Walmart Financial Analysis: 5 Key Ratios

Investing in Walmart (WMT) is an appropriate venture for many investors who want principal protection and current income from dividends. With a financial performance analysis, Walmart stock also may be suitable for value investors or those who favor stocks with low share prices relative to the company's earnings and book value. Although Walmart has historically been a value investment its fundamentals may be changing. This makes it less attractive to conservative value investors.

Determining a stock's suitability for your financial goals requires analyzing specific ratios from the company's financial statements and comparing those financial ratios to benchmarks and other companies within the same industry. Financial ratios shed light on a company's direction, its probability of remaining solvent, and whether its stock is overvalued, undervalued, or valued just right. Here are five key financial ratios that are important in paying attention to when evaluating Walmart.

Key Takeaways

  • Walmart is a global retail giant whose stock is considered a blue chip.
  • Although its stock was typically considered a value investment, Walmart's fundamentals may be changing.
  • The company's strong financial performance is comparable to the likes of Costco and Target.
  • Walmart has a stronger price-to-earnings and price-to-book ratio compared to its two major rivals.
  • Walmart falters in certain financial metrics, such as its return on equity, debt-to-equity ratio, and current ratio.

Price-Earnings (P/E) Ratio

The price-earnings (P/E) ratio is the primary financial ratio that fundamental analysts use to value a company's stock. The ratio compares the share price to earnings per share (EPS). The average P/E ratio varies by industry, but across the board, it is around 15. You can calculate the ratio by dividing the company's market value price per share by its EPS.

As of July 28, 2022, Walmart's P/E ratio is about 27.22, meaning that WMT shares trade in the market at around 27 times the earnings per share. The P/E ratio for WMT shares has been rising, and prior to 2017, the P/E ratio for Walmart shares tended to hover just below 14x or 15x earnings.

Still, this ratio is significantly lower than the P/E ratio of rival Costco (COST) of 41.13. However, the company's other big competitor, Target (TGT), has a P/E ratio of 12.82. This suggests that Walmart is a viable play for value investors but experienced some price action relative to its earnings that may make some value investors uncomfortable. At the very least, the stock does not appear to be grossly overvalued based on earnings.

Price-to-Book (P/B) Ratio

The price-to-book (P/B) ratio indicates what shareholders pay to own the company. It compares the company's market value to its book value, which dictates what the company is really worth from an accounting perspective.

Value investors like to see a P/B ratio below 3.0. A P/B ratio below 1.0 suggests an extreme bargain stock. As of Q2 2022, Walmart's P/B ratio was 4.71 (higher than the value investor limit), compared to 6.79 for Target and 11.75 for Costco. Again, Walmart shows characteristics of a reasonably good value buy relative to its competitors.

Headquartered in Bentonville, Arkansas, Walmart operates in 24 different countries. It has 10,585 locations around the world, including Walmart U.S, Sam's Club, and Walmart International.

Return on Equity (ROE)

Return on equity (ROE) expresses net income as a percentage of shareholders' equity. A company's ROE is a great indicator of how efficiently its management team is performing. Savvy investors want to see that management is able to parlay the company's equity into strong earnings. Hence, a higher ROE is usually a better ROE.

ROE values above 10% are considered strong, so an ROE above 25% is considered to be excellent. As of July 2022, Walmart's ROE was at 15.53%. Its competitors had stronger ROE numbers: Costco's ROE came in at 30.58% while Target's ROE was 45.53%.

Debt-to-Equity (D/E) Ratio

Even a mature, profitable company sits in a tenuous financial position if it cannot manage its debt. Recessions and market downturns expose companies that have been too reckless with their debt management.

The debt-to-equity (D/E) ratio expresses a company's total debt as a percentage of its equity. Ideally, a company's debt should be lower than its equity, which means a D/E ratio of under 100% is preferable.

As of July 2022, Walmart's D/E ratio was 79.75%, indicating a large level of debt. By comparison, Target's D/E ratio of 161.03% indicates its debt load has overtaken the value of its equity. Costco's D/E ratio stands at an impressive 44.05%.

Current Ratio

A company's current ratio measures its ability to pay its current debts, defined as those due within one year, and is a measure of a company's short-term liquidity. It does so by comparing the company's current liabilities with its current assets, meaning those that can be converted to cash within a year or less.

The formula is current assets divided by current liabilities. A value of 1.0 or higher is preferred. Many value investors consider 1.5 to be an ideal current ratio. Walmart's current ratio was 0.86 at the end of April 30, 2022. As of the first quarter of 2022, Target's current ratio was 0.87. Costco's was 1.03 as of May 8, 2022.

All three companies have current ratios of around 1, and the difference between them is insignificant. While a slightly higher current ratio would be good to see from Walmart, its other financial ratios offer confidence that paying debts should pose no problem to the company.

Who Founded Walmart?

Walmart was founded by Sam Walton. The first retail location was opened in Rogers, Arkansas, in 1962. The Walton family expanded to 24 stores by 1967. The company was incorporated two years later and went public in 1970.

Where Does Walmart Operate?

Walmart operates in 24 different countries around the world and online. As of July 2022, the company had 10,585 locations, including those in its U.S., Sam's Club, and Walmart International divisions.

Where Does Walmart Stock Trade?

Walmart's stock trades on the New York Stock Exchange under the ticker symbol WMT. It is considered a blue chip. Blue chips are well-established companies that are nationally recognized because of their ability to remain afloat during economic downturns and continue to remain profitable. Walmart's stock is among the companies listed on the Dow Jones Industrial Average (DJIA), which is one of the world's most widely watched benchmark indexes.

The Bottom Line

Walmart has traditionally been viewed as a stalwart of value investing. A blue-chip company that dominated the retail space, its fundamentals, based on ratio analysis, indicates that its trend has been away from the key metrics sought by a value investor. In fact, Walmart has transgressed several of these thresholds in terms of its debt load, share price relative to earnings, and liquidity status. This may be due in part to increased competition from online retailers like Amazon, as well as mounting pressure from brick-and-mortar stores like Target and Costco.

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