Wal-Mart in the News, Adoption of Eco-Friendly Activities

Description:

The article focuses on Wal-Mart’s adoption of eco-friendly initiatives.

Stakeholders involved:

The primary stakeholders were the environment, Unilever, PepsiCo, Universal Music, and Environmental Defense, an environmental group who’s opening a new office new Wal-Mart’s headquarters in Bentonville, Ark.

Ethical issues involved:

Actual and future potential harm to the environment: Sustainability is the key to securing the future of our natural resources and environment. The article focuses on Wal-Mart’s attempts at increasing sustainability through more economically friendly business practices.

Duty to the society: Wal-Mart has a duty to not just Americans but to the rest of the world that can and will ultimately be affected by the greenhouse emissions that the Wal-Mart chain’s stores emit every year.

Key ethical question the company must resolve:

How will Wal-Mart limit the damage it does to the environment through its daily activities?

Manner in which the company managed the issue:

In the article, Wal-Mart claims to have taken two steps in increasing overall sustainability for the future. First, they have outfitted refrigerator cases in over 500 stores with a new LED lighting system. Secondly, Wal-Mart claims to be working with local farmers in producing a “zero waste” alternative to recycling food that isn’t sold. Both efforts claim to increase sustainability, but now I shall evaluate the validity of the claims. In the case of the new lighting system, Wal-Mart claims the plan with save the company “$3.8 million a year and reduce its carbon dioxide emissions by 65 million pounds.” Seeing as the extra money could also be used in further sustainability projects, I would say this effort is definitely very effective, and strong. In the case of zero waste, given that, if the plan succeeds, none of the food that Wal-Mart can’t sell will be wasted, the plan is a good one in terms of recycling. It will aid in fertilizing fields and thereby provide cheaper alternatives for farmers who do fertilize.

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

Analysis of Wal-Mart Financial Ratios, P/B

Walmart’s P/B ratio is quite high for a company in its industry. Based on this value of 2.77, I would lean toward not investing because Walmart will be expected to return a value for ROE that I don’t think is reasonably feasible in the long-term for the company. Walmart’s forward P/E is low for a company in its industry, standing at 12.90. While lower than other companies in its industry, Walmart’s low P/E ratio simply suggests that the company is expected to grow earnings at a slower pace, but could also mean that the stock has some upside room to move. Walmart’s 1.08 PEG ratio suggests the company’s stock may be overpriced, however the ratio is close enough to 1.00 that I feel comfortable giving less weight to it when making an investment decision. As a practical investor, I know that Walmart has continued to produce growth in earnings, income, and dividends in a historical context, leading me to view Walmart stock as a “buy.” As an analyst, however, the evidence suggests to me that there may be a better time to buy Walmart stock. The expectation of slow earnings growth, an expected ROE that is much higher than average, and a PEG ratio that suggests the stock may be overpriced lead me to say “no” to WMT as an investment.

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

Analysis of Wal-Mart Financial Ratios, P/E Growth

Walmart’s price-earnings-growth ratio is presented in Exhibit D. While the P/E ratio measures expected earnings growth, the PEG ratio gives better context to its applicability by providing an informal determination of whether Walmart’s stock is over- or under-priced. Walmart’s PEG of 1.08 suggests that the stock may be slightly overpriced.

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

Analysis of Wal-Mart Financial Ratios P/E, V/E

Walmart’s forward price-to-earnings ratio at the end of 2008 was 12.90, as presented in Exhibit C. The company’s competitors’ forward P/Es fell relatively near to this figure, ranging from 10.89 (Target) to 18.23 (Costco). The industry average for general merchandisers between 1998 and 2007 was 18.31. Walmart’s forward P/E suggests that, compared to competitors and the rest of its industry, the company is expected to grow earnings at a slower pace. This aligns with the expectation that one of the world’s largest companies will be hard pressed to grow at a “fast” pace. The value-to-earnings ratio for Walmart breaks down into the use of two forward-looking figures, in an attempt to achieve a performance measure more theoretically precise. The V/E ratio Walmart reveals is typical of a company in its industry and suggests modest expected future growth.

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

Analysis of Wal-Mart Financial Ratios

Walmart’s price-to-book ratio of 2.77, presented in Exhibit B, is higher than the general merchandising industry’s median P/B ratio of 1.80. This implies that the market expects a higher level of return-on-equity relative to the cost of capital to the business, when compared to other firms in the same industry. Walmart’s competitors all have lower P/B ratios, but they also have lower sales and lower asset bases, leading to the rational conclusion that companies with larger sales volume are expected to produce a greater return on equity that competing firms. Walmart’s high value-to-book ratio of 4.28 supports the P/B ratio in suggesting that investors expect larger than average returns on equity from this company.

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

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

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