2. other1,6852,9602,9803,0633,1822,690Current assets of
discontinued operations89131140195––Current
assets54,97551,89348,33148,94947,58546,588Property and
equipment, net, excluding property under capital
leases109,603105,09899,54492,85693,87585,390Property under
capital leases, net2,7212,7802,7632,7973,1423,050Property and
equipment,
net112,324107,878102,30795,65397,01788,440Goodwill20,6511
6,76316,12615,26016,07113,759Other assets and deferred
charges5,4564,1293,9423,5672,8412,406Non-current
assets138,431128,770122,375114,480115,929104,605Total
assets193,406180,663170,706163,429163,514151,193LIABILIT
IESJan 31, 2012Jan 31, 2011Jan 31, 2010Jan 31, 2009Jan 31,
2008Jan 31, 2007Short-term
borrowings4,0471,0315231,5065,0402,570Accounts
payable36,60833,55730,45128,84930,37028,090Accrued wages
and benefits5,0895,8955,9865,5775,2475,347Self-
insurance3,6383,4473,2243,1082,9072,954Other9,4279,3599,52
49,4277,6456,374Accrued
liabilities18,15418,70118,73418,11215,79914,675Accrued
income taxes1,1641571,3656771,016706Long-term debt due
within one year1,9754,6554,0505,8485,9135,428Obligations
under capital leases due within one
year326336346315316285Current liabilities of discontinued
operations26479283––Current
liabilities62,30058,48455,56155,39058,45451,754Long-term
debt, excluding due within one
year44,07040,69233,23131,34929,79927,222Long-term
obligations under capital
leases3,0093,1503,1703,2003,6033,513Deferred income taxes
and other7,8626,6825,5086,0145,1114,971Non-current
liabilities54,94150,52441,90940,56338,51335,706Total
liabilities117,241109,00897,47095,95396,96787,460STOCKHO
LDERS EQUITYRedeemable noncontrolling
interest404408307397––Preferred stock ($0.10 par value; none
issued)––––––Common stock ($0.10 par
3. value)342352378393397413Capital in excess of par
value3,6923,5773,8033,9203,0282,834Retained
earnings68,69163,96766,63863,66057,31955,818Accumulated
other comprehensive income (loss)-1,410646-70-
2,6883,8642,508Walmart shareholders’
equity71,31568,54270,74965,28564,60861,573Noncontrolling
interest4,4462,7052,1801,7941,9392,160Total
equity75,76171,24772,92967,07966,54763,733Total liabilities
and equity193,406180,663170,706163,429163,514151,193
Ratio AnalysisInstructions: You will solve 10 ratios for the
year 2011 and 10 for the year 2012, using the data available on
the Walmart Income Statement and the Walmart Balance Sheet
included in this file.
Step 1: Provide the formula for the ratio in text format (T) in
Column B
Step 2: Provide the formula for the ratio in excel/computation
(C) format in Column D and Column F
Wal-Mart Ratio Analysis20112012Ratio (text)Ratio
(calculation)Ratio (calculation)Liquidity Ratios (solve
both)Click on .89 for required excel format Current
RatioCurrent assets / Current liabilities0.89Quick
RatioTCCActivity Ratios (choose 2)Total Asset
TurnoverTCCInventory TurnoverTCCAverage Collection
PeriodTCCDebt Ratios (choose 2)Debt RatioTCCDebt-Equity
RatioTCCTimes Interest earnedTCCProfitability Ratios (choose
2)Gross Profit Margin TCCOperating Profit Margin TCCNet
Profit MarginTCCEarnings per Share* TCCUse for PE
belowReturn on Total Assets TCCReturn on EquityTCCMarket
Ratios (solve both)PE RatioTCCMB Ratio TCC* To calculate
Outstanding Shares: Divide the total cost of common stock by
the cost per share.
4. Analyzing Financial Data
Ratio Analysis
Lesson ComponentsFour Key Financial StatementsRatio
OverviewRatio
CategoriesLiquidityActivityDebtProfitabilityMarketPractice
Four Key Financial Statements
Each corporation is required to file with the Securities and
Exchange Commission (SEC) four key financial statements:
Income statement:provides a financial summary of the
company’s operating results over a specified period of
time.Balance sheet: provides a summary statement of the
company’s financial position at a given point in time.Statement
of Stockholders’ Equity: shows all the equity account
transactions in a given year.Statement of Cash Flows: summary
of cash flows of a given period of time.
*
Learning StatementsThese financial statements are also used in
order to do ratio analysis to examine the performance of a firm.
Income Statement
Sample Accounts
5. Sales
COGS
Operating Expenses
Selling Expenses
Interest Expense
Earnings before Interest & Taxes (EBIT)
Net Income
Balance Sheet
Sample Accounts
Cash Accounts Payable
Accounts Receivable Notes Payable
Inventories Accruals
Total Current Assets Total Current Liability
Land and Buildings Preferred Stock
Machinery & Equipment Common Stock
Vehicles Retained Earnings
Ratio OverviewMany internal and external stakeh0lders use
ratiosA ratio is not enough information on its own.Several
limitations exist to ratio
analysisSeasonalityInflationSummarizationAsset valuation
Five Categories of
RatiosLiquidityActivityDebtProfitabilityMarket
Liquidity Ratios
Liquidity is the company’s ability to pay its short-term bills
6. Current ratio
Current assets/Current liabilities $72,000/$69,000 = ???
Quick ratio
Current assets-inventory/Current liabilities $72,000-
45,500/$69,000 =???
Activity Ratios
Activity is a measure of how quickly the firm’s current assets
are converted into cash.
Inventory Turnover
COGS /Avg Inventory $106,000/ $45,500=???
Average Collection Period
Accts rec/(Annual sales/365) $25,000/(160,000/365)=???
Total Asset Turnover
Sales/ Total Assets $160,000 $150,000=???
Debt Ratios
Debt Ratio
Total liabilities/ Total assets $91,950/ $150,000
=???
Times Interest Earned Ratio
EBIT/ Interest expense $17,000/ 6,100 =???
Used to determine whether the firm is able to meet long-term
financial obligations.
7. Profitability Ratios
Gross Profit Margin
(Sales-COGS)/ Sales ($160,000-
106,000)/$160,000 =??
Operating Profit Margin
EBIT or Operating Income/Sales
$17,000/160,000=??
Net Profit Margin
Net Income/Sales $6,540/160,000=??
Earnings per Share
Net Income/Shares Outstanding $6,540/3,000=??
Return on Total Assets
Net Income/ Total Asset $6,540/150,000=??
Return on Equity
Net Income/Shareholder Equity $6,540/31,500=??
Measure how well management is utilizing company resources
to earn a return on the funds invested by various groups
Market Ratios
Price Earnings Ratio
Market price per share common stock/ EPS
$25/$2.18 = ???
Market/Book Ratio
Market price per share common stock/(Shareholder
Equity/shares outstanding)
$25/($31,500/3000) =???
8. This set measures how well the firm is doing in terms of the
stock price and risk and return
Check Your Understanding
Which of the following measure a company’s liquidity without
considering inventory?
a. Current ratio
b. Rapid test ratio
c. Quick ratio
d. Inventory ratio
Analyzing Financial Data
For the remainder of the lesson, you will be concentrating on
learning some basic skills in financial calculations. It is
important in finance to have an understanding of financial
statements and how they are used to interpret the financial
performance of corporations. We will review the various
financial statements, and discuss how ratios are used to examine
the different areas of a company’s financial operations. You
will also learn about cash flow and the importance of managing
the company’s cash operations to the overall financial planning.
Financial Statements and Analysis
In finance, it is key to have an understanding of financial
statements from the perspective of being able to read them and
knowing what goes where. Being able to compile them is, well,
better left to the accountants. You will learn about that in
another course! For our purposes, it will be enough for you to
recognize the parts of each statement and be able to use them
for analysis.
Four Key Financial Statements
9. Each corporation is required to file with the Securities and
Exchange Commission (SEC) four key financial statements:
1. Income statement: provides a financial summary of the
company’s operating results over a specified period of time.
2. Balance sheet: provides a summary statement of the
company’s financial position at a given point in time.
3. Statement of Stockholders’ Equity: shows all the equity
account transactions in a given year.
4. Statement of Cash Flows: summary of cash flows of a given
period of time.
These financial statements are also used in order to do ratio
analysis to examine the performance of a firm.
Using Financial Ratios
There are several reasons for doing ratio analysis. For example,
if you are considering two investments between two companies,
one that is a large company with a net income of $2 million in
the previous year and the other a smaller startup with a net
income of $200K; how do you decide which is the better
investment?
It is not necessarily the larger company with the larger net
income. There may be other factors that are not apparent
without analysis of the financial status of each of the
companies.
There are five general areas that you would want to explore.
These are liquidity, activity, debt, profitability, and market
ratios.
10. Liquidity Ratios
The first area to explore when beginning your analysis is the
company’s liquidity. Liquidity is the company’s ability to pay
its short-term bills. If a firm is having liquidity problems, it
can be an indicator of cash flow problems that can signal larger
internal difficulties. There are two primary measures of
liquidity: the current ratio and the quick or acid-test ratio.
We will use the example of Pampered Pet’s balance sheet and
income statement as we proceed through the following
examples.
Current ratio
Current assets/Current liabilities
$72,000/$69,000 = 1.04
Quick ratio
Current assets-inventory/Current liabilities
$72,000-45,500/$69,000 =0.38
When looking at ratios, you should always take them as a
comparison either with an industry benchmark or by doing a
trend analysis over time. You would never want to look at a
ratio as an isolated indicator. For the current ratio, the normal
acceptable ratio is 2.0 and for the quick it is 1.0, but this can
vary depending on the industry. By looking at our example, we
can see that Pampered Pets does not have enough in assets to
cover current liabilities by 2, in fact, it just barely has enough
to cover its current liabilities. This could be a sign to worry.
We will need to reserve judgment, however, until we complete
our analysis.
11. Critical thought question: Why would the quick ratio be a truer
measure of a firm’s ability to pay short term debts?
Activity Ratios
The second area of analysis is activity. Activity is a measure of
how quickly the firm’s current assets are converted into cash.
For example, inventory turnover is a measure of how quickly
inventory is sold off or turned into cash. There are three other
measures we will cover as well, and they are average collection
period, and total asset turnover.
Inventory Turnover
COGS /Average Inventory
$106,000/ $45,500=2.33 (avg. already calculated)
Avg. Collection Period
Accts receivable/ (Annual sales/365)
$25,000/(160,000/365)
=57.03 days
Total Asset Turnover
Sales/ Total Assets
$160,000/ $150,000=1.07
· Inventory turnover: measures the liquidity of the firm’s
inventory. Useful only when compared to industry averages or
past inventory turnovers
· Average collection period: useful when evaluating a firm’s
credit policies
· Total asset turnover: indicates how efficiently the firm used
its assets to generate sales during the year. The higher the
better.
12. The inventory turnover for Pampered Pets could indicate a
problem. The store may want to consider branching out into
something less specialized such as fish that would generate
more cash flow. The average collection period must be looked
at in context with the collection policies of the store. If the
credit policy for vendors is 30 days, then the company is not
doing a good job of collecting receivables. However, if it is 60
days, then this ratio is fine. The total asset turnover indicates
that the company is using its overall assets efficiently to
generate sales.
Debt Ratios
The next area to consider is debt. You should be concerned
with whether the firm is able to meet long-term financial
obligations. There are two basic categories of debt measures.
First, you want to know the degree to which the company is in
debt with relation to other items on the balance sheet. Then you
want to know about its ability to pay the interest on those debts.
Debt Ratio
Total liabilities/ Total assets
$91,950/ $150,000=61.3%
Times Interest Earned Ratio
EBIT/ Interest expense
$17,000/ 6,100=2.79
Although Pampered Pets is doing well to stay away from
financing too much with debt, the loans they do have are
generating quite a bit of interest. The earnings or profits before
paying the interest expense on debt should, by rule of thumb, be
13. three times the interest owed at a minimum. So, you can see
here that Pampered Pets is not quite at that mark since its ratio
is 2.79. They should consider raising more capital to expand
operations into another product line that will increase profits
and cash flow.
Profitability Ratios
The following ratios are used to measure how well management
is utilizing company resources to earn a return on the funds
invested by various groups.
Gross Profit Margin
(Sales-COGS)/ Sales
($160,000-106,000)/ $160,000 =33.76%
Operating Profit Margin
EBIT or Operating Income/Sales
$17,000/160,000=10.63%
Net Profit Margin
Net Income/Sales
$6,540/160,000=4.08%
Earnings per Share
Net Income/Shares Outstanding
$6,540/3,000=$2.18
Return on Total Assets
Net Income/ Total Assets
$6,540/150,000=4.36%
Return on Equity
Net Income/Shareholder Equity
$6,540/31,500=20.76%
Despite the liquidity problems identified earlier, which could be
explained by a small business, Pampered Pets seems to be doing
quite well from a profitability standpoint. For a small business
owner, these ratios are indicative of stability. It seems that the
company is supporting growth through equity instead of debt as
well as indicated by the ROE ratio.
14. Market Ratios
The last area is the market ratios. This set measures how well
the firm is doing in terms of the stock price and risk and return.
The first ratio in this set is the Price/Earnings or PE Ratio. This
ratio gives an idea of the owner’s opinion of the share value.
This ratio indicates a degree of confidence from investors in the
company. The other is the Market/Book or M/B Ratio which
assesses investor’s perspective on a company’s performance.
Price Earnings Ratio
Market price per share common stock/ EPS
$25/$2.18 = 11.47
Market/Book Ratio
Market price per share common stock/ (Shareholder
Equity/shares outstanding)
$25/($31,500/3000) =2.28
Generally speaking, Pampered Pets is in good shape. According
to the PE Ratio, the company’s stock was selling for $25 per
share and investors were paying $11.47 for every $1.00 of
earnings. On the books, investors are paying $2.38 for each
$1.00 of book value. This is a good indicator because investors
are willing to pay more than book value for the stock, so the
company is being viewed favorably by investors.
A Complete Ratio Analysis
So, what have we learned? The five measures of performance in
a ratio analysis are liquidity, activity, debt, profitability, and
market. Remember that just calculating any of these ratios on
their own will do you no good, as we learned when we started
off calculating the liquidity ratios on Pampered Pets. You must
compare your findings with that of the industry and with
previous calculations from previous years to get an idea of how
the company is truly performing. Then, and only then, will you
have done a complete ratio analysis.
Summary
15. This has been a lesson full of key concepts. You began by
reviewing some accounting principles with a recap of the
important financial statements and how they are used to perform
ratio analysis for a company. You learned about the five areas
of ratio analysis: liquidity, activity, debt, profitability, and
market ratios. Each area tells us a little something about the
performance of a company. We worked through the calculations
of several different ratios in each category by looking at a
company called Pampered Pets.
Balance Sheet
Sample Accounts
Cash Accounts Payable
Accounts Receivable Notes Payable
Inventories Accruals
Total Current Assets Total Current Liabilities
Land and Buildings Preferred Stock
Machinery & Equipment Common Stock
Vehicles Retained Earnings