Management

Understanding and using financial ratios is a key method by which analysts determine company value and long-term sustainability. Select a publicly traded company of your choosing. Use their annual report or other information to:

Share some of the financial ratios you have found
Share some of the trends you see
Provide a recommendation on the health of that company
Is it important for department managers across the company to understand some of these ratios? Why or Why Not?

ANSWER

Financial Ratio Analysis

Financial ratios are considered relationships used to determine a company’s financial information. Financial ratios may be used to examine the efficiency of operations, employee performance, potential investments, and creditworthiness (Babalola and Abiola, 2013). Companies draw financial ratios from financial data. Therefore, the financial ratio compares the liabilities and assets to determine the performance and health of an organization.

When assessing a company’s operating performance, various financial ratios are used to determine its financial condition. There are aspects of financial condition and performance that can be evaluated from Walmart’s financial data to determine if it meets its financial obligations. Walmart’s financial ratios are grouped by activity liquidity, profitability, and solvency. The liquidity ratios offer information about the company’s capacity to achieve its short-term obligations. These include the current and quick ratios.

The profitability ratios indicate the ability of a company to generate revenue (Suthar, 2018). Leverage ratios determine the value of equity compared to debt. These include the net profit margin and the operating profit margin. The activity ratio measures how well the company has used its assets and the benefits gained from its assets collectively. These include the inventory turnover and total asset turnover. The solvency ratio is used in measuring the company’s ability to achieve long-term debt obligations.

With regards to the financial ratios, the financial position of Walmart is better compared to most of the listed companies. Walmart has a quick ratio of 0.29, which shows it’s at a financial risk. A company with a quick ratio of less than one means that it’s not in a position to fully pay its current liabilities. Walmart has a low current ratio of 0.79. A low current ratio means that the company is at a higher risk of default or distress. Walmart has had a gross profit margin of 25%. The profit margin shows how efficiently the company sales cover the cost. Walmart’s current operating profit margin is 3.10%. This means that Walmart is not efficiently converting revenue into profit. A low operating margin means that the company uses poor pricing strategies and ineffective cost structure, thus inadequate revenue.

Walmart has a total asset turnover of 2.29 which means that the business utilizes its assets efficiently. This is a sign that Walmart is using efficient methods to utilize assets. Walmart has been operating at a median inventory turnover of 8.8 from 2017-2021. An inventory turnover above 5 shows that the company has a good inventory balance, meaning that it can sell and stock its inventory within two months. Walmart’s debt to asset ratio is at 0.22. A lower debt to asset ratio means that Walmart has a stronger financial structure, thus reducing its financial risks.

Considerably, the ability of a company to pay off its obligations is a good indicator of its financial health. Walmart should focus on increasing its liquidity ratios to align with the industry average. A large retailer such as Walmart can minimize the inventory volume by having an efficient supply chain that shrinks its assets, lowers overhead expenses, and pays off liabilities. Boosting its profits, business operations (managing payables and receivables), efficient utilization of assets, and long-term financing can help grow its business.

Managers need to understand different financial ratios that act as useful management tools that improve understanding of financial performance and trends over time. Managers need to understand how to use financial ratio analysis to evaluate the strengths and weaknesses from which initiatives and strategies can be developed.

References

Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), 132-137.

Suthar, M. K. U. (2018). Financial Ratio Analysis: A Theoretical Study. International Journal of Research in all Subjects in Multi Languages, Gujarat, India.