Walmart Accounting Case Study
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Wal-Mart is an American multinational corporation that runs chains of large general merchandise and warehouse stores. With more than $421 billion (USD) in revenue, Wal-Mart is not only the largest global retailer but also the biggest private employer in the world, with over 2 million employees. Wal-Mart has 8,500 stores in 15 countries under 55 different names. The company operates under its own name in the United States including the 50 states and Puerto Rico. “Everyday Low Prices” (EDLP) is its pricing philosophy under which it prices items at a low price every day, so the customers trust that the prices will not change under frequent promotional activity. Wal-Marts operations are organized into three divisions: Wal-Mart stores U.S., Sams Club, and Wal-Mart International. The company does business in several different store formats including super-centers, general merchandise, membership warehouse clubs, neighborhood market, discount stores, etc.
Wal-Mart operates in an industry of oligopolistic nature, with Target and Costco as the other two major players. In the past, competition among the firms was minimized because each targeted a different market segment. For example, Target focused on higher end neighborhoods while Wal-Mart focused on rural locations, and Costco originally served small businesses. However, as the firms began to grow, they had to expand beyond their original targeted segment. Today, Wal-Mart has extended its mass-merchant concept in the U.S. to wholesale retailing in the form of Sams Club. Target has launched super-stores that sell fresh produce and groceries along with high-quality merchandise, while Costco has achieved far greater sales by serving individual and non-business shoppers.
This report presents the comparative evaluation of Wal-Mart against its two major competitors, Target and Costco, through financial ratio analysis. It also provides an understanding of Wal-Marts performance and financial standing with respect to Target and Costco.
Performance measurements help to interpret a companys ability to meet its financial obligations (debts), called solvency and earn income, called profitability. Current Ratio and Quick Ratio measure a companys ability to meet its short-term obligations. If the current ratio is less than 1, current liabilities exceed current assets, and the companys liquidity is threatened. The higher the current ratio, the more capable the company is of paying its current liabilities from the conversion of current assets into cash. Quick ratio measures the “instant” debt-paying ability of a company by excluding inventories and prepaid assets. In terms of liquidity, Wal-Marts current ratio of 0.9:1 is not as favorable as its competitors, Target with a ratio of 1.7:1 and Costco with a ratio of 1.1:1. The quick ratio of 0.2:1 for Wal-Mart is also not as good as its competitors, Target with a ratio of 0.8:1 and Costco with a ratio of 0.5:1. However, considering the size and influence of the company, Wal-Mart is in a good position to manage any short-term liability arising in the near future. Nevertheless, Wal-Mart can improve its short-term liquidity ratios by selling additional capital stock, converting some of its short-term debt to long-term debt, borrowing long-term debt, or by disposing of unproductive assets and retaining the proceeds.
Accounts Receivable and Inventory Analysis facilitate a good interpretation of a companys efficiency in managing its receivables and inventory respectively. Collecting receivables as quickly as possible improves the companys solvency, and the cash collected may be used to improve or expand its operations. It also reduces the risk of uncollectible accounts. Wal-Marts accounts receivable turnover of 91.4 times or 4.0 days is almost at par with Costcos receivables turnover of 96.2 times or 3.8 days. However, Wal-Mart exhibits relative efficiency in collecting receivables in contrast to Targets receivable turnover of 10.3 times or 35.5 days, which takes it about 8 times longer to collect its receivables. Wal-Mart has a much higher receivables turnover as it keeps a very low balance of receivables as a percentage of assets. To improve its receivable turnover, Wal-Mart could implement an incentive program where if a customer makes cash payment, he or she could get a small discount toward his or her purchases, cashing in on the fact that everyone loves a discount, regardless of the amount.
The inventory turnover of 9.1 times or 40 days for Wal-Mart is higher than Targets inventory of 6.2 times or 59 days, signifying that Wal-Mart experienced more sales in comparison to Target, thus causing a decrease in the average inventories. However, Wal-Mart is not as effective as Costco in managing its inventory, because Costco, with an inventory turnover of 12.7 times or 28.8 days, sells large volumes of perishable goods as compared to Wal-Mart and Target. Excess inventory decreases solvency by tying up cash in inventory and may cause an increase in expenses such as insurance expenses and storage costs, which further reduce funds that could be invested in the business. Excess inventory also increases the risk of losses because of price declines or obsolescence of the inventory. Wal-Mart could invest some of its excess funds on new marketing strategies to generate more sales and on new systems for thorough inventory analysis to eliminate existing items or brands that tend to sit on the shelf for an extended period of time.
In terms of solvency, Wal-Marts ratio of fixed assets to long-term liabilities of 2.1:1 signifies that each $1.00 of debt is backed by $2.10 of fixed assets. This is turn implies that its creditors are at lower risk of losing their investments in comparison to Targets ratio of 1.5:1. However, Wal-Mart faces a strong competition from its competitor Costco, which stands strong with a ratio of 5.8:1. Debt to equity ratio shows the proportion of debt financed by shareholders funds. Wal-Marts debt to equity ratio of 1.5:1 indicates that it has been aggressive in financing its growth through debt, in comparison to Costcos ratio of 1.1:1, but not as much as Target,