Investment in Wall-Mart - Research Paper Example

Introduction Financial managers are responsible for establishing investment strategies for businesses. As a financial manager I have been asked to select a publicly traded corporation that is a good investment alternative for a client. There are various characteristics that I consider in the investment. The company must have a long history of success in the marketplace. Another desired attribute is that it must operate in than one country making the firm a global enterprise. Looking for companies that during the last three years earn a positive net income. The firms stocks must be considered a blue chip stock. Blue chip stocks are stocks issued by a well-known company with an established record of making money and paying dividends (Teweles & Bradley & Teweles, 1992). Choosing a blue chip stock will ensure that the investment selected has a lower overall risk in comparison with other offerings in the stock market. Based on these criteria the company selected for investment is the retail giant Walmart. Company Background Walmart is the largest retail store in the world. The company has 11,000 stores under 71 banners in 27 countries and e-commerce websites in 11 countries (Walmart, 2015). Walt-mart is also the largest employer in the world with 2.2 million employees. The organization was founded by Sam Walton in 1962. The Walt-Mart store was established in Rogers, Arkansas. Sam Waltons legacy includes valuing the importance of human capital. Doug McMillon is the chief executive officer (CEO) and President of the company. The firm believes in the value of promoting from within. Approximately 75% of the stores managers started as hourly associates. Walt-mart compensates its employees with with an average hourly rate of its full time employees of $12.94 (Walmart, 2015). The organization is also a big supporter of the military. Walmart established a goal of hiring 100,000 veterans. The company believes in the value and importance of having a good corporate social responsibility program. Walmart established a fund of $2 billion to fight hunger in the United States. In 2013 the Walmart Foundation gave out $1.3 billion in cash and in-kind contributions to people around the world. The three most important factors of the firms environmental sustainability initiatives are energy, waste, and products. Renewable energy is used by the company. The goal of the firm is to create zero waste. Walmart sells products that sustain people and the environment. In the U.S. the firm operates three types of stores: superstores, discount stores, and neighborhood markets. Internationally Walmart has 6,100 stores. Walmart international is the fastest growing sector of the business. Walmart is a publicly traded company whose stocks are sold in the New York Stock Exchange (NYSE) under the symbol WMT. As of March 5, 2015 the stocks of the company were trading at $83.57 (Yahoo, 2015). The market capitalization of Walmart is $269.93 billion. Financial Overview In fiscal year 2014 Walmart obtained total revenues of $473.08 billion. The revenues of the company increased by 1.6% in comparison with the previous year. In 2014 Walmart had a net income of $16.02 billion. When comparing the net income of Walmart in 2014 with its 2013 results the companys net income decreased by 5.74%. The total assets of Walmart as of January 31, 2014 were $204.75 billion, while its total equity and total liabilities were $81.34 billion and $123.41 billion respectively. The cash balance of the firm at the end of fiscal year 2014 was $7.28 billion. The flow of cash of the company during 2014 came from operating, financing, and investment activities distributed in the following manner: Operating activities: $23.25 billion Financing activities: -$11.02 billion Investing activities -$12.30 billion Ratio Analysis A ratio analysis was performed on the financial results of Walmart. The ratio analysis includes the results of the past three fiscal years. There are ten financial ratios included in the ratio analysis. The results of the ratio analysis is summarized in the table below: Financial Ratio 2014 2013 2012 Net margin 3.39% 3.65% 3.54% Return on assets 7.82% 8.37% 8.12% Return on equity 19.70% 20.79% 20.72% Current ratio 0.88 0.84 0.88 Debt ratio 0.6 0.6 0.61 Inventory turnover 7.98 8.04 10.98 Average sale period 45.73 days 45.38 days 33.24 days Earnings per share $4.90 $5.04 $4.54 Dividends per share $1.88 $1.59 $1.46 Dividend payout ratio 38.37% 31.55% 32.16% The net margin of Walmart in fiscal year 2014 was 3.39%. Net margin measures the absolute profitability of a company. Its net margin decreased by 0.26% in comparison with the previous year. Despite the fact that the net margin of Walmart experienced a small decrease in 2014 the firms profitability is very good considering the fact that the industry average net margin for the retail industry is 1.30% (Dun & Bradstreet, 2015). The return on assets (ROA) of Walmart in 2014 was 7.82%. Return on assets measures how effective a company has been at generating profits from its assets. Its return on assets is 4.02% better than the industry average of 4.10%. The companys return on asset in 2014 is slightly lower than its 2013 results. The return on equity (ROE) metric when compared to the return on total assets, measures the extent to which financial leverage is working for or against common stockholders (Garrison & Noreen, 2003). Walmart had a return on equity of 19.70% in 2014. The return on equity of the company is outstanding since it is 12.8% above the industry average of 6.70%. The current ratio is a liquidity and efficiency ratio that shows the ability of a company to pay off its short term debt (Besley & Brigham, 2000). The formula to calculate current ratio is current assets divided by current liabilities. Walmart had a current ratio in 2014 of 0.88 which is 0.04 higher than its 2013 results. The fact that the current ratio of the company increased by 0.04 is a positive sign. The companys current ratio is a bit below the general rule of a current ratio being good if is above the 1.0 threshold. In 2014 the debt ratio of Walmart was 0.60. The debt ratio shows the solvency of the company. A debt ratio is good if is the below the 1.0 threshold, thus Walmart is not too highly leverage and has an acceptable level of overall debt. The inventory turnover ratio measures how many times a firm has flipped its inventory during a year. A high inventory turnover ratio is the desirable outcome. Walmart in fiscal year 2014 had an inventory turnover ratio of 7.98. The average sale period measures how many days it takes a company to sell its entire inventory. In 2014 it took Walmart an average of 45.73 days to sell its inventory. The earnings per share (EPS) metric tends to have an effect on the market price per share of a corporation (Garrison, et al. 2003). The organization in 2014 had an earnings per share of $4.90. This figure is $0.14 lower than the previous year. The company might have had lower EPS in 2014, but in regards to its dividends the dividend per share of Walmart in 2014 of $1.88 is $0.29 higher than the previous year. Walmarts dividend payout ratio in 2014 was 38.37%. Stock Price movement WMT common stocks are priced at $83.57 as of March 5, 2014. During the past fifty-two weeks the range of prices that the stock has sold in the market was $72.61 - $90.97. A graph showing the movement of price of Walmarts stock during the past year is illustrated below. (Yahoo, 2015). The graph of the prices of Walmart common stock during the past year shows that the stock during the first six month went up and down. After October 16, 2014 the price of the stock went in an upward spiral peaking in price in January 8, 2015. Since then the price of WMT common stock have gone down in a value about $7 per stock. Risk Analysis Walmart runs a sound business model that has helped the company generate billions of dollars in revenues during the past fifty years. Despite the success of Walmart its executive management team must the aware that the corporation is exposed to a variety of business risks. As the largest employer in the world one of the risk the company is exposed too comes from its own work staff. Employees can become a source of risk because acts such as injuries in the workplace can cost the company money in medical expenses and potential lawsuits. Employees can file a lawsuit against the employer for a variety of reasons including wrongful termination of employment, sexual harassment, and discrimination among other reasons. Another risk that the firm faces is legal. Just like employees can file lawsuits against the company other stakeholder groups such as suppliers and customers can also take legal action against the company. The unionization of employees is a risk that can affect the employee relations of the company. A union can ask for exorbitant pay raises which could force Walmart to raise its payroll expenses which would lower the profitability of the firm. A union also has the power to shutdown the operations of the firm if the employees go on strike. Walmart operates in 26 countries outside the United States. As a global company Walmart faces a lot of risks associated with its international operations. One of those risks is currency risk associated with loss of purchasing power from fluctuations in foreign exchange. To mitigate this risk the company can exchange the cash reserves of its international stores to Euros or U.S. Dollars on a weekly basis. Another strategy that can be used to offset this risk is hedging. A risk associated with its international operation is the risk of political instability. A battle for power in a foreign region can lead to a civil war. Such a scenario would be devastating for the operations of Walmart in that country. One of the most valuable assets of Walmart is its total inventory. At the end of fiscal year 2014 Walmarts inventory was worth $44.86 billion. A risk associated with the inventory the company owns is obsolesce. Inventory obsolesce is more likely to occur in technological products such as computers. A way to mitigate the risk of inventory obsolesce is by implementing just in time inventory. A risk that the firm faces which is hard to predict because it is based on the laws of nature is risk of natural disaster. A natural disaster such as an earthquake can destroy the physical facilities of a store. A way to mitigate the risk of natural disaster is by purchasing insurance. Recommendation Walmart is socially responsible company that believes a lot in the value of helping the community. Those are good qualities to have in a company you want to invest in. The financial analysis of Walmart showed a lot of positive signs. The company obtained a sales growth in fiscal year 2014 of 1.6%. The net margin of the company of 3.39% was above the industry standard. The ROA and ROE of the company were outstanding evidence by the fact that both metrics were nearly twice as better as the industry standard. The EPS of Walmart was good. A promising trend for investors is the fact that the company in 2014 had higher dividends per share than in the past two years. Also its dividend payout ratio was higher. In terms of risks the company is exposed to several of them, but most of those risks can be mitigated by the executive management team of the company. My recommendation is to purchase WMT common stocks due to the companys solid profitability, efficiency, liquidity, and solvency. Conclusion The work of a financial managers involves analyzing both qualitative and quantitative information in order to assess the financial performance of an investment target. It is important for a financial manager to be unbiased when analyzing a firm. This report utilized a variety of techniques to present information including tables, graphs, and financial ratios. The information used in this report was retrieved using secondary research. An in-depth analysis of the information helped in the determination to recommend the purchase of Walmart common stocks. Walmart is a company that has the potention to continue its existance for centuries. The price of the stock should continue to steadily climb in the long run. References Besley, S., Brigham, E. (2000). Essentials of Managerial Finance (12th ed.). Forth Worth: The Dryden Press. Dun & Bradstreet (2015). Key Business Ratios – SIC 5331. Retrieved March 5, 2015 from Dun & Bradstreet database. Garrison, R., Noreen, E. (2003). Managerial Accounting. (10th ed.). Boston: McGraw Hill Irwin. Teweles, R., Teweles, E., Teweles, T. (1992). The Stock Market (6th ed.). New York: John Wiley & Sons. Yahoo.com (2015). Wal-Mart Stores Inc (WMT). Retrieved March 5, 2015 from http://finance.yahoo.com/q?s=WMT&ql=1 Yahoo.com (2015). Wal-Mart Stores Inc (WMT) – Interactive Charts. Retrieved March 5, 2015 from http://finance.yahoo.com/echarts?s=WMT+Interactive# Walmart.com (2015). Our Story. Retrieved March 5, 2015 from http://corporate.walmart.com/our-story/ Walmart.com (2015). Walmart U.S. Retrieved March 5, 2015 from http://corporate.walmart.com/our-story/our-business/walmart-us Read More