Walmart Financial Analysis

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Walmart Financial Analysis

1.0 Introduction

According to Peng (2016), business environment presents various opportunities and

threats to multinational companies across the globe. Additionally, the current markets are

characterized by intense competition and a high cost of operation that negatively impacts on a

business ability to compete. Therefore, the success of the multinational companies, as well as

the ability to achieve their goals and objectives, largely depends on the ability to identify and

implement appropriate strategies that will act as a source of competitive edge in the market

and help take advantage of the available opportunities. As such, the motivation of the

multinational companies is to develop appropriate strategies to help take advantage of the

available opportunities, mitigate possible threats and ensure competitive advantage in their

market segment. This report will identify and evaluate relevant Walmart theoretical drivers,

measure the impacts of these drivers on the company strategy and finally determine the

consequences for enhanced shareholders value.

2.0 Company Introduction

Walmart is an American multinational company operating as a grocery store, chain of

hypermarkets and department stores. Sam Walton founded the company in the year 1962, and

its headquarters are based in Bentonville, Arkansas (Caraway 2016, p. 909). Walmart is

estimated to be operating more than 11,500 stores and clubs in more than 28 countries

worldwide. The company trades in stock on the New York Stock Exchange where it was first

listed in the year 1972. In the year 2016, the company estimated revenue was US$ 482.13,

operating income US$ 24.11, net income US$ 15.08, Total assets US$ 199.58 and Total

equity US$ 83.6. Currently, the company has employed more than 1.4 million employees in

the US and a total of 2.3 million employees globally (Walmart 2016). As such, Walmart is

one of the largest multinational companies operating in the retail sector.

3.0 Walmart Theoretical Drivers

In the argument of Jeston and Nelis (2014), business drivers refer to the conditions,

process, and resources that are important for the company growth as well as its continued

success. Business drivers can be classified as either internal or external. The company ability

to identify and monitor its key drivers is critical to boosting to boosting its profitability and

enhancing its competitive advantage. As such, it is critical for companies to identify their

drivers and attempt to control those under their control.

Walmart key drivers that have significantly impacted on its performance include the

following;

3.1 Cash flow drivers

Kaplan and Atkinson (2015) argue that cash flow is an important key business

indicator and thus, it is crucial for every company to have healthy cash flow. Having positive

cash flows is important for the business as it allows a company to invest, grow, operate and

work towards the attainment of its goals and objectives. An analysis of the Walmart financial

statement shows a cash and cash equivalent of US$ 8.705 million at the end of 2016

(Walmart 2016). As such, Walmart has positive cash flows that are critical to ensuring

continued operation and growth of the business. Additionally, the positive cash flows act as a

source of Walmart competitive advantage because the company has adequate cash available

to engage in innovative activities and to invest in various activities like technology

advancement that have a positive impact on its efficiency and customer experience.

Therefore, Walmart should take care of cash flow drivers like gross margin, account payables

and receivables, sales volume and inventory to maintain the positive cash flows and

appropriate liquidity level.

3.2 Supply chain drivers

In the argument of Aswathappa (2010), the product cycle theory explains that

explains every product is likely to lose its market share to the competitors unless appropriate

strategies that will guarantee its competitiveness in the market are put in place. Therefore,

one of the strategies a company can put in place is to create an effective supply chain. As

such, supply chain drivers play a critical role in determining the efficiency and

responsiveness of the company entire supply chain. Walmart creation and maintenance of an

effective supply chain has various benefits such as an increase in revenues and the decline in

the cost of sales. For example, Walmart total revenue in 2012 was US$ 446.509 million and

US$ 482.13 million in 2016 (Walmart 2016). A further analysis of the financial statement

shows revenue increase is between 5.0% and 0.7% from 2012 to 2016 that can be associated

with efficient supply chain management (Walmart 2016). As such, the supply chain is a key

driver for the success and long-term growth of the company.

3.3 Information Technology driver

Analysis of the financial statement indicates the importance of information

technology to Walmart as it intends to invest over US$ 1 billion in e-commerce initiatives in

the year 2017 to improve its technology capacity (Walmart 2016). In an imperfect market,

information technology is considered as the cornerstone of the modern businesses success as

it drives critical innovations, increases organization efficiency and reduces the cost of

operations. An imperfect market is characterized by the ability of the sellers and buyers to

influence production and price. As such, Walmart can be considered operate in an imperfect

market as it significantly controls the price at which its products are offered to the customers.

For example, Walmart fixes its prices lower than the price of the competitors which is made

possible by the use of information technology in almost all its operations. Thus, information

technology is a critical driver for Walmart as its use significantly reduces the operation costs

thus enabling the company to offer products at lower prices and acts as a source of Walmart

competitive advantage.

3.4 Political drivers

Analysis of the Walmart annual report indicates that the company operates more than

11,500 retail locations in different countries (Walmart 2016). Walmart operations in different

countries expose it to increased political risks as different countries have a different political

climate. Walmart operations are influenced by different political factors that include taxation

laws and policies, labor laws, minimum wage requirements and health regulations.

Additionally, Walmart operations and investment in countries other than the United States

exposes the company to foreign currency exchange fluctuations and thus, exposing it to

increased foreign exchange risk. Analysis of the Walmart financial statement indicates that

the foreign exchange fluctuations in the year 2016 in countries like Chile, Japan, Canada,

UK, and Mexico were the primary cause of the company net loss of US$4.7 billion (Walmart

2016). As such, the political factors have a significant impact on the company operations and

profitability.

4.0 Measuring Impacts of Walmart’s Drivers on its Strategy

According to McDermott (2015), business drivers are significant factors that cause

and determine major improvement and increase in the value of an organization. As such, the

company key drivers have a direct impact on its growth and performance. Additionally, a

company should identify its key drivers and integrate them with the company strategies.

Also, it is important for the company to evaluate the impacts of the identified drivers of its

strategy.

In the case of Walmart, the impacts of identified key drivers on the company strategy can be

measured by considering the following;

4.1 Company growth

Osman (2012) argues that the impacts of the company key drivers can be evaluated by

considering its growth in terms of the investments made and the market share acquired.

During the year 2016, Walmart made a global capital investment of US$11.5 billion that

consisted of investments primarily made to add new clubs and stores, investment in

technology, and construction of company distribution centers (Walmart 2016). The increased

investments indicate a growth of the company in terms of the asset base as well as area of

operation. As such, the growth of the company indicates that its key drivers have a positive

impact on its strategy.

4.2 Company Returns

The company key drivers also do place a priority on growing the company returns so

as to ensure an appropriate balance with the company growth. As such, return on investments

can also be used to measure the impacts of company drivers on its strategy. Return on

Investment (ROI) is calculated by dividing the benefit of an investment with its cost, and it is

normally expressed as a ratio or a percentage. As such, ROI is a metric used to measure the

profitability of the company investment. The company key drivers are considered to have a

positive impact on its strategy is they cause a positive ROI (Osman 2012). Walmart annual

report indicates that its ROI in the year 2016 was 15.5 % and 16.9% in 2015 (Walmart 2016).

However, despite the decline in ROI in the year 2016, Walmart key drivers have a positive

impact on the company strategies as they have caused a positive ROI.

5.0 Consequences of enhanced shareholder value

Leszczynska (2012) claim that shareholders value is a term used to refer to the value

derived from management ability to grow a company free cash flow, earnings, and sales, to

the shareholders. The company shareholders’ value is largely influenced by the strategic

decisions made by the management. Also, the shareholder's value is influenced by the ability

of business to generate high ROI and management ability to invest wisely. Therefore,

enhanced shareholders value can be determined by high ROI, increase in cash flow, increased

capital investment and high earning per share.

According to Stout (2012) enhanced shareholders value has the following consequences;

5.1 Increased risk

To enhance shareholders value, the company is expected to take more risks than it

would ordinarily take. For example, the company would be required to take on more debt

capital that would increase the risk of bankruptcy and make it unstable. Also, plentiful debts

are argued to be a more conducive way of the company to increase its shareholder's value;

however, it would be detrimental to the stability of the company.

5.2 Financial Instability

Enhancing shareholders value is likely to result in financial instability because the

company efforts are usually directed at investment opportunities that increase the

shareholder's value rather than those that will guarantee company future growth and success.

Also, though increased debt financing has the capability to enhance the shareholder's value, it

could result in cash constraints due to high-interest rates thus, causing financial instability.

Therefore, increased debts are likely to put the business at the danger of collapse and

bankruptcy.

6.0 Reference List

Aswathappa, K. (2010). International business. New Delhi, Tata McGraw Hill Education.

Caraway, B. (2016). OUR Walmart: a case study of connective action. Information,

Communication & Society, 19(7), pp.907-920.

Jeston, J. & Nelis, J. (2014). Business process management. Routledge.

Kaplan, R.S. & Atkinson, A.A. (2015). Advanced management accounting. PHI Learning.

Leszczynska, A. (2012). Towards shareholders' value: an analysis of sustainability

reports. Industrial management & data systems, 112(6), pp.911-928.

McDermott, K. (2015). Key-business-drivers-in-cross-border-ecommerce 2014. Payvision

BV, New York.

Osman I. H. (2012). Strategic performance management and measurement using data

envelopment analysis.

Peng, M.W. (2016). Global business. Cengage learning.

Stout, L.A. (2012). The shareholder value myth: How putting shareholders first harms

investors, corporations, and the public. Berrett-Koehler Publishers.

Walmart (2016). 1st ed. [PDF] Walmart; 2016 Annual Report, pp.1-68. Available at:

https://s2.q4cdn.com/056532643/files/doc_financials/2016/annual/2016-Annual-Report-

PDF.pdf [Accessed 31 May 2017].

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