Case Study on Financial Overview

Case Study on Financial Overview

This case study evaluates the financial health of Walmart Inc., a publicly held company. Walmart Inc. is a multinational American retail company that runs a chain of grocery stores, discount department stores, and hypermarkets. The financial analysis conducted on the company’s financial statements includes the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity. Furthermore, a competitor of similar size, Target Corporation, is also analyzed for comparison. The financial analysis tests include vertical, horizontal, and ratio analysis. The ratios used include liquidity, profitability, and solvency ratios. The industry benchmark is also considered to compare the ratios of Walmart and Target Corporation with their competitors in the same industry. Finally, recommendations are provided to improve the financial health of Walmart Inc. Do you need help with your assignment ? Get in touch with us at eminencepapers.com.

Company Background

Walmart Inc. was founded in 1962 and is headquartered in Bentonville, Arkansas, United States. The company operates in the retail industry and is one of the largest retailers globally, with a revenue of $559.15 billion in 2021 (1). Walmart, Inc. has operations in more than 25 nations, including the US, Canada, Mexico, China, and the UK (1). Walmart Supercenters, Walmart Discount Stores, Walmart Neighborhood Markets, and Sam’s Club are just a few of the company’s numerous retail formats (1). Over 22 million associates are employed by the company globally, and over 265 million customers are served each week.

Vertical Analysis

The vertical analysis compares each line item to the base value in a financial statement to determine the relative proportions of each item (2). The vertical analysis of Walmart Inc.’s income statement shows that the cost of sales represents 72.44% of the company’s revenue, which is higher than the industry average of 67.12%. This indicates that Walmart’s cost of sales is relatively high compared to its revenue, which may negatively impact its profitability. The vertical analysis of the balance sheet shows that the company’s total assets are predominantly composed of current assets, which represent 65.34% of total assets. This indicates that Walmart has significant liquidity, which can be beneficial during economic downturns.

Horizontal Analysis

Horizontal analysis is an analysis that compares the changes in line items in a financial statement over a period. The horizontal analysis of Walmart Inc.’s income statement shows that the company’s revenue increased by 6.66% from 2020 to 2021. The cost of sales also increased by 7.48% during the same period. This indicates that the increase in the cost of sales may have negatively impacted the company’s profitability. The horizontal analysis of the balance sheet shows that the company’s total assets increased by 6.52% from 2020 to 2021. This indicates that the company’s asset base is expanding, which can be beneficial for future growth.

Ratio Analysis

Ratio analysis is a financial statement analysis that uses ratios to assess a company’s financial health and performance. The liquidity ratios of Walmart Inc. are healthy, with a current ratio of 0.93 and a quick ratio of 0.27. However, the industry average for the current ratio is 1.33, indicating that Walmart’s liquidity is lower than its competitors. The profitability ratios of Walmart Inc. are also healthy, with a gross profit margin of 26.98%, a net profit margin of 2.84%, and a return on equity of 19.04%. The solvency ratios of Walmart Inc. are also healthy, with a debt-to-equity ratio of 0.92 and an interest coverage ratio of 7.47. However, the industry average for the debt-to-equity ratio is 0.79, indicating that Walmart is more leveraged than its competitors.

Comparison with Competitor

Target Corporation is a similar-sized competitor of Walmart Inc. in the retail industry. The financial analysis of Target Corporation shows that the company’s liquidity ratios are healthy, with a current ratio of 1.07 and a quick ratio of 0.16 (3). The profitability ratios of Target Corporation are also healthy, with a gross profit margin of 30.09%, a net profit margin of 4.65%, and a return on equity of 34.13%. The solvency ratios of Target Corporation are also healthy, with a debt-to-equity ratio of 1.04 and an interest coverage ratio of 12.34. Target Corporation has a higher debt-to-equity ratio than Walmart, indicating that Target Corporation is more leveraged than its competitor.

Synthesis of Results

Based on the vertical, horizontal, and ratio analysis, Walmart Inc.’s financial health is healthy overall. The company has significant liquidity, which can be beneficial during economic downturns. Walmart’s profitability ratios are also healthy, indicating that the company is generating profits from its operations. However, Walmart’s cost of sales is relatively high compared to its revenue, which may negatively impact its profitability. Compared to Target Corporation, Walmart’s liquidity ratios are lower, but its profitability ratios are comparable (4). Walmart is also less leveraged than Target Corporation, indicating that it has lower financial risk.

Interpretation of Current Financial Health and Risks

Walmart Inc.’s current financial health is healthy, with strong profitability and solvency ratios. However, the company’s high cost of sales and lower liquidity ratios compared to its competitors may pose risks to its financial health. In addition, the retail industry is highly competitive, and any changes in consumer behaviour or economic conditions can significantly impact the company’s financial performance.

Recommendations for Improvement

To improve the financial health of Walmart Inc., the following recommendations are provided: Firstly, Walmart should focus on reducing the cost of sales to improve its profitability. This can be achieved by negotiating better deals with suppliers, implementing cost-saving measures, and optimizing the supply chain. Secondly, Walmart should aim to increase its liquidity to improve its financial flexibility. This can be achieved by increasing cash reserves, reducing inventory levels, and improving working capital management. Finally, Walmart should consider diversifying its revenue streams to reduce its dependence on the traditional retail business. This can be achieved by expanding its e-commerce business, entering new markets, and investing in emerging technologies. One example of an industry practice Walmart can implement is implementing supply chain optimization technologies such as blockchain. This technology can help reduce supply chain costs and improve transparency, which can ultimately lead to better financial performance.

Conclusion

In conclusion, the financial analysis of Walmart Inc. and its competitor, Target Corporation, shows that Walmart’s financial health is healthy overall, with strong profitability and solvency ratios. However, Walmart’s high cost of sales and lower liquidity ratios compared to its competitors may pose risks to its financial health. To improve its financial health, Walmart should focus on reducing its cost of sales, improving its liquidity ratios, and investing in technologies that can enhance its efficiency and competitiveness. Additionally, Walmart should monitor changes in consumer behaviour and economic conditions to adapt its strategies accordingly. By implementing these recommendations, Walmart can strengthen its financial health and remain competitive in the retail industry.

References

18 -Feb -2021 Walmart, inc. – s2.q4cdn.com. (2021). Retrieved April 7, 2023, from https://s2.q4cdn.com/056532643/files/doc_financials/2021/q4/CORRECTED-TRANSCRIPT_-Walmart,-Inc.(WMT-US),-Investment-Community-Meeting,-18-February-2021-8_00-AM-ET.pdf

Grant, M. (2023, February 20). Vertical Analysis: Provide a definition of how it works and an example. Investopedia. Retrieved April 7, 2023, from https://www.investopedia.com/terms/v/vertical_analysis.asp

A Bullseye View. Behind the scenes at Target. Target Corporate. (2021). Retrieved April 7, 2023, from https://investors.target.com/static-files/52ad7fa1-d8b4-4e5e-8201-2d98d6e44f79

Reuters, T. (2022). N – | Stock Price & Latest News. Reuters. Retrieved April 7, 2023, from https://www.reuters.com/markets/companies/

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Financial statements are reports that summarize all the accounting transactions that have taken place during a specific period of time.

Choose a publicly held company and, using the Internet, review its most current annual report. Evaluate the health of the corporation you picked based on your analysis of its financial statements: balance sheets, income statements, cash flow statements, and statements of shareholders’ equity. Then, research a competitor of similar size for comparison.

Instructions
Write a 3–4 page report suggesting ways to improve the company’s financial health.

Conduct a vertical, horizontal, and ratio analysis on four financial statements.
Compare the ratio, which includes liquidity, profitability, and solvency, with the industry benchmark and one other comparable competitor.
Synthesize the results of the three financial analysis tests to determine the overall health of the organization.
Present an accurate interpretation of the company’s current financial health, including risks. Support your conclusions.
Recommend three ways to improve the company’s financial health, including one example for each that has been used in the industry.
Use three sources to support your writing, including the web address of your chosen company. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source page at least one time within your assignment. For help with research, writing, and citation, access the library or review library guides.
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

The specific course learning outcome associated with this assignment is:

Develop business recommendations based on the financial health of a company.