Analysis Of Walmart’s Financial Health in Comparison to Its Competitors: Ebay And Amazon
Walmart Inc. is an American multinational retail business that runs a chain of hypermarkets, discount departments, and grocery stores. Founded in 1962 by Sam Waltonin, it is headquartered in Bentonville, Arkansas, and was incorporated on October 31, 1969. It also owns and operates Sam’s Club retail warehouses. As of January 31, 2018, Walmart has 11,718 stores and clubs in 28 countries, under 59 different names. The company runs under the name Walmart in the U. S. and Canada, as ‘Walmart de México y Centroamérica’ in Mexico and Central America, as Asda in the United Kingdom, as the Seiyu Group in Japan, and as Best Price in India. It has wholly owned operations in Argentina, Chile, Brazil, Canada, and South Africa. Walmart is the world’s biggest company by revenue with over US$500 billion, according to Fortune Global 500 list in 2018 as well as the largest private employer in the world with 2. 3 million employees.
Jeff Bezos, an American entrepreneur, is the founder, chairman and CEO of Amazon, the second company in history to be worth 1 Billion $ just last after a journey of 24 years. Back in 1994, the company was established as an e-commerce book retailer. The first public offering took place in May 1997 as it was listed on the NASDAQ Global Select. The enlargement began in 1999 as the company started selling various new products such as clothing, electronics, movies, etc. The number of employees working in Amazon now is 563,100, and the recorded revenue of company back in December 2017 is 177. 9 billion $. eBayThe auction and shopping website eBay was founded by a Persian-American entrepreneur Pierre Omidyar in 1995. In 2017, eBay registered a revenue of 9. 5 billion dollars. eBay is now an e-market platform with also online tickets exchange called StubHub. In 2005, eBay created “Kijiji” an online classified advertising service.
The first short-term liquidity measure is the current ratio which measures a company’s ability to pay-off its short-term debts (Investopedia. com, 2018). This capacity is determined by the amount of current assets a company has in hand. As for our three companies, one can observe that Amazon and eBay are more liquid compared to Walmart which is obviously facing issues with too much short-term debts to cover and yet not enough current assets. The industry average in this case is 1. 33 where eBay is the leading company. However, having such high ratio could raise some questions regarding how eBay manages its assets and if some money could be used for investment purposes. Amazon is the closest to the average making it the safest among these companies. Applying a horizontal trend analysis for Walmart, it is clear that it is not the first year the company faces liquidity issues, and from year to year, the value of the ratio is actually getting worse as it has dropped around 18% from 2016 to 2018. Quick RatioThe quick ratio is an indicator of a company’s short-term liquidity, and measures a company’s ability to meet its short-term obligations with its most liquid assets(Investopedia. com, 2018). Having inventory considered as liquid as cash or accounts receivables can every now and then be misleading in a way that inventory can perish or can get stolen.
Amazon and Walmart have a ratio below 1 which can raise some doubts concerning the liquidity of these companies. Walmart’s ratio is quite risky as it is five times less than Amazon. What is noticeable is eBay’s ratio that wasn’t quite affected since it has no inventory. This fact diminishes the risk of unreliability of inventories and thus proving it is quite liquid. Ever since 2016, Walmart’s ratio has dropped by 27. 3% proving that the liquidity problem is only getting bigger year after year.
Account Receivable Turnover
The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets (Investopedia. com, 2018). The industry average is 39. 6 times, however this average is not quite accurate since one can observe two different categories where amazon and eBay are quite close to each other with a slight advantage for Amazon since it collects its receivables 16. 54 times per year while eBay collects it 14. 87 times per year. Walmart, on an other hand, collects its receivables 87. 4 times per year. This huge difference can be explained by the fact that eBay and Amazon are online commerce while Walmart has a physical presence on the U. S. Soil. Applying a horizontal trend analysis on Walmart, the receivables turnover ratio increased by 12. 4%.
Account Receivable Collection Period
The account receivable collection period is a ratio that indicates the number of days it takes a company to collect its receivables. This ratio is inversely proportional to the account receivable turnover ratio; therefore, same analysis applies. Walmart has the shortest collection period of approximately 4 days compared to 22 days for Amazon and 24. 5 days for eBay.
This ratio shows how many times a company’s inventory is sold and replaced over a period (Investopedia. com, 2018). A low turnover indicates that sales are poor and that there is an excess in inventory whilst a high one suggests either solid sales or little inventory. The first thing to be mentioned is that eBay has no inventory and therefore it will be excluded from the analysis. Comparing Amazon and Walmart, the latter has an inventory turnover of 8. 6 while Amazon’s turnover is 9. 97. this can be understandable since the sales of Walmart are 2. 82 times the sales of Amazon while the size of Walmart’s inventory is 2. 73 bigger. Applying a horizontal trend analysis on Walmart, there was an increase of 6. 7% in the inventory turnover over the last three years. This is mainly due to the increase of sales.
The profit margin shows how much a company actual keeps of its sales after deducting all types of expenses. Companies usually aim for a high profit margin. eBay has negative profit margin for the year 2018 which means it has negative net income and is losing money. Amazon has positive profit margin but it is less than Walmart. The profit margin of Walmart has reduced from 2016 to 2018. This shows the reduction in net income over the period. However, we can notice that only Walmart shows a considerably high profit margin in 2016 of 3. 05% but it reduced in the next 2 years. Its value of 1. 97 % in 2018 is an outlier when compared to the other 2 showing us that it is managing its sales and lowering the profit. However, a detailed study of its expenses is required especially when it comes to expensing and capitalizing expenses.
Total Asset Turnover
This ratio shows how much the company can generate in sales for each dollar of its assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales. In 2016 Walmart had a total asset turnover of 2. 39 which increased slightly in 2017 and 2018 with a total asset turnover of 2. 44 and 2. 48 respectively, which means Walmart increased its sales. Whereas in 2018 Amazon has total asset turnover of 1. 656 which is less than Walmart. In 2018, eBay has a total asset turnover of 0. 38 which is very low compared to the Walmart ratio. We can see that the ratio is inferior to 1 and that means that the sales are inferior to the total assets and therefore the company is not doing well with generating revenue.
Return on Asset
Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. It is commonly defined as net income divided by total assets. Net income is derived from the income statement of the company and is the profit after taxes. A low percentage return on assets indicates that the company is not making enough income from the use of its assets.
In 2018, eBay has lowest ROA of -4. 08% whereas Amazon and Walmart has 2. 83% and 4. 89 respectively. Even though Walmart is doing better than its competitors, their ROA has been decreased from 2016 to 2018 by 7. 29%, 6. 85% and 4. 89%. This means the company’s net income is dropping.
Return on Equity
This profitability ratio measures the ability of a firm to generate profits from its shareholders’ investments in the company. In other words, the return on equity ratio shows how much profit each dollar of common stockholders’ equity generates. In 2018, eBay is showing negative return on equity of -10. 92%. It means its shareholders are losing, rather than gaining, value and this is a very bad sign for investors. Amazon is more efficient in this case and has 12. 9% ROE and is using its investors’ funds effectively. Walmart had highest ROE of 18. 15% in the year 2016 which dropped by -0. 92% in 2017 and -4. 56 subsequently in 2018 as net income has decreased. Earnings per ShareEarnings per share is a company’s net income or profit divided by the current outstanding of shares, it reports the company’s profitability. EPS gives an insight on stock movements within a company.
A positive EPS shows that the company is profitable. On the other hand a negative EPS suggests that the company is not viable, having shares in such company indicates that stocks are losing value. Walmart has a positive EPS; the company is making money on a per share base. If we look at eBay’s negative EPS, we can deduct that it is no longer profitable because of the company’s profit taking a dip and affecting their stocks. However, over a period of three years Walmart’s EPS has been constantly dropping. Stockholders in Walmart have been making less money over the years but the financial situation is not yet worrying. Amazon seems to be a leader, holding a high EPS insuring all share holders a profitable income.
The PE ratio is a key tool to know a company’s worth. In order to calculate the PE we divide the price per share by the company’s earnings per share. For each dollar of income, we know how much we are paying. A low PE ratio could suggest that shareholders are selling their shares, which consequently drops the price of shares (but without affecting earnings per share staying stable). Or a low PE can be interpreted as a rising share’s price (triggering an increase in earnings per share). In this last case, the PE is low because of a fewer number of investors actually investing in the company (it could be only temporary). A high PE is also an indicator of a high growing company, attracting more and more investors, increasing the share price considerably on the market, even if paradoxically earnings are still low. Walmart has actually slowly increased its PE, showing that the company is actually growing even if the earnings per share have been decreasing. This suggests that more investors have been investing in the company because it seems more interesting to have shares in such company, knowing that for the moment the earnings are not interesting but will be in the future. Shareholders might be betting on Walmart’s future potential.
Total debt to total asset (TDTA) ratio gives us information about the company’s ability to respect its debt obligations in the long term. This ratio shows if a company is able to fund debts by using assets rather than using equity. A ratio higher than 1 shows that a company is using larger amount of assets to pay off debts. On the contrary, a low ratio highlights the company’s possibility to cope with market competitiveness, interest rates, and other key factors potentially disruptive. Amazon has the highest Total Debt to Total Asset ratio compared to eBay and Walmart. Walmart’s TBTA is slightly lower than the two other companies, Walmart is improving on paying debts without using equity. In 2018, for every dollar of the company’s asset, the company has 0. 62 $ of debt. Compared to industry average, Walmart is catching up his competitors. Over the years, Walmart has overall a low debt ratio, however this number has been increasing throughout years which suggests that a financial strategy is trying to maintain a higher income to pay all the company’s expenses and liabilities without using assets.
Times Interest Paid
Times interest paid ratio indicates how many times a company’s income or revenue is able to cover interest payment. The higher the better: a high ratio demonstrates a company’s ability to quickly cover interest. Walmart’s times interest paid used to be higher in 2016, in 2018 a slight dip can be observed. Yet Walmart stays ahead of the game, with a higher ratio than industry average. Amazon has the lowest times interest payment, Amazon might redirect income to other expenses and takes more times to settle interest payments.
Let’s take a look at Walmart’s strategy during the last few years. Historically, Walmart used to search for the suitable market and accessed that market via product delivery. Well, someone familiar with the way of thinking of this company said: “It’s a departure from the historic way Walmart thought about international markets,” he also quoted them for saying: “We have the secret sauce and we will sprinkle the holy water in every country. ’ (Nicolaou, Fontanella-Khan, Stacey, 2018). Walmart is reforming its global strategy to rival Amazon by investing in other foreign companies instead of operating stores overseas. “The current management approach is very different. It’s about deciding the best way to access a market, and in India that was Flipkart. ” (Nicolaou, Fontanella-Khan, Stacey, 2018)Lately, the pressure was on Walmart. Its stock has dropped by approximately 20 per cent. Online sales in its home market were reduced, raising doubts and concerns about whether the $3 billion purchase of ecommerce start-up Jet. com in 2016 will be a positive milestone as Walmart imagined it to be.
Therefore, updating their business strategy was a must. Last April, Walmart merged its UK-based grocer Asda with its bigger competitor J Sainsbury in a deal that will ensure the US company a 42% ownership in the joint company, hence, increasing its yearly revenue by approximately $50 billion a year. Later in May, Walmart purchased 80% of Flipkart, India’s biggest ecommerce company, for a staggering $16 billion. This was the biggest M&A deal in the history of Walmart and India (Nicolaou, Fontanella-Khan, Stacey, 2018). Amazon and Flipkart control 61% of the Indian ecommerce market, which is worth almost $30bn today, but is set to a yearly growth of 27. 8% for the next five years, according to Euromonitor.
Walmart is clearly facing difficulties in terms of liquidity. This can be explained by the relatively high increase in its current liabilities compared to a slight decrease in its current assets. What would be recommended in this scenario is that Walmart try to issue more long-term liabilities rather than short-term ones.
Walmart may not be at bankruptcy risk yet, but the company needs to continue to move forward on reducing debt or increasing income. A better management of assets, debts and cash flow could reduce Walmart’s financial risks. It is still risky to invest in this company if we consider the ratios suggesting that their financial leverage is weak. A stronger financial strategy could give more leverage to the company, invest more or redistribute to shareholders. Although Walmart’s earnings numbers are encouraging, keeping a steady times interest paid ratio should be beneficial for the company. These encouraging numbers will attract investors willing to bet on Walmart’s strategy.