The chosen company is Wal-Mart Stores Inc. and an appraisal of its financial performance based on Income Statement and Balance Sheet has been made in this write-up using four different methods. As per Stephan Gilman(2007, page 9)1, “A complete grasp of the situation of a business is obtained by the use of both income statement and balance sheet.”
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To provide a horizontal financial analysis of Wal- Mart Stores Inc., the year 2007 is taken as the base year and accordingly, the comparative figures for 2008 of its financial statements are calculated as under:
Horizontal analysis reveals that the overall activity of Wall-Mart has gone up in 2008 as compared to 2007. The revenue has increased by 8.65 points giving rise to a net income increase of 12.82 points after adjusting loss from discontinued operations that were much lower in 2008 as compared to 2007. Current liabilities have increased more sharply than current assets and would have destroyed the current ratio even further. Long-term liabilities have gone up by 6.83 points and so also the investments in properties and equipment by 9.7 points. Overall shareholders’ equities have seen a rise by 4.93 points mainly because of increased income.
The financial statements of Wal- Mart Stores Inc. for 2007 and 2008 are vertically analyzed as under:
Vertical comparisons show that operational cost and expenses have increased by 0.07% of sales in 2008 as compared to 2007 and thus lowering EBIT. Further interest and taxes have also risen by 0.05% and thus giving a decrease in operating profits by 0.12%. However net income has increased by 0.12% because of a decrease in loss from discontinued operations (0.23%) and minority interest by 0.01%). Decrease in current assets and increase in current liabilities have made working capital management difficult for Wal- Mart. But the increase in long-lived assets and corresponding long-term liabilities has taken some share from equities.
The third method used for the appraisal of the financial performance of Wal- Mart is ratio analysis. The ratios for two years are calculated as under:
Gross profits have remained more or less the same in 2008 when compared to 2007 as they have increased from 23.43% in 2007 to 23.5% in 2008. But the effect on operating profits (EBIT) decrease of 0.07% (from 5.94% to 5.87%) is caused by an increase in operational expenses by 0.14%. An increase in return on assets is an indication of more effective use of assets as compared to 2007. An increase in return on equities or capital employed will provides increased satisfaction to investors.
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The current ratio is deteriorating further as has already been explained in horizontal and vertical analysis and thus making it difficult for Wal- Mart to meet its current obligations as those become due. An increase in the collection period of receivables will put more pressure on the working capital management of the company. Assets turnover has remained more or less same as in 2007.
Long Term Solvency
Though analysis of long-term solvency is also based on ratio analysis it provides the company an opportunity to rectify its capitalization policy as per its long-term objectives. The requisite ratios are calculated as under:
On a long-term basis, Wal- Mart is a very strong company. First of all, it is a low geared company. That is to say, long-term debts are just 0.39 of equities and long-term debts. The equity holders will always benefit in situations of rising profits as the debt capital is much lower than equity funds providing equity holders an opportunity as residual beneficiaries.
Secondly, the company interest coverage ratio is very good. Anything beyond 2 times is considered good but the coverage here is more than 12.23 times in 2008 and 13.41 times in 207. Thus on a long-term basis, the company enjoys a solvent position because of its appreciable long-term objectives for the benefit of equity holders.
- Stephan Gilman, Analyzing Financial Statements, 2007, published by reading Books, ISBN 1406751715, 9781406751710.