Analysis of Wal-Mart’s Financial Performance

Financial performance is the most important indicator of the extent to which a company’s corporate and business objectives are being accomplished. This report provides an analysis of Wal-Mart’s financial performance. Wal-Mart is a multinational retailer headquartered in the United States. Analysis of Wal-Mart’s financial reports indicates that the company has achieved impressive financial performance compared to its competitors in the retail industry. Although the company uses both debt and equity to finance its business operations, it relies more on equity financing. The company has performed well in terms of key ratios, meaning that its financial performance is strongly aligned to corporate objectives. Despite Wal-Mart’s strong financial performance, it has to contend with various issues that have threatened its financial viability. These issues include increasing competition and litigations.

Table of Contents
TOC o “1-3” h z u 1.Introduction PAGEREF _Toc469640877 h 42.Analysis of Wal-Mart’s Financial Performance PAGEREF _Toc469640878 h 52.1Capital Structure PAGEREF _Toc469640879 h 52.2 Key Financial Ratios PAGEREF _Toc469640880 h 73.Key Issues Affecting Wal-Mart’s Financial Viability PAGEREF _Toc469640881 h 104.Conclusion and Recommendations PAGEREF _Toc469640882 h 12References PAGEREF _Toc469640883 h 14

Analysis of Wal-Mart’s Financial Performance
IntroductionWal-Mart is a multinational retail corporation operating chains of hypermarkets, warehouses, grocery stores and departmental stores.

The company was founded in 1962 in the United States and has grown steadily to become the most successful and largest retail corporation in the world. Currently, Wal-Mart operates close to 11,600 retail stores in twenty-eight countries under 63 different brand names. Most of these stores are rigorous in the United States and the neighboring countries of Canada and Mexico. Wal-Mart’s stores sell a wide range of products including household goods, electronics, clothes, and footwear. Wal-Mart’s mission objective is to make a difference in the lives of its customers by helping them save money and live happily. The retailer endeavors to achieve this objective by offering low-priced and high-quality products and services. Wal-Mart’s focus on cost leadership is a key driver of the corporation’s high sales revenue. For several years, Wal-Mart has led the global retail industry in terms of sales and profitability. To maintain its sales revenue, Wal-Mart is focused on offering customers a seamless experience in both the physical stores and online platforms (Wal-Mart Stores Inc., 2016). The aim of this paper is to provide a detailed report on the financial performance of Wal-Mart Stores. In particular, the paper presents an analysis of the company’s capital structure, financial performance, and key performance ratios. The report also discusses major financial issues that are critical to Wal-Mart’s financial viability. The information used for writing this paper has been obtained mainly from the company’s annual financial reports and industry statistics. Appropriate journal articles and books have also been used to provide a theoretical underpinning of the subject from finance and accounting perspective. The last part of the report is a discussion of recommendations that will help Wal-Mart to maintain higher levels of financial resilience in the market.
Analysis of Wal-Mart’s Financial PerformanceCapital Structure
Wal-Mart has used a combination of equity and debt capital to finance its ever-growing business operations (Fishman, 2006, 19). Equity capital is a form of financing in which a company issues shares to the public to raise funds. Equity funding can also be obtained from accumulated earnings (McWilliams, 2009). For many years, equity financing has been the most important component of the retail giant’s capital structure. As at January 2016, Wal-Mart’s total shareholder equity capital stood at $83.7 billion. This amount comprised of $90 billion worthies of retained earnings, $11.6 billion worthies of accumulated comprehensive loss, common stock capital worth $318 million, and $1.8 billion worthies of capital accumulation above par value.
A review of Wal-Mart’s financial statements shows that the $83.7 billion equity capital in 2016 was a major reduction from $85.9 billion recorded in 2015. This reduction was mainly due to the increase in accumulated comprehensive loss. In January 2014, Wal-Mart’s accumulated comprehensive loss was $3 billion. In just one year, it increased by $4 billion, hitting the $7 billion mark in 2015. The accumulated comprehensive loss then increased to $11.6 billion in January 2016. It is projected that the comprehensive loss will continue growing in the short-term driven mainly by fluctuations in currency translations. Despite this increasing loss, the company’s retained earnings have been growing steadily from 2010. At the beginning of 2014, Wal-Mart’s retained earnings stood at $77 billion rising to $90 billion in 2016. The retained earnings are expected to grow steadily between 2016 and 2020.
Debt financing refers to the use capital instruments that do not entitle shareholders to any claims in the company’s profits apart from interest compensation. Examples of debt instrumentsinclude bonds and loans from financial institutions (Kieso, Weygandt and Warfield, 2007, 43). At the beginning of 2016, Wal-Mart had a long-term debt of $38.2 billion. The corporation’s short-term debts stood at $5.4 billion. This consisted of short-term borrowings and current maturities. In total, the company’s debt capital was $43.6 billion at the beginning of the year. Due to the worldwide nature of its processes and sourcing of debt financing, Wal-Mart’s debt financing is made up of unsecured notes with denominations from different currencies such as the Japanese Yen, the US dollar, the Euro, and the SterlingPound. These notes have staggered maturities ranging from 2017 to 2039.
In comparison to previous years, Wal-Mart’s total debt capital stood at $47.3 billion and $53.6 billion at the beginning of 2015 and 2014 respectively. This shows that the corporation’s use of debt as a source of financing has been decreasing steadily in the past three years, an indication of improved financial performance. Beginning 2014, the retailer reduced its proceeds from the issuance of debts from $7.1 billion to $39 million in 2016. This means that Wal-Mart has not raised any funds through the issuance of new debts as old ones matured during the past three years. However, due to volatilities in the retail market, it is uncertain whether Wal-Mart will be able to sustain its debt reduction in the short-term. An important concept that that is closely related to equity and debt financing is financial leverage. It refers to the extent of debt use in a company’s financing structure. Financial leverage is expressed as a ratio of total debt to total capital. At the beginning of 2016, Wal-Mart’s financial leverage was 34%, a significant reduction from 40% in 2014 and 36% in 2015. This reduction is a positive indication that Wal-Mart has been performing well financially (Wal-Mart Stores Inc., 2016).
Due to its impressive financial leverage, Wal-Mart has been rated favorably by various credit rating agencies. Presently, Wal-Mart’s long-term debt is rated AA by the Standard & Poor and Aa2 by Moody’s. These positive ratings mean that Wal-Mart is capable of meeting its debt obligations without any adverse effects on its business operations. The corporation’s sustained cash flow, intense geographic and portfolio diversification, and massive market capitalization are some of the factors influencing its positive rating. Essentially, Wal-Mart’s low financial leveraging serves an important role in risk management. Over-reliance on debt financing comes with restrictions, which may prevent a company taking advantage of new opportunities in the market. Luckily, the low debt ratio makes Wal-Mart attractive to creditors. Since the debt ratio has decreased significantly over the past three years, this is a strong indication that the company has been using internal sources to finance its operations rather than debt. Therefore, the company’s shareholders are guaranteed of stable earnings with minimal risks of volatility.
2.2 Key Financial RatiosWal-Mart has recorded a steady improvement in financial performance over the past three years (January 2014 – January 2016). During this period, the corporation’s sales revenue increased from $477 billion in 2014 to $482 billion in 2015 and then $485 billion in 2016. This means that Wal-Mart’s stores have been performing well. The corporation’s operating income during the same period increased from $26.9 billion in 2014 to $27 billion in 2015 but decreased to $24 billion in 2016. In effect, net income increased during the 2014-2015 financial year but decreased in the following year (Wal-Mart Stores Inc., 2016).
Price-earnings ratio (P/E) is the most important indicator of a business’ financial performance. The ratio compares the price of a company’s shares to earnings per share at a particular time and is widely used to value stocks (Birt, Keryn, Suzanne, Albie and Oliver, 2015, 34-42). During the financial year ending in January 2016, the price-earnings ratio of Wal-Mart was 13.2, meaning that the company’s shares were priced much higher than what shareholders got as earnings per share (dividend). The high P/E ratio shows that Wal-Mart remains an attractive investment spot for investors. Another important financial indicator is the price to book ratio. This ratio shows the market value of a company and is a good measure of the value of financial resources committed by shareholders. A conservative book ratio of less than 3 is preferable. At the beginning of 2016, Wal-Mart’s price to book ratio was 2.4, meaning that the company promises to offer good value to shareholders (Wal-Mart Stores Inc., 2016).
Wal-Mart’s financial performance can also be describedin terms of returns on equity, which is a ratio of net company income to shareholders’ equity. For companies whose main mission is to maximize profits, return on equity shows how efficient the management team is working to deliver on corporate objectives. At 18.6%, Wal-Mart’s current return on equity is much higher than the 10% minimum as recommended by financial analysts. During the three years preceding 2016, Wal-Mart has maintained a healthy return on equity (greater than 10%). This can be important in attracting investors because it gives confidence that the corporation’s management is capable of turning equity into earnings (University of San Francisco, 2013).
The current ratio is also an important variable in Wal-Mart’s financial analysis. It shows the capacity of a business to service its short-term debts (debts maturing in less than 12 months). The current ratio is determined by comparing the value of current liabilities to that of current assets (Birt, Keryn, Suzanne, Albie and Oliver, 2015, 34-42). An ideal current ratio should be as close to 1 as possible. Wal-Mart’s current ratio is 0.92, meaning that there is the need for the company to reduce its liabilities to improve its ability to pay debts in the long-term. Debt to equity ratio compares the value of total debts to total equity. Wal-Mart’s debt to equity ratio has been decreasing significantly over the past three years and currently stands at 34%. This figure is healthy and shows that the company has the capacity to honor its obligations to creditors.
It can be noted that Wal-Mart’s low debt to equity ratio is in line with the company’s strategic objective of increasing returns on investments for shareholders while also decreasing business risks. With decreasingdebts, Wal-Mart has reduced the burden of repaying profits acquired from equity financing. Thus, shareholders are assured of sustained returns in the short-term. This is an important consideration for Wal-Mart’s business because the company’s shareholders are interested in the profitability of the company (Ehardt and Brigham, 2008, 23). This can only be achieved by maintaining minimum levels of debt. As the company’s debt notes mature, it is relieved of the need to make regular payments out of profits.
Wal-Mart recorded gross profit margin of 24.36% and 24.40% for the financial years ending January 2016 and 2015 respectively. During the same period, the company’s net profit margin was 3.42% and 3.26% respectively. The low percentage of net profit margin indicates that Wal-Mart’s expenses during the two years have been moderately high. This is mainly due to the fact that as the world’s largest and most diversified retailer, Wal-Mart incurs huge costs to maintain its inventories. For this reason, a great part of the company’s financial resources is in the form of inventory. However, this does not mean any challenges to Wal-Mart since the company enjoys a low inventory turnover ratio (Wal-Mart Stores Inc., 2014).
Overall, Wal-Mart’s financial performance is very impressive. The company’s financial strategies are guided by the belief that good financial management skills are critical to meeting the expectations and needs of stakeholders (Chandran, 2009, 36). Compared to its rivals in the retail industry, Wal-Mart has the most impressive financial records. It enjoys strong brand equity in all the countries where it operates. The company has invested massive resources in marketing to promote its brand. In an attempt to boost the performance of its stores, Wal-Mart prefers to purchase from local suppliers and in bulky. Bulk buying enables the company to exert strong bargaining power over suppliers, which ensures huge trade discounts. The discounts are in turn passed to consumers in the form of reduced prices in accordance with Wal-Mart’s cost leadership strategy (Lichtenstein, 2009, 37).
Key Issues Affecting Wal-Mart’s Financial Viability
Wal-Mart faces a number of challenges that will adversely affect its financial viability. The most importantchallenge is increasing competition from rival retailers. In the past three decades, the competitive landscape in the global retail industry has changed drastically with the emergence of hundreds of retailers focused on establishing a strong market presence (Barstow, 2012, 32). The effect of this is that Wal-Mart faces intense competition from the local, regional and international retailers in the countries it operates. Leading competitors include Commercial Mexicana, Kmart, The Real Canadian Superstore, Costco, and Targets. In addition, hundreds of small retailers have been able to establish unique market niches and are competing effectively against Wal-Mart in their respective markets (Bonacich and Khaleelah, 2006, 29). Target is presently the greatest competitor. Targets strategy encompasses delivery of high-quality discount goods at competitive prices, making it the second largest retailer in the world. Just like Wal-Mart, Targets aims to expand its presence across the world through strategic acquisitions, joint ventures and opening up of new stores. The other retailers have also stepped up their competitive moves, which has significantly reduced Wal-Mart’s revenues.
Another challenge facing Wal-Mart relates to the adverse effects of globalization (Baumol and Alan, 2006, 24). As the largest multinational retailer in the world, Wal-Mart cannot assume the realities of globalization and the effects it continues to have on the retail industry. The most important effect globalization has had on Wal-Mart is the disruption of the corporation’s traditional supply chain system. As Wal-Mart expands to other countries, it is compelled to seek partnerships with new suppliers in line with the characteristics of the new markets. New suppliers may not offer the same discounts as old suppliers. Moreover, the new suppliers may not adhere to Wal-Mart’s quality standards. For this reason, management of supplier relations is an important issue for Wal-Mart as it expands globally. In addition, understanding the culture of the new markets is an important issue for Wal-Mart. In order for Wal-Mart’s foreign operations to be successful financially, it must tailor its product offering and marketing strategies to the local cultures.
The third challenge facing Wal-Mart is costly litigations relating to the corporation’s employment practices. In several instances, Wal-Mart has been accused of infringing labor laws in many countries. Some of the allegations include hiring under-aged workers and illegal immigrants, underpaying workers, and not doing enough to provide good working conditions for its employees (Gereffi and Michelle, 2009, 574). The corporation has also been criticized for its anti-union policies, which bar employees from forming or joining trade unions. Other criticisms include doing businesses with companies with questions records regarding the issue of corporate social responsibility. Settling these cases has always cost Wal-Mart a lot of money, causing the company to cut back on its profits (Hicks, Keil and Spector, 2012, 313).
Technological advances have also been a major challenge with adverse impact on Wal-Mart’s financial performance. In the past, Wal-Mart used to differentiate itself through creative store layouts and design, a strategy that had a positive impact on customer traffic and sales revenue. Developments in information technology have had a drastic impact how retail businesses are conducted across the world (Ingram, Yue and Rao, 2010, 53). The possibility of e-retailing means that the aspect of store locations is no longer an important consideration for Wal-Mart. In fact, Wal-Mart stores have to reconsider their marketing strategies with the objective of capitalizing on the immense opportunities offered by technology to boost sales. However, implementing new technologies is costly and replete with many risks, which may jeopardize the company’s financial viability.
Conclusion and Recommendations
It is apparent that Wal-Mart has implemented innovative business strategies, as well as prudential financial control measures to sustain its business. It has led to its growing reputation as the most successful and largest retail corporation in the world. Wal-Mart continues to expand by opening new stores in different parts of the world. This strategy will see Wal-Mart increases its sales revenue, as well as shareholders earnings in the short-term. However, due to competitive pressures, the emergence of new technologies, and economic downturns in many parts of the world, there is need fort Wal-Mart to take measures to secure its financial performance. One of these measures is to expand its capacity in digital marketing (Bergdahl, 2004, 61). In today’s retail environment, digital platforms have proven to be indispensable for retail operations. Although Wal-Mart is a major online retailer, its capacity in this segment is still lower comparedto other online stores such as Amazon and eBay. By expanding its capacity in electronic retailing, Wal-Mart will boost its potentials for enhanced financial performance in the long-term especially as it seeks to expand.
Secondly, it is recommended that Wal-Mart reconsiders its inventory management strategies. As explained earlier, much of the company’s finances are held up in inventory. The company’s retail stores have stocked a wide variety of commodities worth billions of dollars. While most of these commodities are fast moving, some are slow moving affecting the overall rate of stock turnover. In this regard, the issue of stock quantity and inventory requires immediate attention as it can have a major impact on Wal-Mart’s financial performance both in the short-term and long-term. In order for the company to reign on its inventory, it should develop a more innovative supply chain management strategy (Bonacich and Jake, 2006, 28-29). The strategy should lead to optimal inventory levels with the view of making Wal-Mart more competitive in the global retail business.
Third, since Wal-Mart has strong brand equity, it can improve its financial performance by leveraging on such profitable adjacencies as financial institutions, care clinics and gas stations. Among other benefits, this will drive additional traffic to Wal-Mart stores, which will increase Wal-Mart’s sales and financial performance. Another recommended priority for Wal-Mart is to focus on enhancing the competitive footing across its markets by offering reduced prices while embracing high levels of product variety and quality (Matusitz and Reyers, 2010, 234). This will enable Wal-Mart to overcome competitors who are pursuing low-cost strategies. In effect, Wal-Mart will have to lower its prices more in order to maintain a strong competitive edge over rivals. Lastly, Wal-Mart should guard against potential loss of crucial financial information by strengthening internal controls. The corporation can achieve this goal by implementing an integrated system of disclosure controls, specifically designed to foster decision integrity.

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