Evaluation of Corporate Performance - Walmart Inc PDF

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Evaluation of Corporate Performance Introduction Walmart Inc. which was formerly known as Wal-Mart Stores Inc. is an American multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores, headquartered in Bentonville, Arkansas. The company was founded by Sam Walton in the year 1962 and incorporated on October 31, 1969. It also owns and operates Sam’s Club retail warehouses. It currently has more than 11,500 stores and Clubs in 27 countries operating under different names. Walmart is the world’s largest company by revenue and it is also the largest private employer in the world with over 2 million employers. It is a publiclytraded family-owned business as the company is controlled by the Walton family who owns more than 50% of Walmart shares. It is listed on the New York Stock Exchange. It deals with a variety of products ranging from Electronics, Home and furniture, Clothing, Jewelry, Footwear, Toys, Health and beauty, and Grocery including financial services. Walmart’s current mission statement is “Save people money so they can live better” Financial Statement Review Walmart Inc Financial Summary 2019 In Millions $ Net Revenue Operating Income

2018 In Millions $

510,329.00

495,761.00

21,957.00

20,437.00

2017 In Millions $ 481,317.00 22,764.00

Provision for Income Taxes

(4,281.00)

Net Income attributable to Walmart

6,670.00

(4,600.00)

(6,204.00)

9,862.00

13,643.00

Net Income attributable to Walmart per common share - basic

2.28

3.29

4.40

Net Income attributable to Walmart per common share - diluted

2.26

3.28

4.38

Cash Dividends declared per common share

2.08

2.04

2.00

204,522.00

198,825.00

30,045.00

36,015.00

Total Assets

219,295.00

Long Term Debt obligation

43,520.00

Looking at the above financial summary, the following are the findings; 

The net revenues have been increasing considerably over the years which shows that the company sales have been increasing due to a variety of positive factors.



The operating incomes have been consistent over the three years, although it was a little bit high in 2017, dropped a little in 2018, and then increased in 2019. This shows stability in the management of the company's operational expenses.



The provision for income taxes has been reducing over the three years due to the corresponding decreases in net incomes before taxes.



The net incomes have been reducing over the three years due to high debt interests and other losses incurred.



The net income attributable to Walmart per common share both basic and diluted has been reducing over the years due to the corresponding decreases in net incomes.



The company has been able to declare dividends for the last three years at a consistent rate due to good performance from the net incomes being incurred.



The company total assets have been increasing due to an increase in productivity and revenue over the three years.



The long term debt of the company is high and has increased over the three years which means that it borrows frequently and relies on borrowing to finance its growth.

Proforma Financial Statements Walmart Inc Proforma Income Statement 2019 In Millions $

2020 In Millions $

2021 In Millions $

Revenues Net Sales

510,329.00

561,361.90

617,498.09

4,076.00

4,076.00

4,076.00

514,405.00

565,437.90

621,574.09

Cost of Sales

385,301.00

423,831.10

466,214.21

Operating, Selling,General & Administrative Expenses

107,147.00

107,147.00

107,147.00

Membership and other Incomes Total Revenues Costs and Expenses

Operating Income

21,957.00

34,459.80

48,212.88

Interest: Debt Capital lease & Financing Obligations Interest Income Interest Net Other gains and losses Income Before Income Taxes

1,975.00

1,975.00

1,975.00

371.0 0

371.00

371.00

(217.00)

(217.00)

(217.00)

2,129.00

2,129.00

2,129.00

8,368.0 0

8,368.00

8,368.00

11,460.00

23,962.80

37,715.88

Provision for Income Taxes

4,281.00

8,866.24

13,954.88

Consolidated Net Income

7,179.00

15,096.56

23,761.00

Consolidated Net Income attributable to Non-controlling interest

(509.00)

(509.00)

(509.00)

Net Income attributable to Walmart

6,670.00

14,587.56

23,252.00

Net Income attributable to Walmart per common share - basic

2.28

4.98

7.94

Net Income attributable to Walmart per common share - diluted

2.26

4.95

7.90

Cash Dividends declared per common share

2.08

2.08

2.08

Walmart Inc

Proforma Balance Sheet 2019 In Millions ASSETS

$

2020 In Millions $

2021 In Millions $

Current Assets: Cash & Cash Equivalents

7,722.00

7,722.00

7,722.00

Receivables, Net

6,283.00

6,283.00

6,283.00

44,269.00

44,269.00

44,269.00

3,623.00

3,623.00

3,623.00

61,897.00

61,897.00

61,897.00

Property and Equipment

185,810.00

185,810.00

185,810.00

Less Accumulated Depreciation

(81,493.00)

Property and Equipment Net

104,317.00

104,317.00

104,317.00

Property under Capital Lease & Financing Obligations

12,760.00

12,760.00

12,760.00

Less Accumulated Armotization

(5,682.00)

Inventories Prepaid Expenses & Other Total Current Assets Property Plant and Equipment:

(81,493.00)

(81,493.00)

Property under Capital Lease & Financing Obligations:

(5,682.00)

(5,682.00)

Property under Capital Lease & Financing Obligations, Net

7,078.00

7,078.00

7,078.00

Goodwill

31,181.00

31,181.00

31,181.00

Other Longterm Assets

14,822.00

14,822.00

14,822.00

219,295.00

219,295.00

219,295.00

Total Assets

LIABILITIES AND EQUITY Current Liabilities: Short-term borrowings

5,225.00

5,225.00

5,225.00

Accounts Payable

47,060.00

47,060.00

47,060.00

Accrued Liabilities

22,159.00

22,159.00

22,159.00

428.00

428.00

428.00

1,876.00

1,876.00

1,876.00

729.00

729.00

729.00

77,477.00

77,477.00

77,477.00

Accrued Income Taxes Long term debt due within one year Capital lease and Financing obligations due within one year Total Current Liabilities

Long term debt Long term Capital lease & Financing obligations Deferred Income taxes and other

43,520.00

43,520.00

43,520.00

6,683.00

6,683.00

6,683.00

11,981.00

11,981.00

11,981.00

Equity: Common Stock Capital in excess of par value Retained earnings Accumulated other comprehensive loss Total Walmart Shareholders Equity Noncontrolling interest Total Equity Total Liabilities and Equity

Ratio Analysis

288.00

288.00

288.00

2,965.00

2,965.00

2,965.00

80,785.00

80,785.00

80,785.00

(11,542.00)

(11,542.00)

(11,542.00)

72,496.00

72,496.00

72,496.00

7,138.00

7,138.00

7,138.00

79,634.00

79,634.00

79,634.00

219,295.00

219,295.00

219,295.00

Liquidity Ratios

Formula

2019

Current Ratio

Current Assets Current Liabilities

Quick Ratio

Cash∧Cash equivalents + Short term Investments + Accounts Receivable Current Liabilities

7,722 + 6,283 =0.18 77,477

Cash+Cash Equivalents Current Liabilities

7,722 =0.10 77,477

Net Profit Margin

Net Income ×100 Sales

6,670 ×100=1.30 % 514,405

Gross Profit Margin

Gross Profit ×100 Sales

129,104 ×100=25.1 % 514,405

Return On Equity

Net Income ×100 Average Owners Equity

6,670 =8.87 % 0.5 ( 72,496 + 77,869 )

Inventory Turnover Ratio

Cost Of Goods Sold Average Inventory

385,301 =8.75 0.5 (44,269 + 44,783 )

Asset Turnover Ratio

Sales AverageTotal Assets

514,405 =2.43 0.5 ( 219,295 + 204,522 )

Cash Ratio

61,897 =0.80 77,477

Profitability Ratios

Asset Management Ratios

Financial Leverage Ratios

Debt to Assets Ratio

Total Liabilities Total Assets

139,661 =0.64 219,295

Equity Multiplier

Total Assets Shareholders Equity

219,295 =3.02 72,496

Book Value Per Share

Shareholders Equity Average Shares Outstanding

72,496 =24.62 2,945

Earnings Per Share

Net Income Total Outstanding Shares

6,670 =2.26 2,945

Market Value Per Share

Market Value of a company Total Outstanding Shares

350,072.15 =118.87 2,945

` Market Value Ratios

Liquidity Ratios Analysis Liquidity ratios are important when considering the ability of a company to pay off short-term liabilities using the available resources. The ratios help to evaluate the financial health of a company and show the ability of the company to convert its assets to raise cash (Stittle & Wearing, 2011). The quick ratio is a more stringent test of liquidity than the current ratio formula, so the quick ratio measures the ability of a company to pay off the short-term liabilities that fall due using the most liquid assets thus excluding inventory from the value of current assets. While the current ratio measures the ability of the company to pay off the total current liabilities using the current assets. Also, the cash ratio measures the ability of a firm to pay off its current liabilities with only cash and cash equivalents.

Walmart's current ratio of 0.80 was below the recommended rate of 1 and above which means there are not enough current assets to cover the payments that are due to the company’s current liabilities. The quick ratio of 0.18 is even lower and below the recommended rate of 1 which indicates that the company does not have enough liquid assets to pay its current liabilities. It also means that the company’s current assets are highly dependent on inventory. The cash ratio of 0.10 is very low which means that the company’s cash is insufficient to cover its current liabilities. Profitability Ratios Analysis The profitability ratios are used to assess a company’s ability to generate revenue relative to its revenue, operation costs, assets, and shareholder’s equity. It also shows how well companies use their existing assets to generate profit and value to their shareholders. The company with the higher profit margin will help to sell at a higher price with lower expenses (Friedlob & Schleifer, 2012). They tend to be more attractive to investors. The profit margin displays the relationship between profit and sales. The net profit margin indicates how much net income a company makes with total sales achieved. A higher net profit margin means that a company is more efficient in converting sales into actual profits. Walmart's net profit margin of 1.30% which is below the recommended rate of 10% and more is very low which means the company is not efficient in converting sales into actual profits. Gross profit margin is an indicator of a company’s financial health. Walmart's gross profit margin of 25.1% is above the recommended rate and its considered good. It means that the company sold its inventories at a higher profit percentage and therefore will have more money to pay its operating expenses.

Return on equity is a measure of the profitability of a business in relation to the equity. Walmart's return on equity of 8.87% is poor since it’s below the recommended rate of 14% and above. This means that the company has less ability in generating more profits from its shareholder’s investments hence less effective in the management of equity financing to fund operations. Asset Management Ratios Analysis Asset management ratios measure how effectively a firm is managing its assets to generate revenue. The inventory turnover ratio shows how many times a company has sold and replaced its inventory over a certain period. Walmart's inventory turnover ratio of 8.75 is high and therefore good. It shows that the company is managing its inventory well and its generating high sales. The asset turnover ratio measures a company’s liability to generate sales from its assets. Walmart's rate of 2.43 is good and it shows that the company is effectively using its assets to generate sales. That is for every dollar of assets it generated 2.43 dollars in sales. Financial leverage ratios analysis These ratios measure the extent of company leverage that is the ability to pay its debts. They measure the value of equity in a company by analyzing its overall debt. The debt to asset ratio shows a company’s ability to pay off its liabilities with its assets. It helps to analyze the overall debt burden on a company as well as a company’s ability to pay off its debt in the future. The ideal rate is usually 0.4 and below. Walmart's rate of 0.65 is high and above the ideal rate which means that most of the company’s assets are financed through debt.

Equity multiplier ratio measures the portion of the company’s assets that are financed by shareholder’s equity. A rate of 2:1 is considered favorable. Walmart's rate of 3.02 is slightly higher which means that the company is overly dependent on debt for its financing which can sometimes be risky although in terms of growth it is prospective. Market Value Ratios Analysis These ratios are used to evaluate the current share price of a publicly held company’s stock. They are also used to analyze stock trends. Book value per share weighs shareholder’s equity against the shares outstanding. Walmart's rate of 24.62 is lower than its market rate which means that its stocks are overvalued. Earnings per share are the monetary value of earnings per outstanding share of common stock for a company. It indicates the company’s ability to produce net profits for its shareholders. The higher the rate the more profitable a company is. Walmart's rate of 2.26 is low but good as the company was able to generate profits for its shareholders. Market value per share is the dollar amount that investors are willing to pay for one share of a company. Walmart rate of 118.87 is higher than its book value which means its stocks are overvalued

Return On Equity using DuPont System DuPont analysis is an in-depth examination of the Return On Equity of a company. It breaks down the ROE to analyze how corporate can increase the return for their shareholders. We have the 3 steps and 5 steps DuPont calculations as highlighted below;

ROE DuPont Calculation

Formula

2019

3 Step DuPont Calculation

AverageTotal Assets Sales Net Income × × Average Total Assets Average Shareholders Equity Sales

514,405 211,908.5 6,670 × × =8.8 % 514,405 211,908.5 75,182.5

5 Step DuPont Calculation

Avg . Total Assets Sales Net Income EBT EBIT × × × × EBIT Sales Avg . Total Assets Avg . Shareholders Equ EBT

514,405 211,908.5 6,670 11,460 21,957 × × × × =8.8 % 11,460 21,957 514,405 211,908.5 75,182.5

Economic Value Added Calculation EVA = Net Operating Profit After Taxes – (Total Assets – Current Liabilities) * Weighted Average Cost of Capital Where: WACC =        

D E ∗ℜ+ ∗Rd∗ ( 1−TC ) V V

Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D = total market value of the firm’s financing (equity and debt) E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate

E= 2,945 x 118.87 = 350,072.15 E/V =

350,072.15 =87.4 % 400,693.15

D= 5,225+1,876+43,520= 50,621.00 D/V =

50,621 =12.6 % 400,693.15

V= 350,072.15+50,621.00 = 400,693.15 Effective Corporation Tax Rate = 37.4%

Re = CAPM = Risk Free Rate * Beta (Market Return – Risk free return) Risk Free Rate = 1.59%

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billrates

Beta

Average Beta

= 0.38

https://ca.finance.yahoo.com/quote/WMT?p=WMT&.tsrc=fin-srch

= 0.35

https://www.morningstar.ca/ca/report/stocks/performance.aspx?t=0P000005UH&lang=en-CA

= 0.62

https://www.marketwatch.com/investing/stock/wmt

= 0.45

Expected Market Return = 10%

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

Re = 1.59% * 0.45 (10% - 1.59%) = 5.37% Rd = After Tax cost of Debt =

Therefore WACC =

Interest Expense × ( 1−Tax Rate ) 0.5∗(Beg . Debt +Ending Debt )

=

1,975 × ( 1−37.4 %) =5.37 % 0.5∗(39,040+50,621)

(5.37 % × 87.4 % ) + (2.76 % ×12.6 % )× ( 1−37.4 %) =4.91 %

Net Operating Profit After Taxes = Operating Income x (1-Tax Rate) = 21,957 x (1-37.4%) = 13,745.08

Economic Value Added = 13,745.08 – (219,295 – 77,477) x 4.91% = 6,781.82

Economic Value Added (EVA) is an estimate of a firm’s economic profit or the value created in excess of the required return of the company’s shareholders. It is the net profit less than the capital charge for raising the firm’s capital. Positive EVA shows that a company is producing value for the funds invested in it and negative EVA means the company is not generating value from the funds invested into the business. Walmart has a high positive EVA which shows that the company’s management is performing well as the company is p...