from 2003, which could be viewed as inflated in its own rights, the industry average was still nearly 22, while Wal-Mart remained relatively consistent over the same period at 20. In three of the five years considered, Wal-Mart has returned a greater percentage of income to its stockholders than the industry average.

Many smaller and/or lesser companies may ask, how is it that a company of that size can remain so consistent, profitable and efficient? To answer this question we will look to Figure 4, the operating margin ratio.

Figure 4

Over the past 5 years, the industry-operating margin has been on a steady decline. However, Wal-Mart has maintained a steady operating margin of roughly 6%. Wal-Mart's consistent return of $0.06 per $1 may have been seemed inadequate in 2000, when compared to the industry average of $0.14. Now in 2004, that $0.06 is superior to the industry average of nearly $0.02. This clearly explains Wal-Mart's strong and consistent profitability over the past 5 years. However, it has taken aggressive business decisions, marketing, and efficient management of company assets to reach this point.

Asset Management

The difference between great companies and average companies is their level of commitment to improving their processes. Wal-Mart is undoubtedly an extremely successful company. However, the commitment to improvement that got them to that spot will determine whether they stay there. Wal-Mart's consistency in its profitability is something to look highly upon; however, is this consistency a sign of inefficient management of company assets? We will look to the following section for the answer.

By comparing the revenue to the total assets, we will see the effectiveness of Wal-Mart's management of its assets. See Figure 5, shown below.

Figure 5

The revenue/total assets ratio, also known as Asset Turnover Ratio, shows effectiveness of assets on the company's revenue. Over the period, Wal-Mart has maintained a return of approximately $2.50 per $1 of asset. This return is comparable to the industry average of $2.25. This means that Wal-Mart is more aggressive in its uses of assets than the industry. "A high ratio compared with other firms in the same industry could indicate that the firm is working close to capacity. It may prove difficult to generate further business without additional investment". (Brealey, R., Marcus, A., Myers, S., 2003) However, we already know that Wal-Mart has increased net sales by $100 billion in the past 5 years. So according to Brealey, Marcus, and Myers, it found be a safe bet to say Wal-Mart must have made significant investments.

Liquidity Indicators

One of the most common ways to determine a company's liquidity is by using the current ratio. By drawing a direct correlation between current assets and current liabilities, we can see the company's ability to run its day-to-day