Introduction
Since the choice of a company that warrants an investment is complete, the analysis can now move on to a more detailed investigation of Walmart. While the initial impressions of the company are positive, it may be operating in an unsustainable manner and be a poor investment choice. Ratio analysis is an excellent tool for determining whether the company’s finances are in good health based on its financial statements. By focusing on different areas of performance, it can decide what issues the business may be facing in the future and how they will affect investors. This part of the report will focus on the current ratio, debt-equity ratio, profit margin, inventory turnover, and dividend yield of Walmart.
Financial Ratios
The current ratio is used to evaluate the company’s ability to handle its short-term obligations by comparing its existing assets and liabilities. A business where it is below one may have difficulty operating shortly, though the statistic is not the sole determinant of liquidity. According to the “2019 annual report” (2020), at the end of 2019, Walmart had $61,897 million in current assets and $77,477 million in current liabilities. As such, the ratio would be 0.8, which puts Walmart into problematic territory. However, as “WMT – Walmart Inc.” (2020) indicates, this tendency has been continuing throughout the recent years, even as Walmart kept growing. As such, while it is noteworthy, the low value in the ratio likely does not mean that Walmart is at risk of short-term failure.
Unlike the current ratio, the debt-equity rate is a measure of solvency, or the company’s ability to pay off its long-term obligations. It is calculated as the result of the division of the business’s total liabilities by its shareholders’ equity. As such, a high value in this ratio would indicate that the company is at risk of having its borrowing turn unprofitable. “2019 annual report” (2020) shows the business’s liabilities at $139,661 million, while its stockholders’ equity is at $72,496 million.
As such, the ratio is at 1.93, which is, once again, a significantly high value that warrants consideration. However, Walmart breaks the trend somewhat by having its current liabilities be higher than its long-term debt and other costs. Combined with its history of growth despite similar statistics, the assumption that the company is not at significant long-term risk appears to be feasible.
Several types of profit margin exist, but when used without an additional description, the term tends to refer to the net profit margin. It is the one that is of the most interest to an investor, as it typically determines the maximum amount of money that the business can allocate to its shareholders. According to “Walmart Inc. (WMT)” (2020), the corporation’s current profit margin is at 2.84%. This value can generally be considered acceptable and tends toward the higher end of retailer profit margins, as they rely on sales volume rather than making money off of every sale (Ross, 2020). Walmart is the largest brick-and-mortar retailer in the United States that is known for its price leadership. As long as it remains profitable, it can generate a significant profit and pass it on to investors.
Inventory turnover is essential to a retail company, as it demonstrates its ability to acquire goods that will sell. It is determined by the division of total sales by average inventory, which is the middle value between stock at the beginning and end of the period. “2019 annual report” (2020) lists sales in 2019 as $510,329 million, while inventories at the end of 2018 and end of 2019 were worth $43,783 million and $44,269 million, respectively. The turnover ratio will be 11.59 as a result, implying the ability to shift almost the entirety of Walmart’s inventory every month. The rate is more than high enough to ensure that the company does not have much, if any, stock that stays on shelves too long. As such, it is an indicator of excellent sales performance and should be viewed in a strongly positive light.
The final ratio used, the dividend yield shows how much of its cost the stock returns in dividends. To that end, it is calculated as the result of the division of the annual dividend by the share price. According to “WMT – Walmart Inc.” (2020), the business’s dividend yield at the end of 2019 was 1.78%, the result of a 5-year downward trend. The statistic is somewhat concerning, particularly at first glance, because it indicates that the investment will provide less of a return. However, Walmart’s dividend payouts have kept growing slowly throughout the period, and, as such, the reduced value is indicative of the company’s rapid growth. Walmart may not pay out dividends that are appropriate to its current size, but the value of one’s investment in it is likely to grow significantly in the future.
Risk Assessment and Recommendations
Overall, Walmart’s current operating model presents some concerns, particularly concerning short-term liquidity and dividend payouts. However, it has successfully grown over its history, both overall and recently, and become a highly attractive stock. Barring extraordinary and unpredictable circumstances, Walmart should present little risk to its current and prospective investors. The company is an industry leader that displays excellent performance in critical aspects such as its profit margin and inventory turnover. It matches most of the recommendations provided by Benzinga Insight (2012), as well, which further raises its attractiveness. Investing in it should be safe and beneficial in the short and long term.
With these considerations in mind, the report recommends that the person invests in Walmart. If the person is concerned about liquidity, they may attempt a dollar-cost averaging approach to minimize the loss in case of a price drop. They may also consider diversifying their portfolio and investing in stocks with a higher dividend yield. This act can take place immediately or after the person receives Walmart’s dividends and can reinvest them. The choice of a safe and stable industry or one where growth is quick is up to the investor. As such, the choice of a specific investment target for such an endeavor would be the subject of another report.
Conclusion
Walmart’s financial ratios are unusual for a company in its industry, which may be a consequence of its size and position as the market leader. In particular, its liquidity and solvency appear to be weak, but they have remained as such for several years, indicating that there is no short-term concern and likely no long-term one, either. On the other hand, its profit margin and inventory turnover are excellent, which is essential for a retail company. Lastly, Walmart’s dividend yield has been dropping recently, but the reason is that it has grown faster than its dividend payouts. Overall, the company appears to be a low-risk investment, and the person who commissioned this report should proceed with the purchase.
References
Benzinga Insights (2012). Six rules to follow when picking stocks. Web.
Ross, S. (2020). What is a good profit margin for retailers? Web.
Walmart Inc. (WMT). (2020). Web.
Walmart. (2020). 2019 annual report: Defining the future of retail. Web.
WMT – Walmart Inc. (2020). Web.