Evaluation of Financial Performance Metrics
In assessing how well an organisation is using its assets and generating revenues, financial performance can be used. Financial performance is an essential measure, which can be effective in measuring the overall financial position of a business over a period. Investors and analysts can use the financial performance metric to compare different businesses and understand whether their business is in superior position or not. In order to evaluate the financial performance of a company, an analysis of different key performance metrics should be evaluated (Osadchy et,al., 2018). The position of a business from its financial perspective can be understood with the help of the financial performance metrics. One of the most effective metric is key performance indicators that assist a business to analyse the financial health of a business and understand the profitability, liquidity and overall financial situation of the business. The financial metrics and KPIs are available internally for the board and management of a company and those are distributed monthly (Alimohammadlou & Bonyani, 2018). There are three financial statements, which can be evaluated to understand the financial performance of a company affecting the corporate mission of the company. Balance sheet, cash flow and income statement analysis is essential in order to understand how the financial performance of a company is affected by the external factors such as covid 19 pandemic. Following section of the essay will discuss how financial performance measures and targets can affect the ability of Walmart in fulfilling its corporate goals.
Walmart is a multinational organisation focusing on the retail operations and operate within a supermarket chain. Sam Walton founded the company in 1962 and it has been incorporated further in the year 1969. Thereafter, the business has seen massive success financially and has been able to provide goods and services to its customers in a lower price than its competitors. This assisted the company to become one of the largest business in United States. The strategic operation of the company has allowed Walmart to become one of the most recognised commercial company in the globe (Santis, Grossi & Bisogno, 2018). Further, it has been also evident from the operations of the company that the firm has been able to develop a loyal customer and employee base. Following section of the essay will evaluate the financial performance metrics of Walmart and will analyse whether they have been able to achieve their corporate missions or not.
The financial metrics of Walmart includes various factors such as price to earnings ratio, current ratio, price to book ratio, return on equity, debt to equity ratio and other ratios. The evaluation of these ratios are essential in measuring whether Walmart has been able to achieve its financial objectives during the previous year or not. Further, the evaluation will assist the stakeholders and third party to understand the actual financial health of the company.
The shares of the company is currently in appropriate position therefore the investors can decide to invest in the company. Further, the current stock of Walmart is also suitable for the value investors who prefer low priced stocks as compared to the firm’s earnings. Further, the suitability of the stock can be determined using various ratios of the financial statement of the company. The company’s direction, profitability, valuation can be indicated with the help of the ratio analysis (Campisi et.al., 2019).
Price to Earnings Ratio
Price earnings ratio is a financial metric which is used by the financial analysts to understand and evaluate the stock of a company. The ratio can compared the share price to the earnings per share of the company. The industry in which Walmart operates, the average price to earnings ratio lies within 15. As per the recent analysis of the year 2020, the price to earning ratio of Walmart is estimated at 23.88 and this implies that the share of the firm is traded around 24 times in a year. However, prior to the increase, the price to earning ratio of Walmart was 14 in 2017. With the comparison to the COSTCO, the price to earnings ratio of the company is very low. The price earnings ratio of Costco is estimated at 36.19. However, in 2021, the PE ratio is estimated at 18.77. The value investors of the company can have a viable play in selecting the current stocks of the company based on the fact that the current stocks of the firm is not overvalued (Svynarenko, Zhang & Kim, 2019).
Current ratio is used to evaluate a company’s ability to pay for its current amount of debts. The current ratio is a useful financial performance metric which measures the short term liability of a company and compares the current liabilities of a firm with its current assets. As per the industry average in which Walmart operates, the current ratio valued above 1.0 is preferable. During the year 2021, the current ratio of Walmart is estimated at 0.79 while its competitor (Costco) had a current ratio of 1.01. This implies that the current liability of the company is higher than the current assets of the company therefore the firm should manage its liabilities well in order to improve the current financial situation.
The price to book ratio is used to understand and compare the current market value of a company thereby implying what a shareholder can pay to own an amount of current company. Further, this ratio can be also used to understand the financial worth of the company from the accounting perspective (SUTHAR, 2018). The value investors of a company always likes to see their price to book ratio below 3.0 and if the price to book ratio of a company is less than 1.0, it can imply that the company has a bargain stock. During the year 2020, the P/B ratio of Walmart was 5.16, which is higher than the limit of value investors. The P/B ratio of Costco on the other hand is estimated at 8.24. Therefore, Walmart’s PB ratio is a good purchase for the value investors in comparison to its competitors.
Return on equity is an indicator of available net income of a company as a percentage of the equity of the company. The return on equity can be used to estimate the efficiency of management team. Investors always want to understand whether the management of a company is parlaying the equity into earnings therefore higher amount of return on investment always implies better return on investment for a company. As per the current industry average, ROE above 10% should be always taken into consideration as strong financial position wherein return on equity above 25% implies that the company has excellent position of equity (Supriyanto & Darmawan, 2018).
Current Ratio
As per the year 2020, the ROE of the company is estimated at 7.27% while in the ROE of Costco is estimated at 22.9 percent. Further, the equity of the company increased during the year 2021 standing at 15.65%. This implies that the management of the company has taken various measures to improve the financial situation of the company. Further, this also implies that the company has been managing its equity well for maximize profit earning for its stakeholders.
A profitable company can find itself into a doubtful financial position if it fails to manage its debts. Further, different types of economic recessions as well as market downturns can exposure a firm towards recession and can affect its debt management significantly. The total debt associated with a company is evaluated using the debt to equity ratio of a company and in an ideal situation, the debt of a company should always lower than its equity therefore Debt to equity ratio under 100% is always preferable by a company and its stakeholders (Nuryani & Sunarsi, 2020). During 2020, the debt to equity ratio of Walmart was estimated at 97.01%, which indicated that the company has high amount of debt. On the other hand, the debt to ratio of Costco was standing at 47.5%. the company can reduce the debt to equity ratio significantly by increasing its profitability which will further allow it to enhance its revenue and reduce its costs to significant extent. Further the company might select the option of restructuring its debts and improve its inventory management system to improve its debt level.
The net profit margin is a financial metric which measures the percentage of revenue and income left for a business after subtracting off all the expenses associated with the business. The expenses include cost of goods sold, interest, operating expenses as well as taxes. As compared to the gross profit margin, the net profit margin can be used within the business to understand the profitability of the company in a given period of time (Nariswari & Nugraha, 2020).
For the year 2020, the net profit margin of Walmart is estimated at 28.84 percent. As per the industry average in which Walmart is operating, the net profit margin is should be within 3.5%. despite of the excellent financial situation of the company, the company can further improve its net profit margin with the increase in sales as well as reduction in expenses. Further, the net profit margin can be reduce with the reduction of cost of production. This will allow the business to expand further within the industry in which it operates.
Return on investment is a metric used to understand the profitability and efficiency of an investment compared with different sources of investment. The amount of return of a company from their particular investment can be ascertained with the help of the metric. From the recent analysis, it has been evident that return of investment of Walmart was 11.73% during 2020. Based on the situation, ROI above 12 percent should be always accepted by a business considering its current financial situation. Therefore, the business must focus on increasing its revenue by analysing its previous sales data, communicate the financials with the sales team and streamline the sales process and operations of the business accordingly (Bertram et.al., 2018). Walmart should always evaluate their risk tolerance levels and understand the time required for their investment to generate return. This will allow them to improvise ROI in future timeframe.
Price to Book Ratio
From the above, the financial performance metrics of Walmart can be evaluated. The above analysis denotes that the firms investment has grown significantly over the period of past 10 years at a CAGR of 3.96%. Further, it has been also perceived that the firm has been able to generate a significant amount of return over time even during the event when the investment become volatile. Further, the past 5 year period CAGR of the company has improved further. The market capitalisation of the group has been based on the size, growth risks and other factors of the company (Seaman & Bowman, 2021). Market capitalisation is used to understand stock related risks and expected stock growth. It has been found from the recent source of analysis that larger companies such as Walmart can possess less risks as compared to the small capital stocks of a company. The terminal value of the company at the end of 2026 is estimated at $580 billion denoting that the firm can be efficient choice as compared to its competitors. It has been also found from the analysis that after the emergence of new competitors, Walmart had difficult times to emerge in the retail sector however post the maturity stage, it has been evident that the company has been able to perform as per the expectations of its stakeholders with its huge capital and market size (Batista, 2021).
There has been various studies, which has argued about the ability of the company. One of the most significant challenge for the company in the retail sector is to increase customer proposition and reduce the amount of losses (Neebe, 2020). The gross margin of the company has been affected by the lower amount of gross margin post the recessions. In order to improve value for shareholders as well as incorporate with corporate missions, the firm will have to focus on 3 areas; growth, returns and leverage. Growth will focus on the sales through stores, leverage will focus on increase sales by the improvement of selling, operating and general expenses and the return priority will focus on the employment of assets through ROI and other working capital as well as capital expenditures (Alam, 2020). The financial performance of the firm is massively dependant on the low cost of labour, limited amount of health benefits as well as incorporating government related subsidies. The firm will also have to improve its future adoption of technology and will have to depend on design and implementation in order to improve overall financial efficiency.
The above analysis denotes that the company is very solvent and the investors of the company has the option to purchase the shares of the company for return from their investment. It is very safe to invest within the company and it has been also evident that the company is focusing on its corporate mission by improving its financial metrics in a set of time. Further, it has been found as per recent analysis that the company has dominated the global retail sector along with the USA retail sector. Despite of some economic slowdown and inconsistencies, the company has managed to be profitable in recent times. The firm has properly followed its corporate missions and goals therefore investment at Walmart can be one of *the best decision that an external investor can make.
Return on Equity
Conclusion
On a concluding note, it has been evident that the financial performance of Walmart has been significantly better than its competitors during the year 2021 implying that the company is successfully focusing its corporate goals. The firm has successfully met its financial metrics thereby implying that it has significant growth opportunities for future. External stakeholders can invest into the shares of the company due to the fact that the financial position of the company has been very strong.
The financial analysis of the company has been also able to interpret that it has generated significant amount of return over time despite of the market volatility. The CAGR of the company has been also improved significantly and the firm has been found to be less risker as compared to the small stock companies.
The solvency of the company can be perceived from the above analysis denoting that the investors of the company is in profitable position and they have the option to purchase the share and invest safely into the company. Despite of various social and economic fluctuations, the financial metrics of the company are improving and the firm has been able to successfully dominate the USA as well as global retain sector. The firm has been profitable despite of economic shutdowns and it has been able to successfully follow the corporate missions and goals. With that being said, it can be noted that the firm has successfully been able to measure its financial metrics and it has been able to fulfil its Corporate Mission.
Reference list
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