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Capital Structure Analysis - Walmart

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Autor:   •  December 10, 2010  •  4,058 Words (17 Pages)  •  3,110 Views

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Introduction

Every business decision is associated in one way or another with the financial condition of the organization. The results of a working capital analysis will assist in the determination of organizationÐŽ¦s ability to remain in a particular line of business. The primary focus of Team CÐŽ¦s analysis of Wal-Mart, Inc is its current and future financial condition. The most imperative areas that are found in the Capital Structure Analysis Report fall into the following categories: Working Capital Management, Valuation and Investment, and Cost of Capital. The companyÐŽ¦s operational processes within each area can be examined and related financial data reviewed. Once the financial data is collected and calculated potential areas for improvements can be identified and corrective or innovative measures can be implemented. As in all businesses, which include Wal-Mart, it must be considered that there is always room for improvement.

Working Capital Management

In order to fully understand the companyÐŽ¦s financial position a financial manager must consider the amount of net working capital available. The net working capital is the difference between current assets and current liabilities. Companies normally have a positive net working capital. The components of working capital change continually within the cycle of operations. (Brealey, 2001) Therefore, an effective manager will monitor the cash conversion periods to determine the length of the production process. The longer the process, the longer the companyÐŽ¦s money will be tied up in the process. The two elements in the business cycle that normally absorb the most cash are inventory and receivables. The main sources of cash are payables and equity or loans. Speeding up the working capital cycle will generate more cash for the company. www.planware.org This management of working capital will allow the company to maximize its use of existing cash flows as well as leverage additional sources of working capital.

Underperforming Company Ratios

Although Wal-Mart is performing well overall and remains a leader within the retail industry, the company is not without opportunities for improvement. An analysis of the financial ratios for the company over the last three years as well as an industry comparison has identified areas in which the company could enhance its processes through capital management. (See Appendix A for actual data) Although the current ratio has remained stable over the last three years, it is significantly below the industry average. The current ratio indicates that the company has had significant debt at the end of each year that it would need to pay off by the end of the following year. The amount of this debt increased each year, as evidenced by the slight decrease in the ratio. In order to avoid the continual decrease of the ratio the company would need to reduce the amount of debt incurred each year. The quick ratio has also remained stable, but well below the industry average. This signifies that the proportion of assets that are easily liquidated is below that of other companies. If it became necessary to liquidate some assets to raise capital, the ratio indicates that the company may have difficulty. The asset turnover ratio remained consistent with industry averages for the last three years. In other words, the amount of revenue covers the cost of acquired assets. However, in order to continue its profitability, the company may want to increase this number. The companyÐŽ¦s problem appears to lie within the management of its liabilities and improvements in capital management strategies may assist in the reduction of these problem areas.

Recommendations/Strategies

A working capital strategy is a financial plan that details the companyÐŽ¦s intentions regarding the management of assets and liabilities. Plans for improvements are formulated and implemented following the identification of weaknesses. These plans would require a review of the companyÐŽ¦s long and short-term goals. Last yearÐŽ¦s annual report reveals the following pertinent information: the Wal-Mart segment accounted for 68% of company sales (a 10% increase over the previous year), the SamÐŽ¦s Club segment accounted for 13.5% of company sales (an 8.9% increase), and the International segment accounted for 18.5 % of company sales (a 16.6% increase), and cash flows increased 3 billion due in part to improved inventory management. www.walmart.com The short-term goal is to reduce liability/increase cash, thereby increasing the underperforming ratios, and the long term goal is to continue its international expansion efforts while maintaining sales and profits. In order for management to make the most appropriate decision the potential negative consequences of the planned changes must also be analyzed. To meet company goals, potential changes in the following areas should be explored: cash and marketable securities, short-term financing, credit policies, and inventory management.

Cash and Marketable Securities

Cash and marketable securities are important current assets. A financial manager can review financial documentation to identify significant sources of cash and can forecast future sources and uses of cash. The company may also choose to purchase or sell securities in order to enhance its financial position. A review of the last three annual reports shows that company debt has increased due to the expansion efforts while sales have steadily increased at a rate of only 12%. Total current liabilities have increased by 37% and long term debt has increased by 9%. Total current assets increased by 24% and total assets increased by 25%. These numbers show that although the company has increased its current assets, it has increased its current liabilities at a higher rate. The easiest way to attempt to correct the problem and accomplish the identified short term goal is to increase sales and/or decrease debt. While overall company sales increased, some stores reported decreased sales. Internationally, sales have been consistent for the last three years; however, the majority of those sales are generated in Canada, the UK, and Mexico. Some decrease in revenue may be the result of ÐŽ§rapid development of new stores in the International SegmentЎЁ. www.walmart.com An option for decreasing the amount of debt and increasing sales would include slowing the expansion process in less productive areas and concentrating on the more productive markets.

Sources and Uses of Short-term Financing

Sources and uses of short-term financing are critical elements of effective financial management. Financial managers normally

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