Topics: Financial ratio, Financial ratios, P/E ratio Pages: 8 (2254 words) Published: October 30, 2012
Valuing Wal-Mart Stock

Wal-Mart was founded by Sam Walton in 1962 and was based in Bentonville, Arkansas. Wal-Mart in the successive years has grown to be the world's largest retailer and has more than 4000 stores worldwide. Wal-Mart employs 1.7 million workers worldwide and boasts of 138 million customers every week. Rachael Martin was an investment advisor and was tasked to valuate the Wal-Mart stock with the help of three widely accepted models i.e. dividend discount model, the capital asset pricing model and the price / earnings multiples. Question 1: Assess the financial health of Wal-Mart based on the analysis of the company’s financial statements. Response: The financial health of Wal-Mart can be observed in the Exhibit mentioned in the case study. We have analyzed various ratios in order to gauge the financial health of the firm. Liquidity Ratio:

Liquidity ratios|
| 2004| 2005|
Current ratio| 0.91| 0.90|
Quick ratio| 0.21| 0.21|
Cash ratio| 0.14| 0.13|

The liquidity ratio is an indicator of a firm's market liquidity and its ability to meet creditor's demands. Acceptable current ratios vary from industry to industry and the generally accepted norm is between 1.5 and 3 for healthy businesses. As we can see from the aforementioned table, Wal-Mart's current ratio in 2004 was 0.91 and in 2005 was 0.90. This is way below the industry average, hence it is safe to assume that it is not in good financial health at that point in time. Further, the Quick ratio in 2004 was 0.21, in 2005 was 0.21 and the cash ratio in 2004 was 0.14, for 2005 was 0.13.

Financial Leverage Ratio:
Financial Leverage ratios|
 | 2004| 2005|
Total debt ratio| 0.59| 0.59|
Debt-equity ratio| 1.42| 1.43|
Times interest earned| 18.06| 17.33|
Equity multiplier| 2.42| 2.43|
Cash coverage ratio| 18.06| 17.33|

Form the aforementioned data, it is evident that the total debt ratio, debt to equity ratio and equity multiplier ratio has remained nearly the same for both the years. Since the debt–equity ratio is above the industry average, it might be difficult for Wal-Mart to borrow additional funds without raising any additional equity capital. Further, the time interest earned coverage has decreased from 18.066 in 2004 to 17.33 in 2005. Cash coverage ratio has also decreased from 18.06 to 17.33 in 2005. Turnover Ratios:

Turnover Ratios|
 | 2004| 2005|
Inventory turnover| 7.47| 7.46|
Days sales inventory| 48.87| 48.90|
Receivable turnover| 204.41| 166.31|
Days sales in receivables| 1.79| 2.19|
Total asset turnover| 2.43| 2.37|
Capital intensity| 0.41| 0.42|

The inventory turnover, days sales inventory and capital intensity ratios has remained constant for both the years. The receivable turnover is a ratio that shows us how effectively the company collects its’ funds from its customers for goods or services sold on credit. The receivable turnover declined from 204.41 in 2004 to 166.31 in 2005 and accordingly days of receivable outstanding increased from 1.79 days to 2.19 days. Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue. In this case, the asset turnover has decreased marginally from 2.43 in 2004 to 2.37 in 2005 which is not a good indicator for the firm. Profitability Ratio:

Profitability measures|
 | 2004| 2005|
Profit margin| 3.53%| 3.60%|
ROA| 8.59%| 8.54%|
ROE| 20.76%| 20.79%|
EPS| $2.08| $2.41|

The profit margin increased from 3.53% in 2004 to 3.60% in 2005. The return on assets decreased from 8.59% in 2004 to 8.54% in 2005 and this is not a good indicator for the firm. There was a marginal increase in the return on equity from 20.76% to 20.79% and the EPS increased from $2.08 to $2.41 in 2005. -------------------------------------------------

Question 2: Based on any additional...
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