The selected company is Wal- Mart stores Inc. Wal-Mart is a leading supermarket of the US with large grocery and daily need stores selling a large range of customers’ daily needs. In this write up the purchase of futures is considered with regard to expected future prices of shares of the company.
Factors determining future market prices
The following chart shows five year data of the market prices of the shares of Wal- Mart. This data has been taken from Yahoo.Com.
The above table shows that prices per share of Wal- Mart Inc are fluctuating during the period from 2005 to 2009.This fluctuating trend indicate that shares of the company were active at New York Stock Exchange. However the market price of a share depends upon a number of factors like Earning per share and Price/ earning ratio of the company.
‘The firm’s earning per share (EPS) is generally of interest to present or prospective shareholders and management. EPS represents the number of dollars earned during the period on behalf of each outstanding share of common stock.’(Lawrence J Gitman, page 68)1 The earning per share (basic) of Wal- Mart for the last three years since 2007 are 3.35p, 3.16p, and 2.93p respectively.
Price earning ratio is also a good indicator of the market position of shares of a company. ‘The P/E ratio is commonly used to assess the owners’ appraisal of share value. The P/E ratio measures the amount that investors are willing to pay for each dollar of the firm’s earning. The level of this ratio indicates the degree of confidence that investors have in the firm’s future performance. The higher the ratio, the greater is the investors’ confidence.’ (Lawrence J Gitman, page 69-70)2 P/E ratios of Wal- Mart Stores Inc for last three years since 2007 are calculated as under:
The above figures show that P/E ratio has a fluctuating trend similar to the EPS of the company. According no determined policy can be made for purchase of futures of the company. Investors will have to take a risk if they intend to go in to purchase futures at present.
Clear policy will emerge only when the results for 2009 will be published. Keeping this scenario in view, the only result that can be drawn is that prices of the company are swinging up and down and thus investment in futures at present is certainly risky.
- Lawrence J Gitman, Introduction to Managerial Finance, Eleventh edition, Pearson Education, 2006, page 68
- Ibid, page 69-70