# The Financial Ratios Essay

The financial ratios are very critical aspect on evaluation of the position of the company. Current ratio is calculated by; current assets/current liabilities; inventory turnover on the other hand is given by Cost of Goods sold (COGS) over Average inventory; debt ratio is given by total ratio divide by total assets (Plunkett 2007). Over 2002 through 2002 to 2005 the cost of goods sold reduced from 78% to 76% expressed as a percentage of sales, Business week (2006). The cost of goods sold used 4 million supplies to every store they made each year, but it has not been able to implement policies that cut down transportation costs.

The CFO is maintained at a better position as it has been recording double digit since 2002 to 2007 experiencing some negative growth in 2004 – 2005 year due to the cash outflow in the working capital resulting from inventory accumulation (Jablonsky & Barsky 2008). Cash flow operations were constant; net income expressed as a percentage of cash flow was 60% to 68% from 2004 to 2006. Debt/common equity is obtained by dividing long terms debt over the common stock equity, Wal-Mart’s current debt ratio is about 0. 52.

Price/book ratio or price/equity is

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calculated by taking stock and dividing it by the book value per share; the book figure is the figure that represents the common stock equity (Dickie 2006). The current price book ratio is 3. 07; the price earning ratio is a fast look up that enables possible investors to ascertain the earnings expected from the investments. This helps to determine how much an investor can earn on a dollar, Business week (2006). For instance, if the price for a company share is \$ 10, then for every share, the investor will earn \$ 2 each year and the price earning ratio will be 5:1, Dickie (2006)

Asset Management; there are two aspect that are important in asset management, they are; the Total asset turnover ratio and return on equity. Turnover is a measure of how effectively a company uses its assts to make sales. The most significant is the total asset turnover; asset turnover = net sales over average total assets and return on total assets = net income devised by average total assets, Dickie (2006). Return on equity (ROE) gives an estimate of the earning per dollar of investment while return on assets (ROA) does the same job but over the whole assets. (Harrison & Horngren 2001) They both determine profitability of the company.

In the year 2006, Wal-Mart earned a total of \$11 billion, to determine the return on investment; the earnings are divided by the total equity (\$53B). The result is 21% ROE, and any ratio over 20% is an attractive venture since the company is returning wealth to the investors (Roberts et al 2008). Return on Asset is given by Net profits/ (average assets) which is also equal to ((sales)/ (average assets)) *((net profits)/sales)). Wal-Mart attained a profit margin of 3.. 6% in 2005, its turn over was over 2. 6 times over the succeeding years, as a consequence its ROA was slightly over 9% (3. 6*2. 6), Business week (2006)

Conclusion and Recommendations Wal-Mart Inc is a lucrative business venture basing on its return on equity that has been recorded over the past few years, it is slightly above the industry’ average. Calculations like the price earnings and beta coefficient. The current beta coefficient of 00. 5 and the price earnings pf over 10. 10% are a clear sign of the company’s financial power. The management of the Wal-Mart is very effective basing on the price earning ratios of the previous years, growth is also evident from the earning per share as indicated in the years 2006 and 2007 plus a return on equity of 21% in 2006 increasing by 7.

52%. Wal-Mart Inc has been the leading retail store in the US operating over 5,700 stores and continues to expand over the boundaries and becoming a global venture. Recently, the management announced that it would be moving to other developing countries like India. Having been in the business for quit sometime now, Wal-Mart has managed to take control of its costs, however, the rising interest rates and the blooming fuel prices have seen it loose control of these costs. Currently, Wal-Mart is on a mission to restructure its organization by recruiting younger and active workforce so as to cut down the cost of medical care.

Though there is some legislation that requires Wal-Mart to pay at least eight percent of its payroll to the medical care benefits, it would not have a serious impact on the company because its stock has been constant over the past four years. Finally, Wal-Mart is not an inexpensive initial venture. Compared to greener companies, it will remain a leader in the business with healthy return on investments for the investors as well as giving room for improvement.

References

Business week (2006) Strategy Power Plays How the World’s Most Strategic Minds Reach the Top of Their Game McGraw-Hill Professional Dickie R. B (2006). Financial Statement. Analysis and Business. Valuation for the Practical Lawyer. American Bar Association Dickie R. B (2006). Financial Statement. Analysis and Business. Valuation for the Practical Lawyer. American Bar Association Diamond M. A & Stice E. K Stice J. D (1999) Financial Accounting. Reporting and Analysis Southwestern College Pub Fabozzi F. J. Peterson P & Drake (2003). Financial Management and Analysis. John Wiley and Sons Fridson. M. S & Alverez. F (2002) Financial Statement Analysis. A Practitioner’s Guide.

John Wiley and Sons. Harrison W. T & Horngren C. T (2001). Financial Accounting. Prentice Hall Harrison W & Horgren C (2008). Financial Accounting: International Edition 7th ed. Pearson – Prentice Hall Hooke J. C (1998). Security Analysis on Wall Street. A Comprehensive Guide to Today’s Valuation Methods. John Wiley and Sons Ingram R. W & Baldwin. (2001) Financial Accounting. Information for Decisions South-Western College Pub Jablonsky S. F & Barsky. (2008). The Manager’s Guide to Financial Statement. Analysis John Wiley California

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