Horizontal analysis of an income statement

Nova Southeastern University H. Wayne Huizenga School of Business & Entrepreneurship

Assignment for Course:

ACT 5140 – Accounting for Decision Makers

Submitted to:

Dr. Vik Desai

Submitted by:

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xxx

Date of Submission: Sunday, September 27th 2015

Title of Assignment: Financial Analysis Assignment – Wal-Mart

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ACT 5140 – Accounting for Decision Makers

Walmart Analysis Assignment

Directions: Answer all the questions. Please submit your work in Word or PDF formats only. You can submit an Excel file to support calculations, but please “cut and paste” your solutions into the Word or PDF file. Be sure to show how you did your calculations. Also, please be sure to include your name at the top of the first page of your file.

Part 1

Perform a vertical and horizontal analysis of Wal-Mart Stores, Inc.’s income statements and balance sheets as of January 31, 2015. In performing this analysis, consider any notable trends or changes that you observe that may provide useful information concerning its financial condition. Also use as many years’ worth of statements as you feel necessary. You should write up your results in paragraph form.

Part 2

Assess Wal-Mart, Stores Inc. concerning liquidity, solvency, profitability, and stock performance as of January 31, 2015. For each area, you should calculate the ratios we discussed in class and provide an analysis of the ratios calculated. I include historical stock price information and outstanding common share information below.

Fiscal Year Ended

1/31/2015

1/31/2014

1/31/2013

1/31/2012

Adjusted Closing Price

$83.94

$71.97

$65.79

$56.32

Common Shares Outstanding (millions)

3,228

3,233

3,314

3,418

Part 1 – Vertical and Horizontal Analysis

Vertical Analysis

Vertical analysis is a method in which the relationship between items in the same financial statement is identified by converting all amounts into percentages of the total. This method is also known as the common size as it allows to compare companies of different sizes in the same industry.

This type of analysis has two main advantages; the first is that the percentages can be compared over a number of periods allowing to identify unusual changes in the accounts over time. The unusual changes can be further analyzed and action is taken to bring percentages back to normal levels. The second advantage is that financials from companies of different sizes within the same industry can be compared. This type of comparison allows seeing where companies stand versus a particular competitor or the industry. In the case of Wal-Mart the comparison is performed to industry benchmark.

The vertical analysis on the income statement is performed by comparing each expense to the net sales and the balance sheet is performed by comparing each asset to the total assets and the liabilities, long term debt and equities are shown as a percentage of the total liabilities and stockholder equity.

Income Statement

The vertical analysis of Wal-Mart’s income statement was performed by dividing each expense over the net sales. This allows to see how each dollar of sales is distrusted among the various costs, expenses and profits. It also allows to see the trends of successive years for these items. For example, -----------------------------------------------------………. The consolidated net income ------from 2012 to 2013 but then …in 2014 and ….in 2015. So provide the analysis now

Balance Sheet

The vertical analysis of Wal-Mart’s balance sheet is performed by diving assets as a percentage of total assets and current liabilities, long term debt and equities as a percentage of total liabilities and shareholder’s equity. The balance sheet provides internal and external customer and owner’s essential information about the company’s financial position at a specific moment as it reveals the assets the same thing with balance sheet…………..

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Horizontal Analysis:

Horizontal analysis is a method that shows change in the amounts of financial statement items over a period of time. It is useful to evaluate trends within the company also known as the trend analysis. A base period needs to be establish which is the earliest period being analyzed. The items on the statements after the base period are compared to such. The horizontal analysis main purpose is to see how values change over time and not being utilized or distributed. The base period for the income statement and balance sheet will be 2012 for the purpose of this analysis.

Income Statement

The horizontal analysis for Wal-Mart’s income statement does not show a … trend. SAME THING HERE

Balance Sheet

The horizontal analysis for Wal-Mart’s balance sheet shows a …. trend. SAME THING HERE….

Part 2 – Ratio Analysis

Liquidity Ratios

Calculations:

· Current Ratio: total assets / total current liabilities

· Working Capital: Total assets – total current liabilities

· Acid-test ratio: (cash + accounts receivables) / total current liabilities

· Inventory turnover: cost of sales / average inventory

· Days sales in inventory: 365 / inventory turnover

· Accounts receivables turnover: total net sales / average accounts receivables

· Days sales in receivables: 365 / A/R turnover

· Free cash flow: Operating cash flow + capital expenditures

· Average Inventory: (inventory 2015 + inventory 2014)/2

· Average A/R: (accounts receivables 2015 + accounts receivables 2014)/2

Liquidity Ratios

Fiscal Year Ended

2/1/2015

2/2/2014

2/3/2013

1/29/2012

Current ratio

Working capital

Acid-test ratio

Inventory turnover (times)

Days sales in inventory

Accounts receivable turnover (times)

Days sales in receivables

Free cash flow

Average inventory

Average A/R

Analysis:

Liquidity ratios determine the company’s ability to pay off its short-term debt. The ability to turn short-term assets into cash to cover debt is very important for investor’s fundamental analysis. Wal-Mart’s current ratio has been … much l…..than the current ratio as a core part of their business is being eliminated from the calculation.

Overall the liquidity rations have been …………..…

Long-Term Solvency

Calculations:

· Debt to equity: long-term liabilities / total equity

· Interest coverage: operating income / interest expense

· Long-term liabilities: total liabilities - total current liabilities

Solvency Ratios

Fiscal Year Ended

2/1/2015

2/2/2014

2/3/2013

1/29/2012

Debt to equity

Interest coverage

Long term liabilities

Analysis:

The debt to equity ratio has …

Profitability Performance

Calculations:

· Asset turnover: total net revenues / average total assets

· Return on sales: adjusted net income / total net revenues

· Gross margin %: (total revenue – cost of sales) / total revenue

· Return on assets: adjusted net income / average total assets

· Return on equity: net earnings / average equity

· Average interest rate: interest expense / average total liabilities

· Average total assets: (total assets 2015 + total assets 2014)/2

· Income tax rate: Provision for income taxes / earnings before income taxes

· Net of tax interest expense: income tax rate * interest expense

· Adjusted net income: net earning + net of tax interest expense

· Average equity: (total shareholders’ equity 2015 + total shareholders’ equity 2014)/2

· Average total liabilities: (total liabilities 2015 + total liabilities 2014)/2

Profitability Ratios

Fiscal Year Ended

2/1/2015

2/2/2014

2/3/2013

1/29/2012

Asset turnover

Return on sales

Gross margin %

Return on assets

Return on equity

Average interest rate

Average total assets

Income tax rate

Net of tax interest expense

Adjusted net income

Average equity

Average total liabilities

Analysis:

Profitability ratios are important for the analysis of a company as well. They determined the company’s bottom line and its return to its investors.

The asset turnover ratio indicated that Wal-Mart is using its assets …

DuPont Model – Analysis of ROA

Calculations:

· Product: Return on sales * asset turnover

DuPont Analysis of ROA

Fiscal Year Ended

2/1/2015

2/2/2014

2/3/2013

Return on assets (calculated)

Return on sales

Asset turnover

Product

Analysis:

ROA has ….

Stock Performance

Calculations:

· Book value per common share: book value of equity / common shares outstanding

· P/E Ratio: adjusted closing price / earnings per share (diluted)

· Dividend yield: dividend per share / adjusted closing price

· Dividend payout: dividend per share / earnings per share (diluted)

· Adjusted basic EPS: adjusted net income / Weighted average shares outstanding: basic

· Adjusted diluted EPS: adjusted net income / Weighted average shares outstanding: diluted

· Adjusted P/E ratio: adjusted closing price / adjusted diluted EPS

· Adjusted dividend payout: Dividends per share / adjusted diluted EPS

Stock Ratios

Fiscal Year Ended

2/1/2015

2/2/2014

2/3/2013

1/29/2012

Book value per common share

Earnings per share (basic)

Earnings per share (diluted)

P/E Ratio

Dividend yield

Dividend payout

Adjusted Basic EPS

Adjusted Diluted EPS

Adjusted P/E Ratio

Adjusted dividend payout

Book value of equity

Common shares outstanding

Adjusted closing price

Dividends per share

Analysis:

Wal-Mart is a growing company. The book value has ………CONTINUE THE ANALYSIS

APPENDIX A

Wal-Mart’s Common Size Income Statement

WAL MART STORES INC

10-K

Income Statement

(Amounts in millions except per share data)

Fiscal Year Ended January 31,

2015

2014

2013

2012

2015

2014

2013

2012

Revenues:

%

%

%

%

Net sales

482,229

473,076

465,604

443,416

100.00%

100.00%

100.00%

100.00%

Membership and other income

Costs and expenses:

Cost of sales

Operating, selling, general and administrative expenses

Gross Margin

Operating income

Interest:

Debt

Capital leases

Interest expense

Interest income

Interest, net

Income from continuing operations before income taxes

Provision for income taxes:

Current

Deferred

Total provision for income taxes

Income from continuing operations

Income (Loss) from discontinued operations, net of tax

Consolidated net income

Consolidated net income attributable to noncontrolling interest

Consolidated net income attributable to Walmart

APPENDIX B

Discount Department Stores Industry Benchmark Common Size Income Statement (Data Period 2013)

Company Size

All

Large

Medium

Small

Size by Revenue

Over $50M

$5M - $50M

Under $5M

Company Count

Net Sales

100%

100%

100%

100%

Gross Margin

Officer Compensation

Advertising & Sales

Other Operating Expenses

Operating Expenses

Operating Income

Net Income

APPENDIX C

Wal-Mart’s Common Size Balance Sheet

WAL MART STORES INC

10-K

Balance Sheet

(Amounts in millions except per share data)

Fiscal Year Ended January 31,

2015

2014

2013

2012

2015

2014

2013

2012

ASSETS

%

%

%

%

Current assets:

Cash and cash equivalents

Receivables

Inventories

Prepaid expenses and other

Current assets of discontinued operations

Total current assets

Property and equipment, at cost

Less accumulated depreciation

Property and equipment, net

Property under capital lease

Less accumulated amortization

Property under capital lease, net

Goodwill

Other assets and deferred charges

Total assets

203,706

204,751

203,105

193,406

100.00%

100.00%

100.00%

100.00%

LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities:

Short-term borrowings

Accounts payable

Accrued liabilities

Accrued income taxes

Long-term debt due within one year

Obligations under capital leases due within one year

Current liabilities of discontinued operations

Total current liabilities

Long-term debt

Long-term obligations under capital leases

Deferred income taxes and other

Redeemable non-controlling interest

Commitments and contingencies

Total liabilities

Shareholders’ equity:

Common stock

Capital in excess of par value

Retained earnings

Accumulated other comprehensive income (loss)

Total Walmart shareholders' equity

Noncontrolling interest

Total equity

Total liabilities and shareholders’ equity

203,706

204,751

203,105

193,406

100.00%

100.00%

100.00%

100.00%

APPENDIX D

Discount Department Stores Industry Benchmark Common Size Balance Sheet (Data Period 2013)

Company Size

All

Large

Medium

Small

Size by Revenue

Over $50M

$5M - $50M

Under $5M

Balance Sheet

Cash

Accounts Receivable

Inventory

Total Current Assets

Property, Plant & Equipment

Other Non-Current Assets

Total Assets

Accounts Payable

Total Current Liabilities

Total Long Term Liabilities

Net Worth

APPENDIX E

Wal-Mart’s Trend Analysis Income Statement

WAL MART STORES INC

10-K

Income Statement

(Amounts in millions except per share data)

Base Year

Fiscal Year Ended January 31,

2015

%

2014

%

2013

%

2012

Revenues:

Net sales

Membership and other income

Costs and expenses:

Cost of sales

Operating, selling, general and administrative expenses

Operating income

Interest:

Debt

Capital leases

Interest expense

Interest income

Interest, net

Income from continuing operations before income taxes

Provision for income taxes:

Current

Deferred

Total provision for income taxes

Income from continuing operations

Income (Loss) from discontinued operations, net of tax

Consolidated net income

Consolidated net income attributable to noncontrolling interest

Consolidated net income attributable to Walmart

APPENDIX F

Wal-Mart’s Trend Analysis Balance Sheet

WAL MART STORES INC

10-K

Balance Sheet

(Amounts in millions except per share data)

Base Year

Fiscal Year Ended January 31,

2015

2014

2013

2012

ASSETS

Current assets:

Cash and cash equivalents

Receivables

Inventories

Prepaid expenses and other

Current assets of discontinued operations

Total current assets

Property and equipment, at cost

Less accumulated depreciation

Property and equipment, net

Property under capital lease

Less accumulated amortization

Property under capital lease, net

Goodwill

Other assets and deferred charges

Total assets

LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities:

Short-term borrowings

Accounts payable

Accrued liabilities

Accrued income taxes

Long-term debt due within one year

Obligations under capital leases due within one year

Current liabilities of discontinued operations

Total current liabilities

Long-term debt

Long-term obligations under capital leases

Deferred income taxes and other

Redeemable non-controlling interest

Commitments and contingencies

Total liabilities

Shareholders’ equity:

Common stock

Capital in excess of par value

Retained earnings

Accumulated other comprehensive income (loss)

Total Walmart shareholders' equity

Noncontrolling interest

Total equity

Total liabilities and shareholders’ equity

$203,706

105%

$204,751

106%

$203,105

105%

$193,406

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