Capital Structure Analysis - Walmart

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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 organizations ability to remain in a particular line of business. The primary focus of

Team Cs 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys long and short-term goals. Last years 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 Sams 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