Walmart and Amazon Companies’ Financial Analysis

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Walmart and Amazon have become synonymous names in the U.S. following their innovative retail industry strategies. These two companies’ successes can be attributed to how they have changed the way people go shopping (Cho & Volpe, 2017). Amazon has an interactive website that ensures a good customer experience in product selection. On the other hand, Walmart has a chain of stores placed in strategic locations offering relatively low prices. To critique the differences between the two companies, this report explores the variances across dimensions of financial performance indicators such as liabilities, assets, statement of cash flows, gross profit margin, income statements, and solvency.

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Retail Industry Summary

To amalgamate the differences, it will be necessary first to analyze the industry and the two companies. Both Amazon and Walmart are grouped under the retail sector, but there are distinct forces that drive the companies to influence their competitive nature with time. Amazon’s success is hedged on e-commerce and online auction, while Walmart invests in warehouses and clubs (Cho & Volpe, 2017). The retail industry is highly influenced by the global price of crude oil, per capita disposable income, mobile internet connections available, and services conducted online.

Amazon

Amazon has gained a lot of popularity following its innovative e-commerce as the number one bookshop globally. Jeff Bezos started Amazon company as a bookseller in 2004, headquartered in Seattle, Washington. Internet accessibility in the early 90s’ saw Jeff Bezos grab the opportunity to capitalize via starting Amazon e-commerce (Furgang, 2018). Upon learning, Jeff Bezos realized that the Internet could integrate the whole world in eliciting services such as online shopping, among other online transactions.

Amazon went online under Bezos’ leadership in 1995, marked as one of its tremendous success. In the second quarter (Q2) of 2015, Amazon’s financial reports indicated that the company had made sales worth $23 billion, with the U.S. alone having a proportion of 60% (Furgang, 2018). Amazon is one of the syndicates with high revenue with over 300 million product categories, which can be attributed to its innovative service delivery measures and a wide range of subsidiary branches (Furgang 2018). Amazon is globally known to offer tailored services toward a good customer experience, putting the organization at the top in the retail market.

The company has adopted new ways, such as Amazon retail shops, Amazon Marketplace, and Amazon Web Services, to actualize the company’s evolution up to date. Through Amazon Retail, the company possesses an inventory where it stores its products for the 743 distribution centers across the U.S. (Furgang, 2018). However, third-party agents have to pay a fee, which elevates Amazon’s revenue. Amazon Web Services acts to make use of an offline computing system for storing information.

Walmart Inc.

Walmart Inc. is a retail corporation with subsidiary branches across the U.S., Europe, and Asia. Sam Walton founded Walmart in 1962 in Bentonville, Arkansas, U.S. (Lu, 2019). Walmart operates in three models, including Sam’s Club, Walmart U.S., and Walmart International. Walmart is among the most prominent companies globally, making over $300 billion annually (Lu, 2019). Additionally, it is considered one of the world’s biggest employers, with over 1.5 million internal clients (Lu, 2019). The company’s sales are generated by the 11,526 branches globally, including the Walmart website (Lu, 2019). It is, therefore, considered one of the largest proprietors across the U.S. and Europe.

E-commerce has evolved over the last several decades as a strategic means of generating profits, but some corporates are yet to adopt it. Walmart does not heavily rely on online sales as they create less than 3% of the sales (Lu, 2019). The organization is still in the evolution stage to compete in the digital space as the company progresses from brick-and-mortar retail to the channels that involve online trades. In the second quarter of financial analysis of 2015, Walmart reported $119 billion in sales, with the U.S. alone making 62%, international sales making 26%, and Sam’s Club, a subsidiary of Walmart, with 12% sales (Lu, 2019). Online marketing can sometimes work better for new market entrants, but old organizations seem to have passed that path of trading.

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Financial Performance Indicators

Financial data from the balance sheets for Walmart and Amazon in 2019 will be used to make a comparison between the two companies. Walmart’s revenue in 2019 amounted to $514.4 billion, while Amazon’s was $280.522 billion (Macrotrends, 2020). In terms of income, Walmart outshined Amazon in 2019. Four financial factors shall be calculated to provide a more transparent comprehension of the company’s financial analysis, including the current ratio, debt ratio, and real to total assets ratio.

Real to Total Assets Ratio

Using the annual financial statements for Amazon and Walmart, the real to total assets were evaluated. The real to total assets ratio is the company’s liabilities divided by the number of its assets (Ebert et al., 2017). Utilizing the two companies’ 2019 annual financial spreadsheets, the real to total assets were found to be 0.92 and 0.59 for Amazon and Walmart, respectively (Macrotrends, 2020). Financial assets for the corporates were calculated using factors including long-term investments, short-term investments, net receivables, and cash equivalents. Therefore, all remaining assets shall be based on real assets. A corporate operation in optimal ranges is expected to have a high real to total assets ratio where, in this case, Walmart has a high financial status compared to Amazon.

Current Ratio

The current ratio is defined as the existing assets over the current liabilities. It is used to reflect on a company’s ability to pay short-term debts intuitively a year using short-term investments (Ebert et al., 2017). A higher current ratio is a sign of high liquidity, which grants a corporate the ability to meet short-term liabilities. The reverse is valid for a lower current ratio as a corporate may struggle to meet short-term debts. Based on myriad scholars, the current ratio of two is termed a financial comfort position.

In contrast, a current ratio of more than one across the retail industry reflects that the company can cover short-term debts using its liquid assets. In the recent analysis, Walmart has a recent ratio analysis of 1.04, while on the other hand, Amazon has a current ratio of 0.93 (Macrotrends, 2020). Therefore, it can be concluded that Amazon may struggle to meet short-term debts compared to Walmart, which has a healthy current ratio.

Debt Ratio

The debt ratio is the total long-term and short-term debt over total assets. The debt ratio can alternatively be interpreted as the proportion of corporate assets that are serviced by debt. While a debt ratio that is less than one reflects more assets of a company than liabilities, a lower one is preferred. In the revenue analysis, Walmart evolves to have a debt ratio of 0.58, while Amazon has a debt ratio of 0.77 (Macrotrends, 2020). It can be seen that Walmart only utilizes a small portion to service debt compared to Amazon, which devotes a significant amount of assets to servicing debts.

In conclusion, Walmart’s debt Ratio reflects how the company spends its proportions on servicing assets compared to Amazon, which finances its growth via high-risk debt. On the other hand, Amazon’s minimal higher ratio also shows how Amazon is competent in meeting short-term debts. From the findings, Walmart seems to be placed in a better chance to weather the retail market than Amazon.

References

Cho, C., & Volpe, R. (2017). Independent grocery stores in the changing landscape of the US food retail industry (No. 1477-2017-5743).

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Ebert, R., Griffin, R., Starke, F., & Dracopoulos, G. (2017). Business essentials (8th ed.). Pearson Education.

Furgang, A. (2018). Jeff Bezos: Tech Entrepreneur and Businessman. Enslow Publishing, LLC.

Lu, M. (2019). Evaluation of the financial situation of Walmart company [Master’s thesis, VSB – Technical University of Ostrava Faculty of Economics]. Web.

Macrotrends. (2020). Amazon Revenue 2006-2020. Macrotrends. Web.

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BusinessEssay. 2022. "Walmart and Amazon Companies' Financial Analysis." November 25, 2022. https://business-essay.com/walmart-and-amazon-companies-financial-analysis/.

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