Accounting Assignment 1 Financial Ratio Analysis FNBE 0814
- 1. SCHOOL OF ARCHITECTURE, BUILDING & DESIGN Foundation of Natural & Built Environments (FNBE) BASIC ACCOUNTING Lecturer : Mr. Chang Jau Ho Assignment: Financial Ratio Analysis Company: Walmart Group Members: Lim Zi Shan Chow Kah Yien Audrey Ting TABLE OF CONTENT: No. Contents Page 1 Company Background 2, 3
- 2. 1 2 Recent Development 3 3 Ratio Analysis & P/E Ratio 4, 5 4 Investment Recommendation 6 5 Appendix 7, 8 6 References 9 CompanyBackground Walmart was founded by Sam Walton 52 years ago on July 2nd,1962 and he opened his first Walmart store in Rogers,Arkansas. Walmart is a family owned business and the companyis controlled by the Walton family. Sam Walton’s heirs own more than 50 percent of Walmart through their holding company and their individual holdings. Walmart has been dedicated to making a difference in the lives of all its customers.Walmart sell its product at a low price compared with other supermart which leads Walmart to get a higher-volume sales with low margin. What has beenachieved by Walmart today is the result of Sam
- 3. 2 Walton's visionary leadership, along with generations of associates focused onhelping customers and communities save money and live better. In the 1970s,Walmart went national with the widespread of Sam Walton’s goals for great value and great customerservice. After going national, Walmart continued to spread its business by establishing Sam’s Club which its purpose is to serve small business and individuals. The first Walmart Supercenter,a supermarket with general merchandise was also opened afterwards. By 1990,Walmart became the nation’s top one retailer by revenue. Moving on to the 2000s,Walmart has beenconstantly upgrading itself to provide better services to their customers.It made use of the latest technologywhich offerconvenience to their customers to shop either online, in a store or mobile devices.AfterSam Walton had passed away, Walmart continues to inherit his ideologyof lowering the cost of living for everyone. Till today, Walmart remains leader in the retail industry. They had employed 2.2 million associates worldwide and serves more than 200 million customers each week at more than 11,000 stores in 27 countries. In North America,Walmart’s primary competitors include department stores like Kmart, Publix, Target and Meijer. Walmart also had to face fierce competitionin some foreignmarkets. RecentDevelopment In Jan 2013,Walmart boostsourcing of U.S. products by $50 billion over the next 10 years. Walmart announced bold commitmentto increase domestic sourcing of the products it sells and help veterans find jobs when they come off active duty. Speaking at the National Retail Federation’s annual BIG SHOW,Walmart U.S. Presidentand CEO Bill Simon also announced the company is helping part-time associates who want to be full time, make that transition.
- 4. 3 In April 2013,Walmart U.S. Executive VIce Presidentand COO Gisel Ruiz accepts the El Premio Orgullo award during the 2013 Hispanic FederationAnnual Gala. January 16th, 2014 - Walmart joins Coalition of Immokalee Workers Fair Food Program. Walmart and the Coalition of Immokalee Workers signed an historic agreement for the world’s largest retailer to join the Coalition lmmokalee Workers Fair Food Program,the widely-acclaimed social responsibilityprogram that is bringing real, measurable change to the men and women who harvest tomatoes for Florida’s $650 million tomato industry. On 1st December2014,Walmart breaks its online records on Cyber Monday 2014.Walmart announced that Cyber Monday 2014 (Dec.1) was the biggestonline day in its history for orders.Customer viewed more than 1.5 billion pages on Walmart.com betweenThanksgiving and Cyber Monday. Ratio Analysis of the business based on 2013 & 2014 (Amounts in millions) Profitability Ratios 2013 2014 Interpretation Return on Equity (ROE) 17756 78750 × 100% = 22.5% 16695 81539 ×100% =20.5% During 2013 to 2014, ROE has decreased from 22.5% to 20.5%. The owner is getting less return from his/her capital compared to last year. Net Profit Margin (NPM) 17756 465604 × 100% = 3.8% 16695 473076 × 100% =3.5% Over the period, NPM has decreased from 3.8% to 3.5%. The business is getting worse at controlling its overall expenses compared to last year.
- 5. 4 Gross Profit Margin (GPM) 116354 465604 × 100% = 25% 118265 473076 × 100% =25% Over the period, GPM has remained the same which is at 25%. Selling Exp. Ratio (SER) 44315 465604 × 100% =9.5% 45677 473076 ×100% =9.7% Over the period, the SER has increased from 9.5% to 9.7%. The business’s ability to control its selling expense is getting worse. General Exp. Ratio (GER) 44315 465604 × 100% =9.5% 45677 473076 ×100% =9.7% Over the period, the GER has increased from 9.5% to 9.7%. The business’s ability to control its general expense is getting worse. Financial Exp. Ratio (FER) 2064 466114 × 100% = 0.4% 2216 473076 ×100% =0.5% Over the period, FER has increased from 0.4% to 0.5%.The business is getting worse at controlling its financial expense. (Amounts in millions) Stability Ratios 2013 2014 Interpretation Working Capital 59940 71818 = 0.83 : 1 61185 69345 = 0.88 : 1 From 2013 to 2014, working capital has increased from 0.83 : 1 to 0.88 : 1. The business is getting better at paying off its liability. In addition, it does not satisfy the minimum 2:1 ratio. Total Debt 121367 203105 × 100% 123412 204751 × 100% From 2013 to 2014, total debt has increased from 59.8% to 60.3% . However, it does not satisfy the maximum 50% limit.
- 6. 5 = 59.8% =60.3% Stock Turnover 365 ÷ 352488 44330.5 = 46 days 365 ÷ 358069 44330.5 = 45 days From 2013 to 2014, stock turnover has decreased from 46 days to 45 days. The business is selling its goods slower. Debtor Turnover 365 ÷ 234325.5 6772.5 = 10.5 days 365÷ 238147 6772.5 = 10.4 days From 2013 to 2014, debtor turnover has decreased from 10.5 days to 10.4 days. The business is collecting their debts faster. Interest Coverage 2262 + 17756 2262 = 9 times 2362 + 16695 2362 = 8 times From 2013 to 2014, interest coverage has decreased from 9 times to 8 times. The business is getting better at paying back their interest. Plus, it satisfies the minimum requirement of 5 times. P/E Ratio P/E Ratio = 74.27 4.98 = 14.91 Investors have to wait around 15 years to get back their investment. Investment Recommendation From the profitability ratio, there is a decrease in return on equity in the year 2014 compared to 2013.This means that the owner is getting less return from his capital. For the net profit margin, it has decreasedin the year 2014.This means that the company ability to control their overall expenses is getting worse. However, the gross profitmargin of the company remains unchanged. The operational expenses ratio of the business has decreased in2014 compared to 2013. Besides,the working capital ratio of the company in the year 2014 has increased when compared to 2013.The business is getting better at
- 7. 6 paying off its liability but it still does not satisfy the minimum requirement of 2:1. Moreover, the total debt ratio has increased. This means that the company’s debt has increased and it does not satisfy the maximum 50% limit. Furthermore, the inventory turnover ratio, Debtorturnover ratio and interest coverage ratio has been decreasing throughout the year. Based on the analysis above, Walmart’s overall financial ratios are actually decreasing over the year. If this situation goes on, somedaythey will not be able to cover their expenses and pay off their debts at the same time which would lead to loss in their business.Inconclusion,it would be not wise to invest in Walmart because when you look at their P/E ratio, even though it is only slightly below 15 but it takes about 15 years for the investors to recoup their investment and not to mention that Walmart currently has a slight drop rate in their profitability and financial stability and it is likely that it will continue to drop in the future unless they make effortto control their expenses and debts. Appendix
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- 9. 8 References
- 10. 9 1. Corporate.walmart.com,. (2015). Walmart Corporate: Our Story. Retrieved 31 May 2015, from http://corporate.walmart.com/our-story/ 2. Goldman, L. (2011). The Incredible Story Of Walmart's Expansion From Five & Dime To Global Megacorp. Business Insider. Retrieved 31 May 2015, from http://www.businessinsider.com/the-incredible-story-of-walmarts-expansion- from-five-and-dime-to-global-megacorp-2011-7?IR=T& 3. Walmart 2013 Annual Report. (2013) (1st ed., pp. 32, 33, 54). Atlanta. Retrieved from http://stock.walmart.com/files/doc_financials/2013/Annual/2013-annual-report- for-walmart-stores-inc_130221024708579502.pdf 4. Walmart 2014 Annual Report. (2014) (1st ed., pp. 36, 37, 58). Atlanta. Retrieved from http://stock.walmart.com/files/doc_financials/2014/Annual/2014-annual- report.pdf 5. BREAKING NEWS: Walmart joins CIW’s Fair Food Program! (n.d.). Retrieved May 31, 2015, from http://ciw-online.org/blog/2014/01/walmart/ 6. Walmart to Boost Sourcing of U.S. Products by $50 Billion Over the Next 10 Years. (n.d.). Retrieved May 31, 2015, from http://news.walmart.com/news- archive/2013/01/15/walmart-to-boost-sourcing-of-us-products-by-50-billion-over-the- next-10-years