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Financial Statement Analysis of Wal-Mart Stores Inc. and Target Corporation

Financial Statement Analysis of Wal-Mart Stores Inc. and Target Corporation

1. Outline
2. Introduction
a. Purpose of the paper
b. Background to the company and the industry
c. Recommendations
d. Contents of the paper
3. Common size analysis
a. Vertical analysis
i. Income statement
ii. Balance sheet
iii. Comparison with competitor
iv. Comparison with the industry
v. Summary
b. Horizontal analysis
i. Income statement
ii. Balance sheet
iii. Comparison with competitor
iv. Comparison with the industry
v. Summary
4. RATIO ANALYSIS
a. Introduction
b. Liquidity ratios
i. Discussion
ii. Comparison with competitor
iii. Comparison with the industry
iv. Summary
5. Analysis of Profitability Ratios
i. Discussion
ii. Comparison with competitor
iii. Comparison with the industry
iv. Summary
6. Investor analysis
i. Discussion
ii. Comparison with competitor
iii. Comparison with the industry
iv. Summary

Financial Statement Analysis of Wal-Mart Stores Inc. and Target Corporation

INTRODUCTION

Purpose of the paper

This paper will provide a critical analysis of the financial and operational performance of Wal-Mart Stores, specifically for the three fiscal years 2011, 2012 and 2013. In addition, the company’s financial and operational performance will be viewed in comparison with another corporation- the US-based Target Corporation. Based on the analysis below, the paper provides a recommendation to the management of Wal-Mart stores Inc seeking to improve their operations and financial performance in the coming fiscal years.

Background to the company and the industry

Wal-Mart Stores Inc is an American chain of large discount departmental and warehouse stores. Founded in the United States in 1962, the retail store runs thousands of stores in 27 countries worldwide (Vance & Scott, 2011). It has a heavy presence in the United States, Europe and Asia and a significant presence in Africa, South America and the Middle East. This makes Wal-Mart the world’s largest retailer. In fact, with more than 2 million employees, Wal-Mart is the largest private employer in the modern world (Lichtenstein, 2012). Sam Walt, a businessperson and former employee of J. C. Penney, founded Wal-Mart in 1945 after purchasing one of the several branches of Butler Brothers Company (Vance & Scott, 2011).
The American retail industry is an enormous sector of the economy, with more than one million stores. In fact, by 2013, the sector accounts for over $4.1 million in revenue. Both small and large companies dominate the industry (Ren, 2013). While some of these companies are multinationals, others are confined in the US, a few states or even in some few regions within the US.

Recommendations

Based on the financial and corporate analysis of the Wal-Mart Stores Inc, it has been noted that the company is very innovative and vigorous in its ventures. The company takes the advantage of emerging opportunities to tap additional revenue and increase its presence and diversity in various parts of the world. In fact, it is clear that Wal-Mart’s ability to expand into new markets is enhanced by its ability to apply various business formats.

Content of the paper

This paper seeks to provide an analysis of Wal-Mart Inc’s financial performance based on its annual reports for the years 2011, 2012 and 2013. The analysis will be done in comparison with the financial performance of Target Corporation in order to determine the strengths, weaknesses, opportunities and threats facing Wal-Mart. In these regards, the paper will review the company based on horizontal, vertical and common size analysis of its financial reports. The aim is to determine the worthiness of investing in the company based on the outcomes of the analysis.

COMMON SIZE ANALYSIS

Vertical common size analysis

1. Income statement
Wal-Mart’s income statement indicates a strong performance for the last three years. For instance, the company’s net sales have been on a significant rise since 2011, rising by 5.94% in 2012 and 5.32% in 2013. The company’s gross profit also increased significantly between 2011 and 2013. For example, in 2011, GP increased by 6.41% in 2012 and 5.51% in 2013. The operating income increased by 3.98% in 2012 and 4.8% in 2013 (Wal-Mart Inc., 2013). In addition, Wal-Mart achieved significant growth in its income for the three financial years. For example, the income statement indicates that the company’s income before tax improved by 3.65% and 5.69% for 2011 and 2012 financial years respectively (Wal-Mart Stores Inc, 2013).

Table 1.1: Income statement for vertical common size analysis

INCOME STATEMENT
ITEM WAL-MART STORES, INC. TARGET CORPORATION
2013 2012 2011 2013 2012 2011
Net Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Less: Cost of Goods Sold 75.62% 75.50% 75.17% 70.27% 69.90% 69.51%
Gross Profit 24.38% 24.50% 24.83% 29.73% 30.10% 30.49%
Less: Operating Expenses 19.07% 19.21% 19.42% 24.35% 24.37% 24.95%
Operating Income 5.96% 5.98% 6.10% 7.24% 7.77% 7.98%
Less: Interest Expense 0.48% 0.52% 0.53% 1.06% 1.26% 1.15%
Income before Taxes 5.52% 5.50% 5.62% 6.40% 6.51% 6.83%
Less: Taxes Related to Operations 1.71% 1.80% 1.56% 2.24% 2.23% 2.39%
Net Income (Loss) 3.65% 3.54% 3.91% 4.17% 4.28% 4.44%

2. Balance Sheet

Wal-Mart’s balance sheet reveals an improvement in its financial performance for the three consecutive years 2011, 2012 and 2013. In 2011, total current assets as a percentage of total assets increased by 8.29%. However, the company recorded a 6.16% increase in 2012, which was a reduction of about 2.13%. In 2013, the value of current assets as a percentage of total assets was 10.34%, which is the highest level attained in the recent times. In fact, Wal-Mart’s total current assets performed better than that of Target Corporation in the entire period. While Wal-Mart obtained an increase of about 16.50% in its total current assets expressed as a percentage of total assets, Target Corporation achieved an increase of 5.42%.

However, throughout the period, Wal-Mart performed poorer than Target Corporation in terms of total long-term assets. For instance, in 2011, Wal-Mart’s total long-term liabilities experienced an increase of 5.23%. In addition, the value increased by 16.99% in 2013 compared to the value recorded in 2010. On the other hand, Target Corporation only achieved an improvement of 21.7% between 2010 and 2013 (Wal-Mart Inc, 2013). In this case, the values of total assets increased by 19.19% and 8.15% for Wal-Mart and Target Corporation respectively. Therefore, it is clear that Wal-Mart’s overall performance was superior to that of Target Corporation in respect to the value of total assets.
Similarly, Wal-Mart experienced heavy liabilities compared to Target Corporation. For example, Wal-Mart’s total liabilities increased by 24.15% between 2010 and 2013. On the other hand, Target Corporation was able to maintain a smaller rate of increase in its liabilities, which stood at 8.29% for the entire period.

It is worth noting that Wal-Mart’s shareholders are worth more than those who invest in Target Corporation. For instance, shareholders’ Equity at Wal-Mart increased every year since 2010. For example, shareholders were entitled to receive an increase of 6.21% between 2011 and 2012 and an additional increase of 7.62% in 2013. On the other hand, Target Corporations total equity lagged behind, recording an increase of about 7.89% for the entire period. Shareholders are set to increase in their returns at Wal-Mart than at Target Corporation.

Table 1.2: Balance Sheet
ITEM WAL-MART STORES, INC. TARGET CORPORATION
2013 2012 2011 2010 2013 2012 2011 2010
ASSETS
Current Assets:
Cash 3.83% 3.39% 4.09% 4.64% 1.36% 1.29% 1.33% 1.31%
Marketable Securities 0.00% 0.00% 0.00% 0.00% 0.27% 0.42% 2.58% 3.63%
Gross Receivables 3.33% 3.07% 2.81% 2.43% 12.13% 13.63% 15.66% 17.92%
Less: Allowance for Bad Debts 0.00% 0.00% 0.00% 0.00% 0.00% 0.92% 1.58% 2.28%
Net Trade Receivables 3.33% 3.07% 2.81% 2.43% 12.13% 12.71% 14.08% 15.64%
Inventories 21.57% 21.05% 20.16% 19.20% 16.41% 16.98% 17.38% 16.12%
Prepaid Expenses 0.78% 0.87% 1.64% 1.84% 0.00% 0.00% 0.00% 0.00%
Other Current Assets 0.00% 0.05% 0.07% 0.08% 3.86% 3.88% 4.01% 4.67%
Total Current Assets 29.51% 28.42% 28.77% 28.19% 34.03% 35.28% 39.38% 41.3%

Long-Term Assets:

Net Tangible (Fixed) Assets (other than construction in progress) 56.09% 56.67% 58.14% 58.42% 61.20% 60.45% 57.03% 55.64%
Construction in Progress 0.00% 0.00% 0.00% 0.00% 2.44% 2.07% 1.30% 1.13%
Intangible Assets 10.09% 10.68% 9.27% 9.46% 0.47% 0.52% 0.51% 0.54%
Investments 1.35% 1.41% 1.54% 1.62% 0.00% 0.00% 0.00% 0.00%
Other Non-operating Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Operating Assets 2.95% 2.82% 2.28% 2.31% 1.86% 1.69% 1.78% 1.32%
Total Long-Term Assets 70.49% 71.58% 71.23% 71.81% 65.97% 64.72% 60.62% 58.63%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable 18.75% 18.93% 18.63% 17.87% 14.65% 14.71% 15.16% 14.62%
Short Term Loans 3.35% 2.09% 0.57% 0.31% 0.00% 0.00% 0.00% 0.00%
Current Maturity of L.t. Debt 2.91% 1.19% 2.79% 2.63% 3.10% 6.51% 0.27% 1.79%
Other Current Liabilities 10.35% 10.00% 10.43% 11.78% 11.38% 9.42% 7.61% 9.03%
Total Current Liabilities 35.36% 32.21% 32.42% 32.59% 29.13% 30.64% 23.04% 25.44%
Long-Term Liabilities:
Long-term Debt 18.90% 22.79% 22.51% 19.50% 30.43% 28.84% 26.66% 23.90%
Reserves 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Deferred Liabilities 3.75% 4.07% 3.70% 3.23% 2.72% 2.55% 2.14% 1.88%
Noncontrolling Interest 0.26% 0.21% 0.23% 0.18% 0.00% 0.00% 0.00% 0.00%
Redeemable Preferred 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Long-term Liabilities 1.49% 1.56% 1.74% 1.86% 3.34% 4.04% 12.72% 14.33%
Total Long-term Liabilities 24.40% 28.62% 28.17% 24.77% 36.49% 35.43% 41.52% 40.10%
Total Liabilities 59.76% 60.83% 60.59% 57.37% 65.62% 66.07% 64.56% 65.54%
Shareholders’ Equity:
Preferred Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Common Equity-incl. Ret. Ern. 40.24% 39.17% 39.41% 42.63% 34.38% 33.93% 35.44% 34.46%
Total Equity 40.24% 39.17% 39.41% 42.63% 34.38% 33.93% 35.44% 34.46%
Total Liabilities and Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Vertical Common Size Analysis: A summary

A summary of the analysis of the balance sheets and income statements for each of the two companies reveals a gap in the cost of sales and the total revenues due to increase in revenues. Moreover, Wal-Mart’s net income is significantly higher than that recorded by Target Corporation in the last three years, especially when taken as a ratio of total revenues. Wal-Mart’s withdrawal of its operations from non-performing areas such as Germany during the European financial crisis is an important step towards improving the company’s financial performance. In addition, the company’s venturing into emerging markets is a timely initiative that has seen its revenues grows by a significant margin every year. However, it has been noted that the value of liabilities at Wal-Mart continues to be higher than that of Target Corporation, implying that the company is heavily outsourcing in its attempt to improve its growth in the new markets and business area.

Horizontal Common Size analysis of Wal-Mart vs. Target Corporation

1. Income statement

Wal-Mart’s total revenues increased significantly between 2011 and 2013. The improvement in its performance can be attributed to the efforts it has made since 2008. For example, the initiative of reducing the amounts of sugar, salts and trans fats in food products was accepted by a large portion of consumers because they believed it was meant to improve human health in general. In addition, the new “Wal-Mart Goodies” home delivery initiative that was launched in 2011 increased the number of sales made for foodstuffs. It is also worth noting that the acquisition of such companies as Vudu Inc. might have helped the company improve its revenue since 2010.

Table 1.3: Income statement
ITEM WAL-MART STORES, INC. TARGET CORPORATION
2013 2012 2011 2013 2012 2011
Net Sales 111.26% 105.94% 100.00% 109.38% 104.07% 100.00%
Less: Cost of Goods Sold 111.92% 106.41% 100.00% 110.59% 104.67% 100.00%
Gross Profit 109.25% 104.54% 100.00% 106.63% 102.72% 100.00%
Other Operating Revenue 105.21% 106.87% 100.00% 83.60% 87.22% 100.00%
Less: Operating Expenses 109.23% 104.80% 100.00% 106.76% 101.65% 100.00%
Operating Income 108.84% 103.98% 100.00% 99.20% 101.33% 100.00%
Less: Interest Expense 102.09% 105.31% 100.00% 100.66% 114.40% 100.00%
(no capitalized interest)
Other Income (Expenses) 93.03% 80.60% 100.00%
Unusual or Infreq. Item;
Gain (Loss)
Equity in Earnings of Assoc.;
Profit (Loss)
Income before Taxes 109.34% 103.65% 100.00% 102.54% 99.13% 100.00%
Less: Taxes Related to Operations 121.94% 122.40% 100.00% 102.22% 96.95% 100.00%
N.I. before Noncontr. Inc 104.49% 96.43% 100.00% 102.71% 100.31% 100.00%
Noncontrolling income (loss) 125.33% 113.91% 100.00%
N.I. before Nonrecurring Items 103.72% 95.79% 100.00% 102.71% 100.31% 100.00%

2. Balance sheet

There is a marked difference between the rate of increase in Wal-Mart’s current assets and the value recorded by Target Corporation. For example, total current assets of Wal-Mart increased from 100% in 2010 to 124.79% in 2013. On the other hand, Target Corporation’s performance in terms of current assets was relative poor because it was only able to decrease the value from 100% in 2010 to 88.95% in 2013. This is an indication that the growth rate is substantially higher in Wal-Mart than in Target Corporation. It is worth noting that the increase in total current assets was due to accumulation of value cash, which increased for the three year-period. In addition, the company increased its gross receivables of market securities from 122.8% in 2011 to 163.32% in 2013. Moreover, the company increased its inventories from 111.38% in 2011 to 133.90% in 2013 but decreased its prepaid expenses by about 50% between 2010 and 2013. These initiatives contributed to the increase in the company’s total current assets. Furthermore, Wal-Mart performed better than Target Corporation in terms of its long-term assets increased to 116.99% in 2013 right from 105.23% recorded in 2011. This was due to an accumulation of its operating assets and intangible assets that accumulated from 104.74% to 151.188% and 103.95% to 127.11% respectively. However, Wal-Mart’s investments reduced by 1%. On the other hand, it is worth noting that Target Corporation’s performance in terms of long term assets improved because it had a significant amount of assets under construction was increased from 112.95% to 234.26% between 2011 and 2013.

Table 1.4: Balance Sheet

ITEM WAL-MART STORES, INC. TARGET CORPORATION
2013 2012 2011 2010 2013 2012 2011 2010
ASSETS
Current Assets:
Cash 98.41% 82.84% 93.52% 100.00% 112.18% 102.92% 100.00% 100.00%
Marketable Securities 8.04% 12.00% 69.82% 100.00%
Gross Receivables 163.32% 143.27% 122.80% 100.00% 73.18% 79.64% 85.73% 100.00%
Less: Allowance for Bad Debts 0.00% 42.32% 67.91% 100.00%
Net Trade Receivables 163.32% 143.27% 122.80% 100.00% 83.85% 85.08% 88.33% 100.00%
Inventories 133.90% 124.46% 111.38% 100.00% 110.08% 110.29% 105.81% 100.00%
Prepaid Expenses 50.77% 53.87% 94.63% 100.00%
Other Current Assets 0.00% 63.57% 93.57% 100.00% 89.47% 87.06% 84.27% 100.00%
Total Current Assets 124.79% 114.45% 108.29% 100.00% 88.95% 89.28% 93.43% 100.00%
Long-Term Assets:
Net Tangible (Fixed) Assets (other than construction in progress) 114.45% 110.11% 105.58% 100.00% 118.96% 113.75% 100.60% 100.00%
Construction in Progress 234.26% 191.83% 112.95% 100.00%
Intangible Assets 127.11% 128.06% 103.95% 100.00% 93.72% 101.26% 93.31% 100.00%
Investments 99.60% 98.48% 100.62% 100.00%
Other Nonoperating Assets
Other Operating Assets 151.88% 138.41% 104.74% 100.00% 152.20% 133.90% 131.53% 100.00%
Total Long-Term Assets 116.99% 113.12% 105.23% 100.00% 121.70% 115.60% 101.47% 100.00%
Total Assets 119.19% 113.50% 106.09% 100.00% 108.15% 104.71% 98.14% 100.00%
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable 125.05% 120.22% 110.59% 100.00% 108.37% 105.31% 101.75% 100.00%
Short Term Loans 1301.15% 773.80% 197.13% 100.00%
Current Maturity of L.t. Debt 131.77% 51.27% 112.25% 100.00% 187.69% 381.41% 14.95% 100.00%
Other Current Liabilities 104.67% 96.33% 93.91% 100.00% 136.34% 109.30% 82.74% 100.00%
Total Current Liabilities 129.30% 112.17% 105.51% 100.00% 123.87% 126.13% 88.90% 100.00%
Long-Term Liabilities:
Long-term Debt 115.54% 132.62% 122.45% 100.00% 137.69% 126.35% 109.49% 100.00%
Reserves
Deferred Liabilities 138.22% 142.74% 121.31% 100.00% 157.01% 142.63% 111.86% 100.00%
Noncontrolling Interest 169.06% 131.60% 132.90% 100.00%
Redeemable Preferred
Other Long-term Liabilities 95.36% 94.92% 99.37% 100.00% 25.22% 29.53% 87.15% 100.00%
Total Long-term Liabilities 117.37% 131.10% 120.65% 100.00% 98.40% 92.51% 101.62% 100.00%
Total Liabilities 124.15% 120.34% 112.05% 100.00% 108.29% 105.56% 96.68% 100.00%

Shareholders’ Equity:
Preferred Equity
Common Equity-incl. Ret. Ern. 112.51% 104.29% 98.07% 100.00% 107.89% 103.09% 100.91% 100.00%
Total Equity 112.51% 104.29% 98.07% 100.00% 107.89% 103.09% 100.91% 100.00%
Total Liabilities and Equity 119.19% 113.50% 106.09% 100.00% 108.15% 104.71% 98.14% 100.00%

Horizontal common size analysis: A summary

The horizontal common size analysis of the two corporations shows that the total revenue increased significantly. Moreover, the cost of sales increased significantly at Wal-Mart, with growth improving for the entire three years. Therefore, Wal-Mart’s profit levels improved between 2010 and 2013, with the value of long-term assets increasing significantly. However, the company increased its long-term debts by a significant margin probably due to the new initiatives taken to enhance recovery from the economic crisis experienced between 2008 and 2010. Eventually, the company’s total equities improved every year for the entire three-year period.

RATIO ANALYSIS

Introduction

Ratio analysis is a technique used to evaluate the relationships among a number of items in corporations’ financial statements (Moore & Reichert, 2010). These ratios are important in the identification of growth trends for a company and in comparing a company’s performance from one year to another or between one company and another (Moore & Reichert, 2010). In accounts, financial statement ratio analysis emphasizes on three major aspects of an organization: profitability, liquidity and solvency.

In this case, we analyze the financial ratios for Wal-Mart Inc for three consecutive years 2011, 2012 and 2013 in order to determine the company’s growth trends and predict its future performances. In addition, this evaluation will be done in comparison with liquidity ratios of Target Corporation.

1. Liquidity ratio

What is liquidity ratio?
The purpose of analyzing the liquidity ration of any company is to determine the ability of the organization to meet its short-term responsibilities (Williams, Haka, Bettner & Carcello, 2011). This form of ability is achieved by evaluating the liquidity position of the organization, which is obtained by measuring acid tests and current ratios for the company at a given fiscal period (Moore & Reichert, 2010).

Discussion

In the case of Wal-Mart Inc, the value of total revenues increased significantly for the three years from both horizontal and vertical analysis. From this consideration, one can determine the company’s ratios in comparison to those of Target Corporation as shown in table 1.5. First, Day’s Sales Receivables for Wal-Mart increased from 4.43 to 5.30 units. Similarly, the company’s Days Sales inventory increased significantly. However, the accounts receivables and inventory turnover decreased significantly. Consequently, the company’s working capital increased from 6591 to 11878 as a way of facilitating new customers’ working capital and expansion of its operations.
Wal-Mart’s current ratio has been decreasing since 2011. For instance, the current ratio is 0.83, a slight drop from 0.89 recorded in 2011. This figure provides an indication that the current assets at the company stands at $0.89 for every $1 of its current liabilities. In addition, the company’s acid test and cash ratios decreased by 0.01 and 0.02 respectively. The possible cause of this phenomenon is higher rate of growth of the company’s total current liabilities than the rate of growth of its total current assets. Moreover, current ratio has been on the decline since 2011, possibly due to the reduction in cash as well as cash equivalent, which was a common phenomenon through the three-year period analysed. It is also due to the rise in the value of total current liabilities.
Throughout the period, Wal-Mart experienced a negative value of sales to working capital ratio, although it reduced by about 28 units. The reduction is probably due to an increase in the value of total sales. In addition, although the company’s working capital increased significantly, it was less than the value of total revenues recorded in the period.

Comparison with Target Corporation

While Wal-Mart’s day sales in receivables increased from 4.43 to 5.30, Target corporation values for the same ratios decreased from 37.97 to 29.63 in the same period. Moreover, the turnover of accounts receivables at Target increased by 2.92 units while inventory turnovers increased by a small margin. Therefore, Target’s working capital had positive values, unlike Wal-Mart’s values that were negative throughout the period. However, Wal-Mart’s working capital was increasing while Target Corporation was experiencing a significant reduction in its working capital. Furthermore, this is an indication that Wal-Mart’s operating cycle is shorter than that of Target Corporation. It is also an indication that Wal-Mart has a lower capacity to convert its receivables into revenues within a short time. The increase in Wal-Mart’s working capital over the last three years indicates that the company has enhanced its business operations.

However, it is worth noting that Target Corporation has significant higher levels of current and acid test ratios than Wal-Mart, which indicates that Target’s liquidity position is stronger than that of Wal-Mart. Target has stronger cash to working ratio, cash ratio and cash flow to current maturity and debt ratios. In fact, while Wal-Mart recorded negative values of sales to working capital for the entire period, Target Corporation recorded positive values that increased every year.

Table 1.5: Liquidity Ratios

Liquidity Ratios WAL-MART STORES, INC. TARGET CORPRATION
2013 2012 2011 2013 2012 2011
Days’ Sales in Receivables 5.30 4.88 4.43 29.63 33.89 37.97
Accounts Receivable Turnover 68.87 74.76 82.33 11.80 10.37 8.88
Accounts Receivables Turnover in Days 5.30 4.88 4.43 30.94 35.19 41.13
Days’ Sales in Inventory 45.36 44.34 42.23 57.04 60.39 60.64
Inventory Turnover 8.05 8.23 8.64 6.39 6.17 6.19
Inventory Turnover in Days 45.36 44.34 42.23 57.10 59.16 58.97
Operating Cycle 50.66 49.23 46.66 88.03 94.34 100.10
Working Capital (11,878) (7,325) (6,591) 2,357 2,162 7,143
Current Ratio 0.83 0.88 0.89 1.17 1.15 1.71
Acid Test 0.20 0.20 0.21 0.47 0.47 0.78
Cash Ratio 0.11 0.11 0.13 0.06 0.06 0.17
Sales to Working Capital -39.24 -60.59 -63.56 31.85 14.72 9.24
Cash Flow/Cur. Mat. of Debt & NP 2.01 3.82 3.90 3.56 1.79 44.29

Summary

The difference in the liquidity analysis for the two organizations provide an indication that Wal-Mart Stores Inc’s management has been able to manage their liquidity position with some degree of efficiency, but Target Corporations position is relatively higher than that of Wal-Mart.

ANALYSIS OF LONG-TERM DEBT PAYING ABILITY (LEVERAGE RATIOS)

Introduction

Leverage ratios, also known as long-term debt paying abilities, are used to measure the company’s use of equity and debt as a source of its financing (Moore & Reichert, 2010). In addition, they measure the ability of an organization to pay its long-term obligations.

Discussion

Wal-Mart Stores Inc’s Times Interest Earned increased significantly. It rose to 12.04 in 2013 from 11.35 in 2011. Although the increase is relatively small, it provides an indication that the operating income has risen. It also implies that for every $1of interest, Wal-Mart Inc has $12.04. Wal-Mart’s fixed charge coverage ability experienced dramatic changes over the three years. For instance, it dropped from 9.02 in 2011 to 8.67 in 2012 before rising again to 9.06 in 2013. Overall, fixed charge coverage increased by 0.04 in the entire period, which is a minor change in the ability ratio. Moreover, it should be noted that Wal-Mart’s slight improvement in fixed charge coverage and times interest earned might have been due to its inability to decrease interest expenses and decline in its capitalized interest since 2011. Similarly, the debt ratio changed slightly, declining from 60.59% to 59.77% in the period. However, it should be noted that there was an increase in the debt ratio in 2012. Similarly, debt to equity ratio decreased from 153.74% in 2011 to 148.48% in 2013, but there was an increase of 6.48 units in 2012. The company experienced an improvement in its debt to tangible net worth, which decreased from 201.04% in 2011 to 198.18% in 2013. Again, it should be noted that in 2012, the value increased by 12.43%. Finally, the analysis indicates that Wal-Mart’s cash flow to total debt ratio did not experience significant changes, but decreased from 21.58% to 21.09% between 2011 and 2013.
From this observation, it is worth noting that the changes in the debt ratio indicate that Wal-Mart’s borrowing was minimal, with only 59c on $1 of its assets. The decrease in the company’s debt ratio was due to sluggish growth in its total liabilities. Furthermore, the company’s debt to equity ratio experienced an increase in 2012 and a decrease in 2013 because the management was using the company’s debt more than they were using the equity. The enormous size of the debt to tangible net worth ratio was achieved due to an existence of a large total debt. This is comparable to the net worth of the tangible assets the company had by 2013.

Comparison with Target Corporation

Wal-Mart Inc earned a larger value of times interest earned between 2011 and 2013. While Wal-Mart’s times interest earned increased between 2011 and 2013, Target’s value of the same ability ration was decreasing every year. Secondly, Wal-Mart’s fixed charge coverage was larger compared to that of Target Corporation, but both companies experienced less significant change in the ratio. Target Corporation recorded an increase in its debt, debt to equity and debt to tangible net worth ratios. The rate of change in the three ratios was higher in Target Corporation than they were in Wal-Mart Inc, providing an indication that Target has a low cost of financing its activities but has higher risks than Wal-Mart. On the other hand, Wal-Mart’s cash flow to total debt ratio is higher than that of Target Corporation, which means that Target Corporation has a slightly higher ability to meet its debt liabilities.

Table 1.6: long-term debt paying ability ratios

L.T.D. Paying Ability Ratios WAL-MART STORES, INC. TARGET CORPRATION
2013 2012 2011 2013 2012 2011
Times Interest Earned 12.04 11.22 11.35 6.17 5.69 6.79
Fixed Charge Coverage 9.06 8.67 9.02 5.90 5.43 6.34
Debt Ratio 59.76% 60.83% 60.59% 65.62% 66.07% 64.56%
Debt/Equity 148.48% 155.28% 153.74% 190.87% 194.73% 182.20%
Debt to Tangible Net Worth 198.18% 213.47% 201.04% 193.49% 197.76% 184.87%
Cash Flow/Total Debt 21.09% 20.62% 21.58% 16.85% 17.64% 18.68%

ANALYSIS OF PROFITABILITY RATIOS

Introduction

Profitability ratios are used in measuring a company’s level of achieving its profit goals in comparison with its total revenues, equities and total assets. It represents the ability of an organization to use its assets to achieve profits in its business tasks (Moore & Reichert, 2010).

Discussion

Wal-Mart’s performance can be assessed using as critical analysis of its levels of profitability in the last three years. The profitability ratios indicated in the table 1.7 provide an overview of the results obtained from FinSAS analysis of Wal-Mart and Target Corporation’s performance in the last three years.
First, Wal-Mart’s net profit margin decreased from 4.06% in 2011 to 3.69% in 2012 but increased by a small margin to reach 3.81% in 2013. The company’s total asset turnover was relatively stable, experiencing a slight change of -0.04 between 2011 and 2013. In addition, return on assets changed slightly from 9.68% in 2011 to 8.96% in 2013. In terms of income, the company achieved a decrease of its operating income margin from 6.10% to 5096% for the same period. The return on operating assets, return on investment, and return on total and common equity experienced a slight decline for the three-year period. Moreover, Wal-Mart’s gross profit margin remained constant over the period. In fact, it changed from 24.83% in 2011 to 24.38% in 2013, a slight change of about -0.45%.

These observations provide the company management with a good basis to determine and plan for the company’s future. For example, the sluggishness of the company’s total growth in terms of asset turnover implies that the level of profitability is reduced. Secondly, reduction in the return of assets from one year to another is an indication that there was a decrease in the total revenue since 2010.
It is also worth noting that operating income margins since 2011 were stagnant due to sluggish Net Profit Margin in the period. For instance, the rate of increase in the cost of sales is relatively slow. The decrease in operating asset turnover in the three-year period is caused by a decrease in the company’s total revenues decommissioning its tangible fixed assets. Return on equity at every $1 earns the company 21c in 2013, which is a one-digit fall from the 22c recorded in 2011. Poor performance of the company’s net profit margin and return on assets can be blamed for the decrease in the return on equity recorded between 2011 and 2013. Consequently, the company’s gross profit remained stagnant, with a slight decrease since 2011. This implies that the company is involved in vigorous expansion activities, which could be productive after some years. However, it is worth noting that the company is not making huge losses, which means that it is still a highly competitive and relevant organization as far as the industry is concerned.

Comparison with Target Corporation

The gross profit, operating profit and net profit margins of Wal-Mart Inc and Target Corporation performed poorly compared with each other. While Wal-Mart’s net profit margin decreased by 0.25% between 2011 and 2013, Target Corporation’s net profit decreased by only 0.27% in the same period. In terms of total asset turnover, Wal-Mart performed better than Target Corporation because it achieved a reduction of 0.04% while Target Corporation experienced a reduction of 0.3%. Moreover, Wal-Mart Inc performed better than Target Corporation in terms of total asset and operating asset turnovers, which is an indication that Wal-Mart has a better position. It is also clear that the return on total assets and operating assets were significantly larger in Wal-Mart than in Target Corporation, which makes Wal-Mart’s return on investment and total equity larger to those of Target.

Comparison with the Industry

Wal-Mart’s performance is an indication of the nature of the retail industry in the United States over the last four years. In fact, as shown by the slight differences in the company performance between the two companies analyzed in this paper, the retail industry has experienced sluggish growth as compared to 2004-2007. However, the performance is an improvement from that recorded in the period 2007-2010.

Table 1.7: profitability ratios

Profitability Ratios WAL-MART STORES, INC. TARGET CORPRATION
2013 2012 2011 2013 2012 2011
Net Profit Margin 3.81% 3.69% 4.06% 4.17% 4.28% 4.44%
Total Asset Turnover 2.35 2.37 2.39 1.52 1.52 1.49
Return on Assets 8.96% 8.76% 9.68% 6.33% 6.48% 6.62%
Operating Income Margin 5.96% 5.98% 6.10% 7.24% 7.77% 7.98%
Operating Asset Turnover 2.66 2.68 2.68 1.56 1.55 1.52
Return on Operating Assets 15.89% 16.03% 16.33% 11.30% 12.05% 12.11%
Sales to Fixed Assets 4.17 4.13 4.09 2.50 2.58 2.65
Return on Investment 14.72% 14.18% 15.60% 10.52% 10.60% 10.21%
Return on Total Equity 21.59% 21.36% 22.78% 18.52% 18.71% 18.94%
Return on Common Equity 21.59% 21.36% 22.78% 18.52% 18.71% 18.94%
Gross Profit Margin 24.38% 24.50% 24.83% 29.73% 30.10% 30.49%

Summary

Overall, the analysis provides an indication that Wal-Mart is making slight improvement in its operations. In general, the rate of growth in profitability levels is stagnant, but the company is not making losses. This is an indication that it is on the process of recovering from the recent financial crisis.

INVESTOR ANALYSIS

Introduction

Investor ratios are used in financial accounting to monitor the trend of investor’s investments in a given corporation (Moore & Reichert, 2010). They further provide an indication of the company’s economic performance and ability to return their investments. The rations are important when investors are making decisions on whether to consider the company as a good place to invest or look for a better alternative in the market.

Discussion

Like the profitability ratios, the degree of Wal-Mart’s financial leverage is stagnant. For example, it remained unchanged between 2011 and 2013 as indicated in the table below. Secondly, shareholder’s earnings per share increased slightly from 4.47 in 2011 to 5.02 in 2013. Price/earnings per ratio also increased from 12.54 to 13.93 in the same period. However, the company experienced a reduction in its Percentage of Earnings Retained from 72% to 68%. There was also an increase in the company’s dividend payout, dividend yield and book value per share. In fact, the rate of growth in these rations is commendably high. Price to earnings ratio is on the increase, which provides an indication that the future of investors is good.

Comparison with Target Corporation

Although Wal-Mart and Target Corporation have almost values in terms of degree of financial leverage, earnings per share and price ratio, Wal-Mart performs better than the competitor does. Despite this, there are few differences between the two companies because the growth trend is relatively similar. This is an indication that the industry is growing at a commendable rate.

Comparison with the industry

As indicated above, the retail industry in the United States has experienced growth since 2010. While Wal-Mart grows by 0.24%, the industry has an overall growth of about 1.4%. This is an indication that the future of investors in the company and the industry are good.

Table 1.8: Investor analysis ratios

Investor Analysis Ratios WAL-MART STORES, INC. TARGET CORPRATION
2013 2012 2011 2012 2013 2012
Degree of Financial Leverage 1.09 1.10 1.09 1.17 1.19 1.17
Earnings per Share 5.02 4.52 4.47 4.52 4.28 4.00
Price/Earnings Ratio 13.93 13.58 12.54 13.53 11.69 13.59
Percentage of Earnings Retained 68.46% 67.85% 72.93% 69.89% 73.47% 77.43%
Dividend Payout 31.67% 32.30% 27.07% 30.53% 26.87% 23.00%
Dividend Yield 2.27% 2.38% 2.16% 2.26% 2.30% 1.69%
Book Value per Share 24.42 21.90 19.49 25.21 23.30 21.40
Materiality of Options 0.18% 0.18% 0.32% 12.77% 5.67% 11.86%
Oper. Cash Flow per Share 7.55 6.98 6.44 8.03 7.95 7.23
Oper. Cash Flow/Cash Dividends 4.77 4.80 5.33 5.90 6.99 8.00
Year-end Market Price 69.95 61.36 56.07 61.15 50.05 54.35

CONCLUSION

Although there were indications of slow growth in the company’s profits, it is worth noting that Wal-Mart’s level of profitability is good for a company recovering from the recent financial crisis. In fact, the rate of growth is slow but improving every year. As indicated in the analysis above, Wal-Mart’s growth and performance is better than that of Target Corporation. Moreover, the company’s ability to meet its liabilities with its assets is an indication of its strength to sustain growth in the future. It is also worth noting that Wal-Mart remains a better option for investors who are seeking to gain from their investments. As indicated in the analysis of investors’ ratios above, the company provides investors with a good position to invest because the ratios indicate a good future.
 
References

Lichtenstein, N. (2012). The Retail Revolution: How Wal-Mart Created a Brave New World of Business. New York, NY: Springer
Moore, J. S., & Reichert, A. K. (2010). An analysis of the financial management techniques currently employed by large US corporations. Journal of Business Finance & Accounting, 10(4), 623-645.
Ren, M. (2013). Financial Analysis of the Wal-Mart Stores Company. New York, NY: Cengage learning
Vance, S. S., & Scott, R. V. (2011). Wal-Mart: A History of Sam Walton’s Retail Phenomenon. Washington, DC: Twayne’s Evolution of Modern Business Series.
Wal-Mart Inc. (2013). Annual report. Retrieved from http://az204679.vo.msecnd.net/media/documents/2013-annual-report_130108806067963477.pdf
Wal-Mart Stores Inc. (2013). Annual report to shareholders: Portions of our annual report to shareholders. Retrieved from http://www.sec.gov/Archives/edgar/data/104169/000010416913000011/annualreporttoshareholders.htm#sABA6ABE7F2E01714EB409B0192B18264
Williams, J. R., Haka, S. F., Bettner, M. S., & Carcello, J.V. (2011). Financial & Managerial Accounting. New York, NY: McGraw-Hill Irwin

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