Wal-Mart: A Potential Management Issue Resulting from Excess Cash

A Potential Management Issue Resulting from Excess Cash

Wal-Mart operates in a mostly cash business, with turnover ratios generally high. For this reason, Wal-Mart does not require a cash balance in excess of that presented on the 2008 financial statements. Refer to Exhibit A, which presents forecasted financial statements showing Wal-Mart’s cash balance growing to excess. Having an overly large cash balance is a management issue. Cash that is not used for running a business’s day-to-day operations is used more for strategic purposes. Wal-Mart shareholders expect the company to use funds generated from stock sales and debt funding to invest in business projects that will produce positive returns and contribute to net income. Cash that sits on the balance sheet earns interest, but does not significantly enhance profitability or shareholder value. The result is that Wal-Mart holds more debt than necessary, and shareholders do not experience the return of capital or return on equity that they expect.

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