Current debt for Wal-Mart on a consolidated basis increased from $62.3 million at the close of fiscal 2011 (January 31, 2012) to $71.8 million at January 31, 2013. (Wal-Mart 2013 annual report, page 33). This can be an indicator of both current problems and an indicator of growth, depending on comparision with other factors. Current assets were $54.9 million and 59.9 million for the same periods, respectively.
Several factors contribute to Wal-Mart’s use of debt to finance its operations. It is a supplier-driven retail business, and as such negotiates aggressive terms with its suppliers. Suppliers will cooperate, given the huge potential market they can offer their goods in at retail. Wal-Mart uses supplier credit to support more aggressive uses for its cash. Page 36 of the 2013 annual report expands on other uses of cash by the consolidated entity, including being unwilling to repatriate foreign subsidiary cash to Wal-Mart US for domestic use (there is a tax on repatriation).
Perhaps what Wal-Mart does with its cash should be considered as an option to paying down its current liabilities. Other ratios, such as Return on Equity, will reflect management choices that hopefully increase shareholder value while being less concerned with growing values of vendor-provided credit, ostensibly at $0 financing cost. Wal-Mart does not accumulate cash, but instead has entered into a share repurchase buyback program (a tax-free way of boosting share prices by reducing the number of shares outstanding). Such shares are then used in part to compensate employees and management (see page 26 of the(NNN) NNN-NNNNAnnual Report). The company focus on shareholder value is prominent throughout the Annual Report.
Return on Equity is prominently outlined in the Wal-Mart 2013 annual report. The authors clearly believe that good stewardship of the investments made should be used to demonstrate management performance, and the highlights do not disappoint. Page 21 of the 2013 Annual Report shows a return on Investment (which as calculated by Wal-Mart is essentially Return on Equity) of 8.8% for the January 2012 fiscal year, as compared with 18.8% for the year ended January 2013.
Return on Equity can be misleading as well, since it uses historical values of equity to determine returns. An investor buying shares during this two year period should look at their own per-share value, and examine their own returns in comparison. By converting the performance to Return on Investment, Wal-Mart takes out the historical cost of equity and prior year retained earnings, and converts it to more current values of buildings, debt, etc. for its reported return calculations.
Days receivable is accounts receivable times 365 divided by annual sales. This ratio is often used to evaluate a company’s credit policy, where days outstanding is compared to credit terms. The Wal-Mart revenue model is primarily retail, so the receivables (2013 Annual Report, page 36), from third party pharmacy sales, consumer credit cards some consumer financing in foreign operations, and some supplier incentives (slotting allowances and other supplier incentives), are not a significant component of cash flow. A comparison for fiscal 2011 ($5.9 million receivables*365/$446.9 million in revenues) and 2012(($6.7 million receivables*365/$469.1 million in revenues) yields 4.81 days and 5.21 days, respectively. Such ratios are low, but not unexpected when these segments compose so little of the retail giant’s revenue mix. One could evaluate the segment performance if sales for each component of receivables were broken out in the annual Report, but that information was not provided as it was likely considered immaterial.