This ratio assesses the liquidity of companies and their ability to compensate for their short-term obligations. It gives analysts and investors information on how the company can take advantage of its current assets to pay its current debts (Kenton, 2019). Usually, companies with current ratios below 1 are unable to satisfy their short term obligations while those with a ratio above 1 are able to maintain solvency within the short term.
Current Ratio = Current assets/Current liabilities.
For Wal-Mart, in the year ending 2018, the Current Ratio was
$59.664 billion (Current assets) / $78.521 billion (Current liabilities) = 0.7598.
Since Wal-Mart’s current ratio is below 1, then the company has problems with its liquidity and it may not address its short term financial obligations on time. It needs to boost its current assets and reduce current liabilities to attain a desirable level of current ratio.
This ratio assesses the profitability of a business by revealing the net income that the company generates for each dollar of net sales that the company achieves. Investors use the ratio to ensure that profits are large enough to accommodate payment of dividends while creditors use it to assess whether a company’s profitability will allow it to pay debts. A good profit margin ratio varies across businesses within the same industry. For instance, in 2018, S&P companies with a profit margin ratio of above 11% were considered as strong performers (Murphy, 2019).
Profit Margin Ratio = Net Profit/Net sales
For Wal-Mart, in the year ending 2018, the Profit Margin Ratio was
$9.86 billion (Net profit) / $500.3 billion (Net sales) = 0.0197 or 1.97%.
Based on the industry averages as outlined by Murphy (2019), Wal-Mart has a low-profit margin ratio, which indicates that its net income in relation to net sales made is low. The company needs to reduce operating expenses so that it can raise its net profit or income.
Kenton, W. (2019). Current ratio definition. Investopedia. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp
Murphy, C. B. (2019). What is a healthy operating profit margin? Investopedia. Retrieved from https://www.investopedia.com/ask/answers/041415/what-considered-healthy-operating-profit-margin.asp
Walmart. (2018). Walmart 2018 Annual Report. Retrieved from http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_WMT_2018.pdf
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