Wal-Mart Stores Inc.
As mentioned previously there are actually several groups of financial ratios and each group contains several ratios that describe the company from a certain perspective. In this paper however, we will only use several of the most vital ratios and describe what it means The data reveal how the company has developed over time. The current and quick ratio belongs to the liquidity ratios, which means it describes the company’s ability to sort-out its short term liabilities.
The table above indicated that Wal-Mart remain relatively constant over the years, in its ability to deliver on its short-term obligations. The usual ‘healthy’ number on current ratio is 1 or above, which means that the company at least have enough current assets to settle its current debts. Nevertheless, industrial averages are different with every business environments. Being a capital intensive industry, the retail industry has a relatively low average of liquidity ratios.
The inventory turnover ratio belongs to the activity ratios, which means it describes how the company manages the flow of its goods. The number 8 and 7 as appear in the table above revealed that Wal-Mart’s inventory is replenished 8 times a year, which is a very high number considering the averages of the retail industry. The table also reveals that business slows down a little in 2006 and 2007, but sales and inventory management are better in 2008.
The net profit margin ratio, ROI and ROE belongs to the profitability ratios which describes company’s ability to produce income with existing resources. As we observe the table above, we should remind ourselves that the retail industry is known for its extremely low profit margin. Wal-mart, furthermore, is known as one of the ‘cheap-sellers’, which means that Wal-mart’s profit margin must be one of the lowest in the industry. Instead of depending on profit margins, retail companies like Wal-mart made their profit from quantity of sales.
The debt and P/E ratio belongs to the coverage ratios. They described the company’s long-term ability to maintain continuance of the business. Similar to liquidity ratios, Wal-Mart has relatively low coverage ratios, which is influenced by the nature of the business itself. The table also reveals that 2007 was the year that the company engaged on many debts deals, but the ratio was recovered in 2008, most likely by the selling of several corporate assets. Working Capital Management
In addition to the financial ratios, there are also other tools that managers used to understand the current state of its business operations. Some of those tools will be discussed in this paper. The first is working capital. It is known as a number that reveals the operational liquidity of a company. The bigger the number, the more resources is available for the company to perform its daily operations. It is important to manage the working capital to ensure that the company has sufficient resources to keep improving the quality and profitability of its operations (Moyer, 2007).