Walmart Stores

Yujing Zhao h702007005

Case 4.2

Part A

a.The ROA of Walmart dropped slightly from 9.5% in 2006 to 9.3% in 2007, where it remained for 2008. The slight decrease reflects a drop in the profit margin across the three years, from 4.0% in 2006 to 3.9% in 2007 and 3.7% in 2008. The reason of decrease of profit margin is that the cost of good sold decreased, from 75.8% in 2006 to 75.5% in 2008. However the selling and administrative expense to sales increased, from 18.3% in 2006 to 18.9% in 2008. Obviously, the increases in SG&A exceeded the decreases in COGS.

b. The ROCE decreased between 2006 and 2007 from 21.2% to 20.4% , but remained flat between 2007 and 2008. The primary reasons are a steadily small annual decline in profit margin for ROCE,from 3.5% in 2006 to 3.4% in 2007 to 3.3% in 2008, offset in 2008 by a slight increase in the capital structure leverage ratio, from 2.4 in 2006 to 2.5 in 2007 and 2008.

c. Walmart’s short-term liquidity ratios suggest little change over the three-year period. A current ratio around 1.0 and a quick ratio in the mid to high teens. Walmart’s cash flow from operations to average current liabilities ratio for each year is at the approximate 40% benchmark for a healthy firm.

d.Walmart’s total liabilities to total assets ratio increased slightly between 2006 and fiscal 2007 from 57.8% to 59.3%, but declined again between 2007 and 2008 from 59.3% to 58.7%. However, the long-term debt ratio steadily increased across the years,this increase in long-term borrowings seems to accompany a decrease in short-term borrowings. Its cash flow from operations to average total liabilities ratio is above the 20% benchmark for a healthy firm.

Part B

a.Walmart’s higher ROA is the result of a larger assets turnover that more than off- sets Target’s higher profit margin for ROA.

1.Target’s Higher Profit Margin for ROA.

2.Target has...