Financial Ratio Analysis

In order to produce sufficient information that is required by various stakeholders with different natures of interests, financial reports are designed to be compact with complicated information. Therefore, we need to use some tools to interpret those reports so that we can capture the meanings within the financial data accurately. The tool to interpret financial reports is called financial ratios. Each ratio within the financial ratio analysis is designed to extract meanings from numbers that are displayed within the financial report.

The ratios are grouped into several groups, in order to clarify what performances each of them represents within the analysis. There are generally 4 groups of financial ratios, which are:

Liquidity ratios, Profitability ratios, Activity ratios and Coverage ratios. The information from Balance Sheet and Income Statement can be inputted into these ratios to produce performance levels. The Liquidity ratios represent business’s short term ability to deal with its maturing obligations. It basically reveals how the company is performing in a short team context.

Good liquidity ratios mean that the company is solvent and healthy within the range of maximum 3 months. Profitability ratios described how well the company performs, in terms of making profit from the assets that are entrusted to them. Activity ratios on the other hand, displayed operational effectiveness of the organization in dealing with their assets and resources. Coverage ratios described the ability to sustain the business in the longer term. Good coverage ratios indicated that the company is protected from long term credit and investors.

In this paper however, will use only several of them to focus on certain aspects of a company’s performance 1 Wal-Mart The company that we are using as an object of evaluation is the Wal-Mart Stores Inc. (Wal-Mart). It is the largest operator of retail stores worldwide. The company serves its customers by establishing several formats of retail shopping locations. These formats are divided into three principal segments, which are: the Wal-Mart Stores, Sam’s Club and International segment. Wal-Mart’s largest service segment is the Wal-Mart Stores, operating three different retail formats all over the United States. Read also Walmart

The Sam’s Club is a segment consisting of warehouse clubs and the international segment operates retail centers in 8 countries including Puerto Rico. As of January 31, 2005, Wal-Mart operates more than 1,300 Discount Stores, 1,700 Supercenters, 550 Sam’s Club and 85 neighborhood markets in the United States. Wal-Mart also owns minority interest of foreign retailers like the Seiyu Ltd in Japan. In this paper we are analyzing the financial performance of Wal-Mart Stores Inc. as a single reporting entity.