Wal-Mart’s Financial Health



Wal-Mart’s Financial Health

As the economy seemed to boom in the United States so too did the fortunes of Wal-Mart, the world’s largest retailer. When the United States, and the world, entered the greatest recession since the Great Depression in 2007-2008, however, consumers stopped making purchases and many feared all retailers would soon face significant financial difficulties. This has not been the case for Wal-Mart. Because Wal-Mart has always promoted low prices customers seemed to flock to Wal-Mart due to the recession. While some have indicated that prior to the recession Wal-Mart was facing slowing sales due to competition with Target, its stores actually increased sales after the recession (Palmeri, 2008). The company’s low prices brought new customers to the store who had not previously considered shopping at Wal-Mart “cool” and increased sales to existing customers (Palmeri, 2008).

To see whether the recession continues to help Wal-Mart and how the company is doing overall, however, one needs to review its financial statements. By looking at the company’s financial results over the past two years one can see whether there are positive or negative trends in its financial results. These trends provide a means to determine whether the company is moving toward a positive or negative situation. Past performance is often a good predictor of future performance, so looking at how financial accounts and ratios change over time one can better forecast future results (Managerial accounting, 2010).

The current ratio provides an indication of how liquid a company is. Liquidity indicates how well a company can cover its current debts. Wal-Mart’s current ratio in 2009 was .88 and in 2010 was .87. The fact that the company’s current ratio barely changed indicates that its liquidity has remained constant. Because its current ratio is less than one, however, the company needs more than its current assets to pay for all of its current liabilities. This means the company is not very liquid and this could be an area of concern, particularly as accounts payable, which the company likely uses to acquire inventory, is a current liability. However, the company’s debt ration, .57 in 2009 and .59 in 2010, indicates that the company is not highly leveraged and does not support its assets through debt. This fact means the company is successfully controlling debt and able to overcome a decrease in income and still make its regular payments, as does the fact that its debt ratio is fairly stable.

Return on equity, ROE, indicates the return each dollar shareholders have invested in the business has earned for them. For Wal-Mart ROE was .20 for both 2009 and 2010, indicating that profitability for investors has remained steady and profitable. Lastly, a company’s days receivable ratio indicates how quickly a company turns its sales into actual cash income. For Wal-Mart days receivable was 106 days in 2009 and almost 101 days in 2010. This meant that Wal-Mart’s ability to convert sales into actual cash income improved in 2010, a positive sign that the company is improving its cash flow. Because the days receivable ratio helps indicate how long it will take a company to collect its outstanding accounts receivable balance it is a number that indicates whether or not a business is effectively managing its cash flow. The lower the days receivable for a company the more financially secure the company is. As Wal-Mart decreased its days receivable, therefore, this suggests its 2010 cash flow was better than that of 2009. Another reason why its days receivable has decreased is that consumers have begin to prefer to pay cash, rather than rely on credit payments, during the recession (Palmer, 2010).

To obtain a more effective indication of the company’s health a careful review of industry averages for each ratio needs to be completed. Comparing the past two years of the company’s ratios indicates how well the company is doing from year to year and provides a good trend analysis to suggest future results. However, to properly determine how well a company such as Wal-Mart is doing one needs to evaluate its financial results and ratios against those of all in the retail industry. This will allow one to determine whether the company exceeds, falls behind, or is out-of-normal with its competitors and within the industry. This information can further determine whether the company’s ratios and financial results are average, strong, or weak.

References

Managerial accounting. (2010). University of South Dakota. Retrieved October 26, 2010, from

Palmer, K. (2010). 5 reasons credit card companies won’t survive. U.S. News & World Report. Retrieved October 26, 2010, from

Palmeri, C. (2008). Wal-Mart Wins Big During Downturn. . Retrieved October 26, 2010, from

Wal-Mart 2009 Annual Report. (2009). Retrieved October 26, 2010, from

Wal-Mart 2010 Annual Report. (2010). Retrieved October 26, 2010, from

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