Wal-Mart: Comparison of ROCE for Wal-Mart’s Alternative Cash Management Strategies

Exhibit B presents forecasted financial statements for Wal-Mart that differ from Exhibit A in that Dividends, rather than Cash, is used as the “Plug.” Exhibit B assumes Wal-Mart’s cash balance to remain at $7,275 for each year forecasted.

The two sets of ROCE figures are presented in Exhibit C and show gradual decreases over the five-year span forecasted, as expected for a maturing business. In Exhibit B, Wal-Mart’s excess cash is returned to shareholders in the form of Dividends. With a lower cash balance, interest income over the years projected is lower, thereby decreasing net income as the numerator. With such large dividend payments in lieu, however, the average balance of common equity (the denominator) is significantly decreased, resulting in higher ROCE for the statements presented in Exhibit B. The ROCE ratio calculations for Exhibit B were between 0.8% (2009) to 3.1% (2013) higher than those for Exhibit A.

Wal-Mart’s shareholders would prefer the financial statements in Exhibit B because the they result in higher ROCE, the result of which is grossly increased dividend outlays to shareholders. Excess cash on the balance sheet does not serve the interest of shareholders unless it has been designated by management for use in strategic initiatives. Assuming the excess cash in Exhibit A is truly “excess,” and is not needed for business investments or acquisitions, it is best returned to shareholders or used to retire debt obligations.

Other posts on Wal-Mart financial analysis:

Wal-Mart: Comparison of ROCE for Wal-Mart’s Alternative Cash Management Strategies
Analysis of Wal-Mart Financial Ratios
Analysis of Wal-Mart Financial Ratios, P/E Growth
Analysis of Wal-Mart Financial Ratios, P/B
Wal-Mart: A Potential Management Issue Resulting from Excess Cash
Analysis of Wal-Mart Financial Ratios P/E, V/E
Wal-Mart in the News, Adoption of Eco-Friendly Activities