Industry Averages and Financial Ratios

FIN/370 – Industry Averages and Financial Ratios

When tasked with finding a publicly traded company and comparing the financials of that company with industry averages, Team B selected Wal-Mart.

First the SIC code for Wal-Mart’s industry was located and then used to research the correct industry ratios while utilizing the Dun & Bradstreet Key Business Ratio resource. Once the financial statements for Wal-Mart were found, the financial ratios were calculated so that they could be compared to the D&B industry averages.

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The financial ratios compared included profitability, solvency, andJust-In-Time system. Additionally, a proposed change in the inventory system to the Just-In-Time system is discussed.

Probability Ratios

Profitability Ratios assess how profit is earned relative to sales, net worth, and total assets. By comparing Wal-Mart’s profitability ratio with its industry averages on the D&B Reports, results show that Wal-Mart is more profitable overall than its competitors.

The company return on assets is nearly 1.5% higher than the industry average indicating that Wal-Mart’s management is more successful than its competitors at generating revenue (“WMT Balance Sheet”, 2014).

The company return on equity is nearly double the market at 22%, signifying that Wal-Mart has generated more profit with money shareholder’s have invested compared to industry averages.

Solvency Ratios

In 2013 and current year to date for 2014, Wal-Mart’s Solvency ratio is 62%. The solvency ratio is calculated by net income after taxes plus depreciation divided by short term and longer liabilities total.

This ratio will point out if the organization will be able to meet long and short-term obligations with their cash flow. The lower the ratio, the more vulnerable the organization becomes to defaulting on their obligations.

Currently the industries median solvency quick ratio is at 20% and the upper average is at 60%. This shows that Wal-Mart compared to its industry holds a very healthy solvency ratio. The lower ratio industry average is 10% (“Key Business Ratios”, 2014). This shows that Wal-Mart has good attention to this important key financial ratio.

Efficiency Ratios

Comparing industry efficiency ratios to the calculated ratios from Wal-Mart’s financial statements, it is clear that Wal-Mart comes in just below the upper averages in the industry.

It seems Wal-Mart falls short when contrasting both asset turnover (sales generated per dollar invested) and inventory turnover, or length of time inventory is held before being sold.

This implies that Wal-Mart not only uses its assets less efficiently than its highest ranked competitors (which could also imply it is not managed as well as some of its industry companions), but also has a less liquid inventory than its competitors.

Just-In-Time Inventory System

Wal-Mart could streamline the management process of their inventory in a more efficient manner if they switched to the Just-in-Time inventory system. Switching to this style of inventory system would help Wal-Mart to improve upon the company’s current inventory turnover ratio.

Wal-Mart would need to implement a system that would keep track of accurate inventory. Vendors would be required to consistently maintain product availability that they can ship in a minute’s notice. This process would increase Wal-Mart’s shipping cost but would decrease the storage and insurance cost.

Conclusion

Wal-Mart stacks up well when compared to industry averages for profitability and solvency, but falls short however when comparisons are made using efficiency ratios. The financials for Wal-Mart show that when compared to the D&B reports, the company’s return on assets is 1.5% greater than the competition.

The same holds true for Wal-Mart’s solvency ratio at 62%, giving the company a slight edge against the upper industry average of 60%. The efficiency ratios indicate where Wal-Mart can improve and perhaps operational changes are needed.

The change to a Just-In-Time inventory system would bolster the ability of Wal-Mart to operate in a more efficient and lean manner, which would further separate the company from the competition.

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References

Key Business Ratios. (2014). Key Management Ratios (4th Edition) (Financial Times Series) by FT Press

WMT Balance Sheet. (2014). Retrieved Business Ratios and Formulas: A Comprehensive Guide by Wiley

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