Walmart Financial Analysis
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According to Peng (2016), business environment presents various opportunities and threats to multinational companies across the globe. Additionally, the current markets are characterized by intense competition and a high cost of operation that negatively impacts on a business ability to compete. Therefore, the success of the multinational companies, as well as the ability to achieve their goals and objectives, largely depends on the ability to identify and implement appropriate strategies that will act as a source of competitive edge in the market and help take advantage of the available opportunities. As such, the motivation of the multinational companies is to develop appropriate strategies to help take advantage of the available opportunities, mitigate possible threats and ensure competitive advantage in their market segment. This report will identify and evaluate relevant Walmart theoretical drivers, measure the impacts of these drivers on the company strategy and finally determine the consequences for enhanced shareholders value.
Walmart is an American multinational company operating as a grocery store, chain of hypermarkets and department stores. Sam Walton founded the company in the year 1962, and its headquarters are based in Bentonville, Arkansas (Caraway 2016, p. 909). Walmart is estimated to be operating more than 11,500 stores and clubs in more than 28 countries worldwide. The company trades in stock on the New York Stock Exchange where it was first listed in the year 1972. In the year 2016, the company estimated revenue was US$ 482.13, operating income US$ 24.11, net income US$ 15.08, Total assets US$ 199.58 and Total equity US$ 83.6. Currently, the company has employed more than 1.4 million employees in the US and a total of 2.3 million employees globally (Walmart 2016). As such, Walmart is one of the largest multinational companies operating in the retail sector.
Walmart Theoretical Drivers
In the argument of Jeston and Nelis (2014), business drivers refer to the conditions, process, and resources that are important for the company growth as well as its continued success. Business drivers can be classified as either internal or external. The company ability to identify and monitor its key drivers is critical to boosting to boosting its profitability and enhancing its competitive advantage. As such, it is critical for companies to identify their drivers and attempt to control those under their control.
Walmart key drivers that have significantly impacted on its performance include the following;
Cash flow drivers
Kaplan and Atkinson (2015) argue that cash flow is an important key business indicator and thus, it is crucial for every company to have healthy cash flow. Having positive cash flows is important for the business as it allows a company to invest, grow, operate and work towards the attainment of its goals and objectives. An analysis of the Walmart financial statement shows a cash and cash equivalent of US$ 8.705 million at the end of 2016 (Walmart 2016). As such, Walmart has positive cash flows that are critical to ensuring continued operation and growth of the business. Additionally, the positive cash flows act as a source of Walmart competitive advantage because the company has adequate cash available to engage in innovative activities and to invest in various activities like technology advancement that have a positive impact on its efficiency and customer experience. Therefore, Walmart should take care of cash flow drivers like gross margin, account payables and receivables, sales volume and inventory to maintain the positive cash flows and appropriate liquidity level.
Supply chain drivers
In the argument of Aswathappa (2010), the product cycle theory explains that explains every product is likely to lose its market share to the competitors unless appropriate strategies that will guarantee its competitiveness in the market are put in place. Therefore, one of the strategies a company can put in place is to create an effective supply chain. As such, supply chain drivers play a critical role in determining the efficiency and responsiveness of the company entire supply chain. Walmart creation and maintenance of an effective supply chain has various benefits such as an increase in revenues and the decline in the cost of sales. For example, Walmart total revenue in 2012 was US$ 446.509 million and US$ 482.13 million in 2016 (Walmart 2016). A further analysis of the financial statement shows revenue increase is between 5.0% and 0.7% from 2012 to 2016 that can be associated with efficient supply chain management (Walmart 2016). As such, the supply chain is a key driver for the success and long-term growth of the company.
Information Technology driver
Analysis of the financial statement indicates the importance of information technology to Walmart as it intends to invest over US$ 1 billion in e-commerce initiatives in the year 2017 to improve its technology capacity (Walmart 2016). In an imperfect market, information technology is considered as the cornerstone of the modern businesses success as it drives critical innovations, increases organization efficiency and reduces the cost of operations. An imperfect market is characterized by the ability of the sellers and buyers to influence production and price. As such, Walmart can be considered operate in an imperfect market as it significantly controls the price at which its products are offered to the customers. For example, Walmart fixes its prices lower than the price of the competitors which is made possible by the use of information technology in almost all its operations. Thus, information technology is a critical driver for Walmart as its use significantly reduces the operation costs thus enabling the company to offer products at lower prices and acts as a source of Walmart competitive advantage.
Analysis of the Walmart annual report indicates that the company operates more than 11,500 retail locations in different countries (Walmart 2016). Walmart operations in different countries expose it to increased political risks as different countries have a different political climate. Walmart operations are influenced by different political factors that include taxation laws and policies, labor laws, minimum wage requirements and health regulations.
Additionally, Walmart operations and investment in countries other than the United States exposes the company to foreign currency exchange fluctuations and thus, exposing it to increased foreign exchange risk. Analysis of the Walmart financial statement indicates that the foreign exchange fluctuations in the year 2016 in countries like Chile, Japan, Canada, UK, and Mexico were the primary cause of the company net loss of US$4.7 billion (Walmart 2016). As such, the political factors have a significant impact on the company operations and profitability.
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Measuring Impacts of Walmart’s Drivers on its Strategy
According to McDermott (2015), business drivers are significant factors that cause and determine major improvement and increase in the value of an organization. As such, the company key drivers have a direct impact on its growth and performance. Additionally, a company should identify its key drivers and integrate them with the company strategies. Also, it is important for the company to evaluate the impacts of the identified drivers of its strategy.
In the case of Walmart, the impacts of identified key drivers on the company strategy can be measured by considering the following;
Osman (2012) argues that the impacts of the company key drivers can be evaluated by considering its growth in terms of the investments made and the market share acquired. During the year 2016, Walmart made a global capital investment of US$11.5 billion that consisted of investments primarily made to add new clubs and stores, investment in technology, and construction of company distribution centers (Walmart 2016). The increased investments indicate a growth of the company in terms of the asset base as well as area of operation. As such, the growth of the company indicates that its key drivers have a positive impact on its strategy.
The company key drivers also do place a priority on growing the company returns so as to ensure an appropriate balance with the company growth. As such, return on investments can also be used to measure the impacts of company drivers on its strategy. Return on Investment (ROI) is calculated by dividing the benefit of an investment with its cost, and it is normally expressed as a ratio or a percentage. As such, ROI is a metric used to measure the profitability of the company investment. The company key drivers are considered to have a positive impact on its strategy is they cause a positive ROI (Osman 2012). Walmart annual report indicates that its ROI in the year 2016 was 15.5 % and 16.9% in 2015 (Walmart 2016). However, despite the decline in ROI in the year 2016, Walmart key drivers have a positive impact on the company strategies as they have caused a positive ROI.
Leszczynska (2012) claim that shareholders value is a term used to refer to the value derived from management ability to grow a company free cash flow, earnings, and sales, to the shareholders. The company shareholders’ value is largely influenced by the strategic decisions made by the management. Also, the shareholder’s value is influenced by the ability of business to generate high ROI and management ability to invest wisely. Therefore, enhanced shareholders value can be determined by high ROI, increase in cash flow, increased capital investment and high earning per share.
According to Stout (2012) enhanced shareholders value has the following consequences;
To enhance shareholders value, the company is expected to take more risks than it would ordinarily take. For example, the company would be required to take on more debt capital that would increase the risk of bankruptcy and make it unstable. Also, plentiful debts are argued to be a more conducive way of the company to increase its shareholder’s value; however, it would be detrimental to the stability of the company.
Enhancing shareholders value is likely to result in financial instability because the company efforts are usually directed at investment opportunities that increase the shareholder’s value rather than those that will guarantee company future growth and success. Also, though increased debt financing has the capability to enhance the shareholder’s value, it could result in cash constraints due to high-interest rates thus, causing financial instability. Therefore, increased debts are likely to put the business at the danger of collapse and bankruptcy.
- Aswathappa, K. (2010). International business. New Delhi, Tata McGraw Hill Education.
- Caraway, B. (2016). OUR Walmart: a case study of connective action. Information, Communication & Society, 19(7), pp.907-920.
- Jeston, J. & Nelis, J. (2014). Business process management. Routledge.
- Kaplan, R.S. & Atkinson, A.A. (2015). Advanced management accounting. PHI Learning.
- Leszczynska, A. (2012). Towards shareholders’ value: an analysis of sustainability reports. Industrial management & data systems, 112(6), pp.911-928.
- McDermott, K. (2015). Key-business-drivers-in-cross-border-ecommerce 2014. Payvision BV, New York.
- Osman I. H. (2012). Strategic performance management and measurement using data envelopment analysis.
- Peng, M.W. (2016). Global business. Cengage learning.
- Stout, L.A. (2012). The shareholder value myth: How putting shareholders first harms investors, corporations, and the public. Berrett-Koehler Publishers.
- Walmart (2016). 1st ed. [PDF] Walmart; 2016 Annual Report, pp.1-68. Available at: https://s2.q4cdn.com/056532643/files/doc_financials/2016/annual/2016-Annual-Report-PDF.pdf [Accessed 31 May 2017].
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