Walmart financial analysis: 5 key ratios

Wal-Mart Inc. (WMT) stock is suitable for many investors seeking principal protection and current dividend income. Through financial performance analysis, Wal-Mart stock may also be suitable for value investors, or investors who prefer stocks whose stock prices are relatively low relative to the company’s earnings and book value. Historically, Wal-Mart has been regarded as a value investment; however, its fundamentals may be changing, making it less attractive to conservative value investors.

Determining whether a stock is suitable for your financial goals requires analyzing specific ratios in the company’s financial statements and comparing these financial ratios with benchmarks and other companies in the industry. Financial ratios reveal the company’s development direction, the possibility of maintaining solvency, and whether its stock is overvalued, undervalued, or just right. Here are five key financial ratios to be aware of when evaluating Walmart.

Key points

  • The financial performance of Wal-Mart Inc. (WMT), which is generally regarded as a blue chip stock, is worth comparing with competitors such as Costco and Target.
  • Compared with the above competitors, Wal-Mart has a stronger price-to-earnings ratio and price-to-book ratio.
  • However, when considering return on equity, debt/equity ratio and its current ratio, Wal-Mart faltered.

P/E ratio

The price-to-earnings ratio (P/E) is the main financial ratio that fundamental analysts use to evaluate a company’s stock. This ratio compares stock prices to earnings per share (EPS). The average price-to-earnings ratio varies from industry to industry, but overall it is about 15.

As of the second quarter of 2020, Wal-Mart’s price-to-earnings ratio is approximately 23.88, which means that the trading price of WMT stock in the market is approximately 24 times earnings per share. The price-to-earnings ratio of WMT stocks has been rising. Before 2017, the price-to-earnings ratio of Wal-Mart stocks tended to hover slightly below 14 times or 15 times. Nevertheless, this price-to-earnings ratio is still significantly lower than the 36.19 price-to-earnings ratio of competitor Costco (COST). However, the company’s other major competitor Target (TGT) has a P/E ratio of only around 18.77. This shows that Wal-Mart is a viable option for value investors, but it has recently experienced some price movements related to its earnings, which may make some value investors feel uneasy. At least, based on earnings, the stock does not appear to be severely overvalued.

P/B ratio

The price-to-book ratio (P/B) compares the company’s market value (determining the fees paid by shareholders to own the company) with its book value (determining the true value of the company from an accounting perspective).

Value investors like to see price-to-book ratios below 3.0. An AP/B ratio below 1.0 indicates that the stock is very cheap. As of the second quarter of 2020, Walmart’s P/B ratio was 5.16 (above the value investor limit), compared with Target’s 5.54 and Costco’s 8.24. Compared with its competitors, Wal-Mart once again shows the characteristics of reasonable and value-for-money purchases.

Return on equity

Return on equity (ROE) represents the percentage of net income to shareholders’ equity. A company’s ROE is an important indicator to measure the execution efficiency of its management team. Savvy investors want to see management able to convert the company’s equity into strong earnings. Therefore, a higher ROE is usually a better ROE.

ROE value higher than 10% is considered strong; ROE higher than 25% is considered excellent. As of the second quarter of 2020, Walmart’s ROE is at an unstable 7.2%. The ROE data of its competitors is significantly higher: Costco’s ROE was 22.9% at the end of February 2020, while Target’s ROE was 9.9% at the end of April 2020.

Debt/equity ratio

If debt cannot be managed, even a mature and profitable company will have poor financial status. The economic downturn and market downturn have exposed companies that are too reckless in debt management. The debt/equity (D/E) ratio represents a company’s total debt as a percentage of its equity. Ideally, a company’s debt should be lower than its equity, which means that a D/E ratio of less than 100% is desirable.

As of the end of the previous fiscal year, Wal-Mart’s D/E ratio was 97.01%, and its debt level was relatively high. In contrast, Target’s D/E ratio is 118.1%, indicating that its debt burden has exceeded the value of its equity. Costco’s D/E ratio is as high as 47.5%, which is impressive.

Current ratio

A company’s current ratio measures its ability to repay current debt, defined as debt due within one year, and is a measure of the company’s short-term liquidity. It does this by comparing the company’s current liabilities with its current assets (that is, assets that can be converted into cash in a year or less).

The formula is current assets divided by current liabilities. A value of 1.0 or higher is preferable. Many value investors believe that 1.5 is the ideal current ratio. Wal-Mart’s current ratio is as low as 0.79. At the same time, Target’s current ratio is 0.89, and Costco’s current ratio is 1.01.

The current ratios of these three companies are all around 1, and the difference between them is negligible. Although Wal-Mart’s slightly higher current ratio is good news, its other financial ratios convince people that repayment of debt will not pose a problem for the company.

Bottom line

Wal-Mart has always been regarded as a staunch supporter of value investing. A blue chip company that dominates the retail sector, its fundamentals based on ratio analysis indicate that its trend has deviated from the key indicators sought by value investors. In fact, Wal-Mart has surpassed several of these thresholds in terms of debt burden, stock price relative to earnings, and liquidity conditions. This may be partly due to increased competition from online retailers such as Amazon and increasing pressure from physical stores such as Target and Costco.


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