Wal-Mart was created in 1962 by Sam Walton. Walton defined the company’s policy goals to include service to customer, strive for excellence and respect for individuals. The company’s main operations bases are located in United States Canada, Mexico and the United Kingdom. In the United States, the company is the largest retail store. Wal-Mart has over 4000 retail facilities world wide and employs over one millions people globally. It also takes the lead in Mexico, Canada and the United Kingdom. The Company specializes in providing a wide range of products including electronics, jewelry and shoes, toys, fabrics health and beauty aids among others. The company has also undertaken huge investments in photo processing where it owns a photo processing center, Tire and lube express and also the company operates a pharmaceutical department. The company’s main strategic goal is to dominate the retail market in every market that it ventures. This is to be achieved through providing the best retail services in every place the company operates. As a discount retailer the company sells its products at a relatively low price.
According to the company founder Sam Walton, the company will cut the prices in order to increase the sales. In so doing the company will dominate over its local competitors.
The other goal is to expand its market in the United States and internationally. The company has already dominated the US retail market and id doing well world wide. It is now in operation in countries like Korea, china, Argentina and Brazil among others. The other goal is to satisfy its customers worldwide. The company’s products are doing well globally. As at 2002, the company was ranked the best performing retailer and took the first position in the world in terms of sales. It recorded $200 billion sales value.
The objective of this paper is to analyze the annual report of Wal-Mart Stores for the year 2008. This will be done to determine the company’s financial health. This shall be achieved via vetting the company’s long-term financial objectives and its financial performance. The financial performance will be indicated by the financial ratios like profitability, liquidity and efficiency ratios and any other relevant ratio (Gitman 23). The paper will also determine whether the company faces any financial critical issues and also recommend the measures the company should employ in order to improve its financial performance
Wal-Mart long-term financial objectives
According to Sam Walton, the company founder, the company as a retailer aims at offering competitive discounts to its customers in order to reduce the prices of its products. This means a reduction on the mark up and making huge sales. The discount expected to remain at 40-60 % on prices. The company aims at becoming the retail sales leader in every territory it operates. It also aims at eliminating the middlemen so that the customers can buy directly from the company. This will make the company offer competitive prices and beat the competitors in the market. The company will also increase its sales by attracting more customers through ensuring customer satisfaction and provide neat and clean store environment (Gitman 34)
Analysis of Wal-Mart’s financial performance
The purpose of this section is to determine the company’s financial health. Different financial ratios for the year 2007 will be compared with the performance in the year 2008 in order to determine the company’s financial well being. Comparing the specific financial ratios of the company with those of its competitors, Wal-Mart was leading in the year 2008. The projection done was that the company would continue to lead and dominate the market. Though in this year the company did not dominate in all figures, its leadership guarantees it success going forward. The report will review the quick ratio, current ratio, inventory turnover, the debt ratio, net profit margin ratio, return on investment (ROI), return on equity (ROE), the price/earning ratio (R/E). In the year 2008, these ratios indicated a strong financial position of the company.
According to Bodie and Merton (42) the current ratio which is obtained by dividing the current assets by the current liabilities indicates how much liabilities the company has relative to its current assets. The current ratio for Wal-Mart was 0.90 in the year 2007. In January 2008, the ratio had declined to 0.81. The generally accepted quick ratio is 2:1 or any figure above 1. This company has the ratio less than 1 meaning that it was not able to meet its short term obligations. The company weakened between 2007 and 2008 as the ratio declined from 0.9 to 0.81 in 2008.
The quick ratio is obtained by dividing the current assets less inventory by current liabilities. By exclusion of inventory, the ratio assesses the ability of the company to meet its short term obligations assuming that the sales revenue were not present (Brigham and Houston 52). It concentrates on the assets that are really liquid. It is a better measure of the company’s financial strength than the current ratio; the current ratio assumes that the sale revenue will always be present. Wal-Mart had a quick ratio of 0.25 in the year 2007 which declined to 0.21 as at January 2008. This showed a weak financial position of the company. Should the company not make sales in the year 2008, it could not be able to pay its short-term obligations. Despite the conclusion derived from the liquidity ratios, there are reasons why the company was not as liquid as its close competitors like Costco and family dollars are Stores Company. The most basic reason could be that the company has channeled its profits to investment and growth in order to meet its goals. The company management argued that they have survived the inflationary pressure of dollars by holding their liquid reserves in form of other currencies.
The inventory ratio is obtained by dividing the cost of sales by average stock. The ratio indicates how well the inventory is managed.Wal-Mart inventory ratio was 7.68 in 2007 and it rose to 7.96 in 2008. This indicates that the company holds a lot of inventory. This is health for a company that is making big volume of sales. This company makes big volume of sales. Since the company sells its products at a discounted price, it has an edge against its competitors. It is therefore able to make a lot of sales. It has enough stock to cater for the customers in the year 2008. The competitors were found to have almost the same ratio but their sale were lower that that of Wal-Mart.
The debt ratio is obtained by dividing total debts by the total assets (Bodie and Merton 45). The company had a debt ratio of 0.58 in the year 2007 and 0.59 as of January 2008. This is a health position because the company has a lot more assets than debts. When this ratio is high, the company is very unlikely to get debts because the lenders will perceive it as being very risky. For Wal-Mart, the ratio shows that that the company is not overleveraged. The ratio shows the extent to which the company is over reliant on debts.
The other ratio is net profit margin ratio. This ratio is obtained by dividing net profit before tax by net sales. Is expresses the net profit as a percentage of net sales. It indicates the amount of sales left after the cost of goods sold and other expenses are taken care of but before tax liability is settled. For the Wal-Mart, the net profit margin ratio was 4% in 2007 and 3% as of January 2008. This indicates that the net profit before tax was 4% of net sales in 2007 and declined to 3% as at January 2008.
The other ratio is Return on Investment. This indicates the returns on the investment placed in the business by the business owners (Ross, Westerfield and Jordan 41). It shows whether the investment done is worthwhile. The ratio is also called return on assets and it and it indicates the efficiency of an investment. For Wal-Mart, the ROI was 8% in 2007 and remained the same as of January 2008. The ratio was the highest in the industry and was the most consistent compared with the competitors. The owners’ investment was therefore worthwhile.
According to Brigham and Houston (72), the Return on Equity (ROE) also known as the return on net worth shows how efficiently the assets employed in the business generate profit. This is the best ratio for comparing a company with others in the in the industry. This ratio is obtained by dividing net profit before tax by total assets. The Wal-Mart company had ROE of 0.19 in 2007 which remained the same as of January 2008. This shows that the assets were efficiently used and they generated profit of 19% to the shareholders. The ratio was consistent.
Lastly, the other ratio is price/earning ratio. This ratio indicated a very impressive performance of the company. It is computed by dividing the market price per share by the earnings per share. It shows the potential growth in earnings in the future. The investors expect a higher growth in earnings when this rate is high and vice versa. Wal-Mart had a P/E ratio of 17.89 in 2007 and 16.28 as of January 2008.
According to Scott and colleagues (61), these ratios indicate the firm’s financial health compared to other firma in the same industry. Wal-Mart Company has very strong ratios compared to other companies in the same industry. It shows that the company has the potential to dominate in the retail market as is stated in the company’s strategic goals. The strong return on investment (ROI) shows that the company has the potential to solicit investors to invest in the company. It assures the shareholders that their investment in the company is worthwhile. The company has the potential to venture in many parts of the world.
Does the company face any critical financial issues?
The only financial issue the company is facing is about the liquidity ratios. The current ratios and the quick ratios are below the standard and the generally accepted. It means that the company is having fewer current assets than the current liabilities. This could be attributed to the following: the company could be having a high debt collecting period. It could be taking too long to collect debts. The other issue could be that the company’s creditor’s repayment period is very high meaning that the company is paying creditors more efficiently than it is collecting debtors. Lastly, the company could be having bank over drafts making the current liabilities to exceed current assets. The other ratios depict a health financial position of the company.
Ways in which the company can improve its financial position
Wal-Mart can improve its financial position by first addressing the financial issues. The company should improve the liquidity ratios by reducing the debtors’ collection period in order to increase the debtors as at a given period of time. According to Scott and colleagues, the creditors’ repayment period should be reasonably high in order to reduce the repayment to creditors at a given period of time. The company should try as much as possible to avoid bank overdraft in order to reduce the current liabilities.
Wal-Mart has a sober financial position and with the measures proposed above, it will continue to dominate the retail market.
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