Question

Select a company (preferably a merchandising company) and analyze its financial Statement for a period of 3 years. You will probably be able to find all of the financial statement information you need at the company’s website. If you have trouble finding the information you can pick another company.

The financial statement analysis of the chosen company should include the following sections.

Section I—A brief summary of your company’s profile. (16% Marks)

Section II – Introduction of the term ratio and ratio analysis. (16% Marks)

Section III— calculate the following ratios and offer your comments on the same. (48% Marks)

Profitability (any two ratios)

Liquidity (any two ratios)

Solvency (any two ratios)

Efficiency (any two ratios)

Section IV — you are required to give a brief conclusion of the ratios calculated by you for the 3 years period

Answer 1

Solution)
The name of a company is Walmart - Stores
Website : www.corporate.walmart.com
1) Brief Summary of the Walmart coperation is given below: American multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores. Headquartered in Bentonville, Arkansas, the company was founded by Sam Walton in 1962 and incorporatedon October 31, 1969. It also owns and operates Sam's Club retail warehouses. As of January 31, 2018, Walmart has 11,718 stores and clubs in 28 countries, operating under 59 different names. The company operates under the name Walmart in the United States and Canada, as Walmart de México y Centroamérica in Mexico and Central America, as Asda in the United Kingdom, as the Seiyu Group in Japan, and as Best Price in India. It has wholly owned operations in Argentina, Chile, Brazil, and Canada.
2)
Introduction
The term “ratio analysis” refers to the analysis of the financial statements in conjunction with the interpretations of financial results of a particular period of operations, derived with the help of ‘ratio’. Ratio analysis is used to determine the financial soundness of a business concern.
Meaning and Definition of Ratio Analysis
Ratio analysis is a conceptual technique which dates back to the inception of accounting, as a concept. Financial analysis as a scientific tool is used to carry out the calculations in the area of accounting. In order to appraise the valid and existent worth of an enterprise, financial tool comes handy, regularly. Besides, it also allows the firms to observe the performance spanning across a long period of time along with the impediments and shortcomings. Financial analysis is an essential mechanism for a clear interpretation of financial statements. It aids the process of discovering, the existence of any cross-sectional and time series linkages between various ratios. Formerly, Security qualified as a major requisite for banks and financial institutions, to consider and grant loans and advances. However, there’s been a complete paradigm shift in the structure. Currently, lending is based on the evaluation of the actual need of the firms. Financial viability of a proposal, as a base to grant loans, is now been given precedence over security. Further, an element of risk is an imperative in every business decision. Credits, run a higher risk, as a part of any decision making in business and so,
Ratio analysis and other quantitative techniques mitigate the risk to some extent by providing a fair and rational assessment of risks.
Ratio analysis broadly explains the process of computing, acts as a vital tool in determination and presentation of the relationship of related items and groups of items of the financial statements. Financial position of a unit is concretely and clearly encapsulated by the means of ratio analysis.
The significance of Ratio Analysis for a holistic Financial Analysis remains unflinchingly supreme.
Ratio can be used in the form of percentage, Quotient and Rates. In other words, it can be expressed as a to b; a: b (a is to b) or as a simple fraction, integer and decimal. A ratio is calculated by dividing one item or figure by another item or figure.
Analysis of Ratio
Analysis using ratios can be done in following ways.
Analysis of an individual (or) Single Ratio
Analysis of referring to a Group of Ratio
Analysis of ratios by Trend
Analysis by inter-firm comparison
Advantages of Ratio Analysis
In order to establish the relationship between two accounting figures, application of Ratio Analysis is necessary. Application of the same provides the significant information to the management or users who can analyse the business situation. It also facilitates meaningful and productive monitoring of the annual performance of the firm. Illustrated below are the advantages of ratio analysis:
It facilitates the accounting information to be summarized and simplified in a concise and concrete form which is comprehensible to the user.
It depicts the inter-relationship between the facts and figures of various segments of business which are instrumental in taking important financial decisions.
Ratio analysis clears all the impediments and inefficiencies related to performance of the firm/individual.
It equips the management with the requisite information enables them to take prompt business -decisions.
It helps the management in effectively discharging its functions/operations such as planning, organizing, controlling, directing and forecasting
Ratio analysis provides a detailed account of profitable and unprofitable activities. Thus, the management is able to concentrate on unprofitable activities and consider the necessary steps to overcome the existential shortcomings.
Ratio analysis is used as a benchmark for effective control of performance of business activities.
Ratios are an effectual means of communication and informing about financial soundness made by the business concern to the proprietors, investors, creditors and other parties.
?Ratio analysis is an effective tool which is used for measuring the operating results of the enterprises.
It facilitates control over the operation as well as resources of the business. Ratio analysis provides all assistance to the management to discharge responsibilities. Ratio analysis aids in accurate determination of the performance of liquidity, profitability and solvency position of the business concern.

Limitations of Ratio Analysis

Various environmental conditions such as regulation, market structures etc. vary for different companies, operating in different industries. Significance of such factors is extremely high. This variation may lead to a difference or an element of discrepancy, while comparing the two companies from diverse industries.
Financial accounting information is impacted and often subject to change, by estimates and assumptions. Accounting standards allow scope for incorporating different accounting policies, which impairs comparability and hence functionality of ratio analysis is less in such situations.
Ratio analysis explicates association between past information while current and future information is of more relevance and application to the users.
Section 3)
Profitability Ratio
Particulars 2014 2015 2016 2017
Revenue $ 485651 $ 482130 $ 485,873 $ 500,343
Gross profit $ 120,565 $ 121,146 $ 124,617 $ 126,947
Operating Income $27,147 $ 24,105 $ 22,764 $ 20,437
GPM(GP/Revenues) 24.825% 25.127% 25.6480% 25.37%
Operating Margin(OI/Sales) 5.589% 4.999% 4.685% 4.08459%
Solvency Ratio
Equity 81,394 80,546 77,798 77,869
Debt 41,086 38,214 36,015 30,045
Total Assets   199,163 196,516 196,088 201,569
D/E 50.47% 47.44% 46.29% 38.58%
Debt to captial 33.54% 32.177% 31.64% 27.84%