Financial Ratios Analysis
Wal-Mart Inc(WMT)
Ratios
Industry Average
2018
2017
2016
2018
Current Ratio
0.76
0.86
0.93
1.13
Debt / Equity Ratio
1.5885654
1.520476105
1.4397984
0.08
Free Cash Flow (000)
12,162,000
14,838,000
9,781,000
Earnings per Share
3.29
4.40
4.58
2.17
Price / earnings ratio
27.98
22.07
14.39
9.64
Return on Equity
0.13
0.18
0.18
22.57%
Net profit margin
2.0%
2.8%
3.0%
2.64%
Number of Shares Outstanding
Closing Price Last Business Day in December
92.13
97.1
65.95
Competitor firm
Amazon.com Inc(AMZN)
Ratios
Industry Average
2018
2017
2016
2018
Current Ratio
1.10
1.04
1.04
1.13
Debt / Equity Ratio
1.57
3.74
3.32
0.08
Free Cash Flow (000)
17,296,000
6,410,000
9,399,000
Earnings per Share
20.68
6.32
5.00
2.17
Price / earnings ratio
71.46
187.71
152.97
9.64
Return on Equity
0.23
0.11
0.12
22.57%
Net profit margin
4.3%
1.7%
1.7%
2.64%
Number of Shares Outstanding
Closing Price Last Business Day in December
1478.02
1186.1
765.15
Keywords: Ticker Symbol: Wal-Mart (WMT) and Amazon. Com. Inc (AMZN)
Current Ratio
The current ratio is a liquidity ratio that measures a company ability to pay it short term dues. WMT current ratio decline from 2016 to 2018 meaning that the firm ability to pays its short-term dues declined in the three periods. Amazon.com. Inc (AMZN) current ratio improved from 2016 to 2018 meaning that the firm ability to pay or offset current liability improved. Amazon.com. Inc had a strong current ratio as compared to its competitor in the retail industry such as Wal-Mart. Still, the two firms their current ratio was below the industry average meaning that the firm current ratio was not strong enough as compared to industry average. The two firm’s management is inefficient on how it collects its receivable.
Debt to equity ratio
The debt to equity ratio is the proportion of the equity and debt used to finance company assets and capital expenditure. Based on the computation, the company has a debt to equity ratio of 1.58 in 2018, 1.52 in 2017 and 1.44 in 2016. This means that the company debt is more than the equity used to finance the firm operations. For every dollar of company owed to shareholders, the creditors owe the company shareholders $1.59 in 2018, $1.52 in 2017, $1.44 in 2016. Amazon.com a competitor of Wal-Mart Inc owes creditors $1.57 in 2018, $3.74 in 2017 and $3.32 in 2016 for every dollar the company owes to shareholders. AMZN is at higher financial risk based on the debts acquired to funds’ investments as compared to WMT which used less debt to fund investments. In 2018, WMT had higher equity to debt ratio as compared to AMZN. The debt to equity ratio is more than the industry average for the two firms meaning that WMT and AMZN are facing financial risk because the debt is too high. The firm which is managed well should have a debt to equity ratio of below industry average.
Free Cash Flow
Free cash flow is the measure of profitability that exclude the non-cash expenses of the income statement and that includes spending on the equipment’s an asset as well as a change in working capital (Peterson, & Fabozzi, 2012). FCF indicates how much effect the business is at generating cash and if it can pay its investors a return after it funds its operation and expansion. FCF indicates excess cash a business produces after it pays all its operating expenses. WMT free cash flow improved from 2016 to 2017 and in 2018 its declines. AMZN free cash flow improved from 2016 to 2018. The two companies had higher free cash flow even through WMT had higher free cash flow because the firms still paid dividend to shareholder and AMZN did not pay dividend and that might indicate why it had higher free cash flow as compared to WMT which in reality had higher free cash flow but based on expenses the cash flow was used to pay dividend, capital expenditure, and operation expenses. This means that the firm had an efficient method of generating cash flow or had improved revenue generation and collection of it account receivable.
Earnings per Share
The earning per share (EPS) is the market prospect ratio that measures the amount of net income earned per share of stock outstanding. EPS is the money that would be received by a shareholder if all net income is distributed to the outstanding shares owned (Peterson, & Fabozzi, 2012). WMT shareholders would receive $3.29 in 2018, $4.40 in 2017 and 4.58 in 2016 if the net income was to be distributed to all outstanding shares. The firm is more profitable based on the value of shares after distribution. AMZN shareholders would receive $20.68 in 2018, $6.32 in 2017 and 5.00 in 2016 if the net income was to be distributed to all outstanding shares. This means that the firm is more profitable, and shareholders would earn a lot if the net income was to be distributed to the outstanding shares. The two firms perfumed better based on industry performance. AMZN earning per share is higher than WMT earning per shares based on the computation meaning that the firm performed much better.
Price / earnings ratio
The price-earnings ratio is the relationship between company stock prices and earning per share and it gave the investor a sense of the value of the company. The price per earning denotes the expectation of the market and what market is willing to pay for a stock based on its current earnings. Based price earnings ratio WMT the investors or market is willing to pay $27.98 in 2018, $22.07 in 2017 and $14.39 in 2016. AMZN price earnings ratio is $71.46 in 2018, $187.71 in 2017 and $152.97 in 2016. This indicates that the market is willing to pay that much based on the current earning of the company. AMZN performed much better and investors will be attracted to purchase stock in AMZN based on current earning as compared to WMT. The two firms performed much better as compared to the industry average. The value of price per earning still indicates that the firm is profitable. The price per earning is more than the industry average.
Return on Equity
Return on equity is the measure of financial performance calculated by dividing net income by shareholder equity. This ratio measures the ability of a firm to generate profits from its shareholder investments. The WMT in 2018 it generated 13 cents of profits from shareholder investments, 2017 and 2016 it generated 18 cents of profits from the shareholder investments. AMZN in 2018 it generated 23 cents of profits from shareholder investments, 2017 and 2016 it generated 11 and 12 cents of profits from the shareholder investments which is an indication of improvement in profit generation based on shareholder funding of investments. AMZN management was efficient in utilizing shareholder investments in 2018 as compared to WMT in generating each cent of net income but the other two years that is 2016 and 2017, Wal-Mart performed better than Amazon. The industry average is higher than WMT and AMZN return on equity meaning that WMT and AMZN managements were inefficient because they fail to utilize the shareholder investments to improve net income.
Net profit margin
Net profit margin is the financial ratio used to calculate the percent of profit a company produces for its total revenue (Warren, 2009). WMT produce 2 percent of income from its total revenue meaning that 98 percent of total revenue expenses in 2018. In 2017, the total income level is 2.8 percent total revenue generated that period meaning that 97.2% is the expenses incurred that period. In 2016, the net income generated that period is 3 percent total revenue meaning that 97 percent of revenue is expenses. The firm performed better than the industry average in 2017 and 2016 but in 2018 the income percentage generated was below industry average. AMZN generated 4.3 percent of net income while 95.7 percent was expenses only in 2018 and in 2017 and 2016 the net income generated was 1.7 percent while 98.2 percent expensed. The firm performed poor based on industry average in 2016 and 2017. AMZN performed better than WMT in 2018 based on industry average while in WMT outperformed AMZN in 2017 and 2016 based on industry average.
The rate of Return on Stock price
The rate of return (ROR) is the gain or loss of an investment over a certain period of time. The rate of return is computed over a three-year period. The rate of return for WMT was 62.43 in a period of three years which indicates a gain of 62.43 percent while AMZN was 119 percent in a period of three years. This indicates that the AMZN stock price performed extremely better as compared to its competitor Wal-Mart.
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