Walmart Financial Analysis Key Ratios
Shares of Walmart Inc. (WMT) are appropriate for many investors seeking primary protection and current dividend income. With a financial performance analysis, Walmart shares may also be suitable for value investors, or investors who favor stocks with low stock prices relative to the company’s earnings and book value. Historically, Walmart has been seen as a value investment; however, its fundamentals may be changing, making it less attractive to conservative value investors.
Determining the suitability of a stock for its financial objectives requires analyzing specific ratios of the company’s financial statements and comparing those financial ratios to benchmarks and other companies in the industry. Financial ratios shed light on a company’s direction, its likelihood of remaining solvent, and whether its shares are overvalued, undervalued, or valued. Here are five key financial ratios that are important to pay attention to when evaluating Walmart.
Compared to the aforementioned competitors, Walmart has a stronger P / E ratio and a P / B ratio.
However, when you look at the return on equity, debt-to-equity ratio, and your current ratio, Walmart wobbles.
The price-earnings ratio (P / E) is the primary financial ratio that fundamental analysts use to value a company’s shares. The ratio compares the share price to earnings per share (EPS). The average P / E ratio varies by industry, but overall, it is around 15.
As of Q2 2020, Walmart’s P / E ratio is approximately 23.88, which means WMT shares are trading on the market at around 24 times earnings per share. The P / E ratio for WMT shares has been rising, and before 2017, the P / E ratio for Walmart shares tended to float just below 14x or 15x. still, this price-earnings is significantly lower than rival Costco’s (COST) P / E ratio of 36.19. However, the company’s other major competitor, Target (TGT), has a P / E ratio of around 18.77. This suggests that Walmart is a viable game for value investors, but lately it has experienced some price action relative to its earnings that can make some value investors feel uncomfortable. At the very least, stocks don’t seem to be grossly overvalued based on earnings.
The price/book (P/B) ratio compares the market value of the company, which dictates what shareholders pay to own the company, with its book value, which dictates what the company is really worth from an accounting perspective.
Value investors like to see a P / B ratio below 3.0. A P / B ratio below 1.0 suggests extreme bargain action. As of Q2 2020, Walmart’s P / B ratio was 5.16 (higher than the investor value limit), compared to 5.54 for Target and 8.24 for Costco. Once again, Walmart shows characteristics of a reasonably good value purchase relative to its competitors.
Return on equity (ROE) expresses net income as a percentage of shareholders ‘ equity. A company’S ROE is a great indicator of how efficient your management team is running. Smart investors want to see that management is able to compare the company’s capital in strong profits. Therefore, a higher ROE is usually a better ROE.
Roe values above 10% are considered strong; ROE above 25% is considered excellent. As of Q2 2020, Walmart’S ROE was at a precarious 7.2%. Its competitors had significantly stronger ROE numbers: Costco’S ROE reached 22.9% at the end of February. 2020 while Target’S ROE was 9.9% at the end of April 2020.
Debt / equity ratio
Even a mature and profitable company is in a tenuous financial position if it cannot manage its debt. Recessions and market falls expose companies that have been too reckless with their debt management. The debt-to-equity ratio (D/E) expresses the total debt of a company as a percentage of its equity. Ideally, a company’s debt should be less than its capital, which means that a D / E ratio of less than 100% is preferable.
At the end of the last fiscal year, Walmart’s D / E ratio was 97.01%, indicating a high level of debt. By comparison, Target’s D / E ratio of 118.1% indicates that its debt load has exceeded the value of its capital. Costco’s D / E ratio stands at an impressive 47.5%.
A company’s current ratio measures its ability to pay its current debts, defined as those due within a year, and is a measure of a company’s short-term liquidity. It does this by comparing the company’s current liabilities to its current assets, that is, those that can be converted into cash within a year or less.
The formula is current assets divided by current liabilities. A value of 1.0 or higher is preferred. Many value investors consider 1.5 to be an ideal current ratio. Walmart’s current ratio comes down at 0.79. Meanwhile, target’s current ratio is 0.89, and Costco’s is 1.01.
The three companies have current relationships around 1, and the difference between them is negligible. While a slightly higher current ratio would be good to see at Walmart, its other financial relationships offer confidence that paying off debts should not pose any problems for the company.