Assessment of Financial Statements of Walmart Inc.
Companies determine their financial positioning by evaluating their financial data and related reports for proper investment decisions (Wang, 2016). This assessment reveals the business situation of the organization in the past, at present, and predicts coming trends to aid them better scheme for subsequent years to advance their portfolios. This study seeks to assess recent corporate financial data of Walmart Inc. to determine the financial position of the corporation. The company draws its financial data from its statements of cash flow and income as well as balance sheets.
According to Fortune 500 ratings, Walmart Inc. is the leading retailer in the US, with over five hundred billion dollars in revenue. The company was founded by Sam Walton in 1962 by founder Sam Walton and later incorporated (1969), after which it began openly trading on the New York Stock Securities.
To assess the financial position of Walmart Inc., an understanding of its income cash flow and balance sheet statements is necessary. This study will evaluate the financial statements of Walmart Inc for the years between 2015 and 2019. This assessment will inform the comments on its financial standing.
Define Financial Statements
A balance sheet is a listing of the liabilities, owner’s equity and assets of a company at a particular timeline. This statement highlights the resources owned by a company that has future economic value, the monetary obligation of the company to creditors, and the shareholders’ investment in the company. In a balance sheet, assets equal to the summation of owner’s equity and liabilities.
A Statement of Income, on the other hand, is a report highlighting the revenues, net profits or losses and expenses of an organization over a specified period. Other names used include the Profit and loss account and statement of earnings.
A cash flow statement indicates the flow of cash into and out of the company. It is also referred to as a statement of cash flow. This financial statement records changes in the cash earnings of a company caused by alterations in both the balance sheet and the statement of income.
Purpose of Financial Statements
Generally, financial statements are a crucial component of the company as they provide information concerning operations, the financial position and cash inflows and outflows of a company.
The balance sheet is the most vital financial statements. It reveals the economic resources owned by a company, how much the company owes its creditors and the amount of money invested in the business by investors at a specific period.
The statement of income indicates the number of gains or losses the company has generated over a given timeframe. Companies are required by law to declare their profits annually as public accountability measures. Failure to disclose information publicly can lead to legal action.
Companies use Cash flow statements to report the source of cash inflows as well as outflows. Companies use cash flow statements as a measure to evaluate their liquidity and solvency. These reports determine the capacity of an organization to offset its debts.
Data Categories in Financial Statements
Balance Sheet
A balance sheet comprises of the owner’s equity, assets and liabilities of a company. Assets are classified on the left of a balance sheet, whereas owners’ equity and liabilities on the right side. The assets are listed in the order of liquidity.
Income statement
The most common sources of data for an income statement include; revenues, cost of sales (also Cost of Goods Sold), gross gains (profits), expenses as well as Earnings Before Interest and Tax (EBIT). Broadly, they are classified as incomes and expenses.
Cash flow Statement
The cash flow statement compares items in the balance sheets accounts and their impact on cash and cash equivalents of the company. This comparison takes the form of financial ratios such as the debt ratio, current assets ratio, return on equity, and asset turnover.
Analysis of Walmart’s Financial Statements
Walmart Balance sheet
According to Walmart’s 10K annual reports for the period 2015 to 2019, the company registered a sustained increase in their cash position at approximately 1.5% of total sales. However, there is an area of concern on the balance sheet evident in the company’s long-term debt. For example, in the year 2015, the company had long-term debt of 40 billion dollars. The debt rating, however, grew significantly for the five years to reach over 43 billion dollars in 2019 and 2020. This rating indicates there are changes in the company’s capital structure, which posses a considerable financial risk.
When considering the inventory, the company has, for the five years, maintained its stock at approximately 21% of its total assets. Also, the company has kept its accounts receivable aligned with sales and the cash balance aligned with the company’s sales. Because of optimizing the company’s current assets, there is a sustained and balanced alignment of the inventory and its assets.
Walmart’s Income statement
Walmart’s 10k annual report for the past five years indicates an average rise in the company’s revenue by approximately 1%. Nonetheless, within the same time range, there is a significant decrease in the net income of the company from seventeen billion dollars in 2015 to slightly over six billion dollars in 2019. Notably, there is a sharp increase of over 8 billion dollars to hit fourteen billion dollars in 2020.
The five-year consistent decrease in net income in 2015-2019 shows a rise in the company’s costs, which the retailer might have failed to transfer to the consumers. However, the turnaround in net income for 2020 is proof of a reduction in the company’s costs. This way, the company has started making profits.
Walmart Inc.’s cost of sales is about seventy-four per cent of the total revenue. This reflects a consistent pricing structure that the company utilizes to optimize gross profit margins. Also, the company witnessed a drop of about 3billion dollars in total revenue in 2016. However, the subsequent four years up to 2020 experienced a moderate growth rate, which is characteristic of the retail industry within which the company operates.
Cash Flow Statement
Current Ratio
Walmart’s current ratio was .97 in 2015, which is almost equal for most industries. However, over the subsequent years, the ratio dropped to end at .8 in 2019. In light of the retail industry, this ratio is still quite high as it shows that the company is solvent for both the short to medium term.
Total Asset Turnover
The total asset turnover for the year 2019 was 2.35, which was a decrease from 2.48 the previous year. This decrease indicates that the company utilized assets to produce the same or fewer sales volume. With the prevailing market environment, the allocation of more fixed assets can hinder the sustainability of the business because of the thin profit margins received. The company may, however, need to liquidate some of its assets to pay down debt if the current total asset turnover continues to decrease.
Return on Equity
During this study period, the company’s internal rate of return fell from 21% in 2015 to about 8.4% in 2019. This significant decline is cause for anxiety among shareholders. Nevertheless, the company structure indicates a high debt utility in its capital structure. Over time, the utilization of debt in its structure should be able to improve its return on equity substantially.
Debt Ratio
Over the five years, the company has increased its long-term debt ratio, with 2019 registering approximately 23%. Following this drift, investors can forecast a consistent shift in capital structure from reliance on debt rather than shareholder equity. This debt ratio is beneficial to the company as it will increase its return on investment while it generates more revenue from borrowed capital. However, the organization may face challenges paying off debts should there be a drop in its revenue.
References
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