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Case 4.2: Profitability and Risk Analysis of Walmart Stores

Case 4.2: Profitability and Risk Analysis of Walmart Stores

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323



Profitability and Risk Analysis of Walmart Stores



pharmaceuticals, health and beauty products, sporting goods, and similar items, and Supercenters including a full-line supermarket.38 Walmart U.S. Stores are in all 50 states, Discount

stores are in 47 states, Supercenters are in 48 states, and Neighborhood Markets are in 16

states. Customers also can purchase many items through the company’s website at http://

www.walmart.com.

2. International: The International segment includes wholly owned subsidiaries in Argentina, Brazil, Canada, Japan, Puerto Rico, and the United Kingdom; majority-owned subsidiaries in five countries in Central America, Chile, and Mexico; and joint ventures in India

and China. The merchandising strategy for the International segment is similar to that of

the Walmart U.S. segment.

3. Sam’s Clubs: Sam’s Clubs are membership club warehouses that operate in 48 states.

The average Sam’s Club is approximately 133,000 square feet, and customers can purchase many items through the company’s website at http://www.samsclub.com. These

warehouses offer bulk displays of brand name merchandise, including hardgoods, some

softgoods, institutional-size grocery items, and certain private-label items. Gross margins

for Sam’s Clubs stores are lower than those of the U.S. and International segments.

Walmart uses centralized purchasing through its home office for substantially all of its merchandise. It distributes products to its stores through regional distribution centers. During fiscal 2008, the

proportion of merchandise channeled through its regional distribution centers was as follows:

Walmart Discount Stores, Supercenters, and Neighborhood Markets

Sam’s Club (non-fuel)

International



81%

65%

74%



Exhibit 4.47 sets out various operating data for Walmart for 2006–2008. Exhibit 4.48

presents segment data. Exhibit 4.49 (page 325) presents comparative balance sheets for

Walmart for 2005–2008 (an extra year to enable average balance computations when



Exhibit 4.47

Walmart Stores

Operating Data

(Case 4.2, Part A)

Fiscal Year



Walmart Discount Stores, Supercenters, and

Neighborhood Markets (U.S.)

Number

Square footage (millions)

Sales per square foot

Operating income per square foot



2008



2007



2006



3,656

589.3

$433.98

$ 31.84



3,550

566.6

$422.75

$ 30.91



3,443

540.4

$418.75

$ 30.76

(Continued )



38

Walmart’s fiscal year ends at the end of January of each year. Despite Walmart’s convention of referring to its year

ending January 31, 2009, as its fiscal 2009, we follow the common practice of referring to it as 2008 because 11 of

the 12 months fall within 2008. This same convention holds true for Carrefour and Target in Part B of this case.



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324



CHAPTER 4



Profitability Analysis



Exhibit 4.47 (Continued)

International

Number

Square footage (millions)

Sales per square foot

Operating income per square foot

Sam’s Club (Domestic)

Number

Square footage (millions)

Sales per square foot

Operating income per square foot

Domestic Comparable Store Sales Increase



3,615

251.8

$391.76

$ 19.62



3,098

222.6

$406.20

$ 21.23



2,734

188.4

$383.04

$ 18.76



602

79.9

$586.41

$ 20.15

3.5%



591

78.2

$567.23

$ 20.69

1.6%



579

76.3

$544.98

$ 19.40

2.0%



Exhibit 4.48

Walmart Stores

Segment Profitability Analysis

(Case 4.2, Part A)

Fiscal Year



Sales Mix

Walmart Discount Stores, Supercenters, and

Neighborhood Markets

International

Sam’s Club

Walmart Discount Stores, Supercenters, and

Neighborhood Markets

Operating profit margin

Assets turnover

ROA

International

Operating profit margin

Assets turnover

ROA

Sam’s Club

Operating profit margin

Assets turnover

ROA



2008



2007



2006



63.7%



64.0%



65.6%



24.6

11.7

100.0%



24.1

11.9

100.0%



22.3

12.1

100.0%



7.3%

3.0

22.2%



7.3%

2.8

20.8%



7.3%

2.9

21.0%



5.0%

1.6

8.2%



5.2%

1.5

7.6%



5.5%

1.4

7.8%



3.4%

3.8

13.0%



3.6%

3.8

13.8%



3.6%

3.6

12.9%



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325



Profitability and Risk Analysis of Walmart Stores



Exhibit 4.49

Walmart Stores

Balance Sheets

(amounts in millions)

(Case 4.2, Part A)

2008

ASSETS

Cash and cash equivalents

Marketable securities

Accounts receivable—net

Inventories

Prepaid expenses and other current assets

Current assets of discontinued segments

Total Current Assets

Long-term investments

Property, plant, & equipment—at cost

Accumulated depreciation

Goodwill and nonamortizable intangibles

Total Assets

LIABILITIES AND EQUITIES

Accounts payable—trade

Current accrued liabilities

Notes payable and short-term debt

Current maturities of long-term debt

Income taxes payable

Total Current Liabilities

Long-term debt

Deferred tax liabilities—noncurrent

Total Liabilities

Noncontrolling interest

Common stock ỵ Paid-in capital

Retained earnings

Accum. other comprehensive income (loss)

Total Shareholders’ Equity

Total Liabilities and Equities



$



7,275



2007



$



5,492



2006



$



7,373



2005



$



6,193



3,905

34,511

3,063

195

$ 48,949



131,161

(35,508)

18,827

$163,429



3,642

35,159

2,760

967

$ 48,020



127,992

(31,125)

18,627

$163,514



2,840

33,685

2,690



$ 46,588



115,190

(26,750)

16,165

$151,193



2,575

31,910

2,468

679

$ 43,825

1,884

100,929

(23,064)

14,613

$138,187



$ 28,849

18,112

1,506

6,163

760

$ 55,390

34,549

6,014

$ 95,953

$ 2,191

4,313

63,660

(2,688)

$ 65,285

$163,429



$ 30,344

15,725

5,040

6,229

1,140

$ 58,478

33,402

5,087

$ 96,967

$ 1,939

3,425

57,319

3,864

$ 64,608

$163,514



$ 28,090

14,675

2,570

5,713

706

$ 51,754

30,735

4,971

$ 87,460

$ 2,160

3,247

55,818

2,508

$ 61,573

$151,193



$ 25,101

13,274

3,754

4,879

1,817

$ 48,825

30,096

4,630

$ 83,551

$ 1,465

3,013

49,105

1,053

$ 53,171

$138,187



Source: Walmart Stores, Inc., Form 10-K for the Fiscal Years Ended 2005–2008.



necessary), Exhibit 4.50 (page 326) presents comparative income statements for 2006–2008,

and Exhibit 4.51 (pages 326–327) presents comparative statements of cash flows for

2006–2008. Exhibit 4.52 (pages 327–328) presents selected financial statement ratios for

Walmart for 2006–2008. The statutory income tax rate is 35%.



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326



CHAPTER 4



Profitability Analysis



Exhibit 4.50

Walmart Stores

Income Statements

(amounts in millions)

(Case 4.2, Part A)



Revenues

Cost of goods sold

Gross Profit

Selling, general, and administrative expenses

Operating Profit

Interest income

Interest expense

Income Before Tax

Income tax expense

Noncontrolling interest in earnings

Income (loss) from discontinued operations

Net Income (Computed)

Other comprehensive income items

Comprehensive Income



2008



2007



2006



$ 405,607

(306,158)

$ 99,449

(76,651)

$ 22,798

284

(2,184)

$ 20,898

(7,145)

(499)

146

$ 13,400

(6,552)

$ 6,848



$ 378,476

(286,350)

$ 92,126

(70,174)

$ 21,952

309

(2,103)

$ 20,158

(6,889)

(406)

(132)

$ 12,731

1,356

$ 14,087



$ 348,368

(263,979)

$ 84,389

(63,892)

$ 20,497

280

(1,809)

$ 18,968

(6,354)

(425)

(905)

$ 11,284

1,575

$ 12,859



2008



2007



2006



$ 13,400

6,739

581

(101)

(220)

(410)

2,036



$ 12,731

6,317

(8)

(564)

(775)

865

1,034



$ 11,284

5,459

89

(214)

(1,274)

2,132

588



(146)

1,268

$ 23,147



132

910

$ 20,642



860

1,311

$ 20,235



Source: Walmart Stores, Inc., Form 10-K for the Fiscal Years Ended 2006–2008.



Exhibit 4.51

Walmart Stores

Statements of Cash Flows

(amounts in millions)

(Case 4.2, Part A)



Net income

Add back depreciation and amortization expenses

Deferred income taxes

(Increase) Decrease in accounts receivable

(Increase) Decrease in inventories

Increase (Decrease) in accounts payable

Increase (Decrease) in other current liabilities

Other addbacks to net income

Other subtractions from net income

Other operating cash flows

Net Cash Flows from Operations



(Continued )

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327



Profitability and Risk Analysis of Walmart Stores



Exhibit 4.51 (Continued)

Proceeds from sales of property, plant, and

equipment

Property, plant, and equipment acquired

Investments sold

Investments acquired

Other investment transactions

Other

Net Cash Flows from Investing Activities

Increase in short-term borrowing

Decrease in short-term borrowing

Increase in long-term borrowing

Decrease in long-term borrowing

Share repurchases—treasury stock

Dividend payments

Other financing transactions

Net Cash Flows from Financing Activities

Effects of exchange rate changes on cash

Net Change in Cash

Cash and Cash Equivalents, Beginning of Year*



$



714

(11,499)

781



(1,576)

838

$(10,742)

$ (3,745)

6,566

(5,739)

(3,521)

(3,746)

267

$ (9,918)

(781)

$ 1,706

$ 5,492



$



957

(14,937)



(95)

(1,338)

(257)

$(15,670)

$ 2,376

11,167

(9,066)

(7,691)

(3,586)

(622)

$ (7,422)

252

$ (2,198)

$ 7,373



$



394

(15,666)

267



(68)

610

$(14,463)

$ (1,193)

7,199

(6,098)

(1,718)

(2,802)

(510)

$ (5,122)

97

$

747

$ 6193



*The amounts do not reconcile with the balance sheet presentation because Walmart reclassified cash and equivalents applicable to

discontinued operations.

Source: Walmart Stores, Inc., Form 10-K for the Fiscal Years Ended 2006–2008.



Exhibit 4.52

Walmart Stores

Financial Ratio Analysis

(Case 4.2, Part A)

Fiscal Year



Profitability Ratios

ROA

Profit margin for ROA

Assets turnover

Cost of goods sold/Sales

Selling and administrative expense/Sales

Interest expense (net of taxes)/Sales

Income tax expense (excluding tax effects of

interest expense)/Sales



2008



2007



2006



9.3%

3.7%

2.5

75.5%

18.9%

0.3%



9.3%

3.9%

2.4

75.7%

18.5%

0.4%



9.5%

4.0%

2.4

75.8%

18.3%

0.3%



2.0%



2.0%



2.0%

(Continued )



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328



CHAPTER 4



Profitability Analysis



Exhibit 4.52 (Continued)

Accounts receivable turnover

Inventory turnover

Fixed assets turnover

ROCE

Profit margin for ROCE

Capital structure leverage

Risk Ratios

Current ratio

Quick ratio

Accounts payable turnover

Cash flow from operations to current liabilities ratio

Long-term debt ratio

Total liabilities/Total assets ratio

Cash flow from operations to total liabilities ratio

Interest coverage ratio



107.5

8.8

4.2

20.4%

3.3%

2.5



116.8

8.3

4.1

20.4%

3.4%

2.4



128.7

8.0

4.2

21.2%

3.5%

2.4



0.88

0.20

10.3

40.7%

34.6%

58.7%

24.0%

10.6



0.82

0.16

9.9

37.5%

34.1%

59.3%

22.4%

10.5



0.90

0.20

10.0

40.2%

33.3%

57.8%

23.7%

11.0



REQUIRED

a. What are the likely reasons for the changes in Walmart’s rate of ROA during the threeyear period? Analyze the financial ratios to the maximum depth possible.

b. What are the likely reasons for the changes in Walmart’s rate of ROCE during the threeyear period?

Note: Requirements c and d require coverage of material from Chapter 5.

c. How has the short-term liquidity risk of Walmart changed during the three-year period?

d. How has the long-term solvency risk of Walmart changed during the three-year period?



Part B

Part A of Case 4.2 analyzed the profitability and risk of Walmart Stores for its fiscal years 2006,

2007, and 2008. Part B of this case compares the profitability and risk ratios of Walmart and two

other leading discount retailers, Carrefour and Target, for their 2006–2008 fiscal years.



Carrefour

Carrefour, headquartered in France, is Europe’s largest retailer and the second largest retailer in

the world. Sales in 2008 totaled E86,967 million (approximately $118,000 million). Carrefour is

organized by geographic region (France, Europe excluding France, Asia, and Latin America).

Each segment is organized according to store formats, which include the following (2008 number of stores and sales mix percentages in parentheses):

Hypermarkets (203; 62%): Offer a wide variety of household and food products at competitively low prices under the Carrefour store brand

Supermarkets (590; 22%): Sell traditional grocery products under the Champion, Norte,

GS, and GB supermarkets and other store brands

Hard Discount Stores (842; 11%): Offer a limited variety of food products in smaller stores

than those of hypermarkets and supermarkets at aggressively low prices under the Dia, Ed,

and Minipreco store brands



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329



Profitability and Risk Analysis of Walmart Stores



Other activities (9; 5%): Includes convenience stores and wholesale stores, the latter

targeted at business customers, under the SHOPI, Marche Plus, 8 A Huit, Express, Contact,

and Proxi store brands

Carrefour derived approximately 44% of its 2008 sales in France, 37% in Europe excluding

France, 12% in Latin America, and 7% in Asia.



Target

Target Corporation, headquartered in the United States, operates two reportable segments: retail

and credit card. The retail segment includes all merchandising operations, including large-format

general merchandise and food discount stores as well as an online business at http://www.target

.com. Target stores offer a wide variety of clothing, household, electronics, sports, toy, and entertainment products at discount prices. Target stores attempt to differentiate themselves from Walmart’s

discount stores by pushing trendy merchandising with more brand-name products. Target emphasizes customer service, referring to its customers as ‘‘guests’’ and focusing on the theme of ‘‘Expect

More, Pay Less.’’ Target Corporation attempts to differentiate itself from competitors by providing

wider aisles and a less cluttered store appearance. At the end of fiscal 2008, Target Corporation operated 1,682 stores and 34 distribution centers. The credit card segment offers branded proprietary

credit cards under the names Target Visa and the Target Card. For 2008, total revenues were $64,948

million, consisting of retail sales of $62,884 million and credit card revenues of $2,064 million.

Exhibits 4.53 and 4.54 (page 330) present profitability ratios for Carrefour, Target, and

Walmart for their 2006–2008 fiscal years. Exhibit 4.55 (page 331) presents risk ratios for the

three firms. Exhibit 4.56 (page 332) presents selected other data for these firms. The financial



Exhibit 4.53

Carrefour, Target, and Walmart

Cross-Section ROA Profitability Analysis

(Case 4.2, Part B)

ROCE



Carrefour

Target

Walmart



2008



2007



2006



3.0%

6.0%

9.3%



4.4%

7.8%

9.3%



4.5%

8.6%

9.5%



Profit Margin for ROA



Carrefour

Target

Walmart



Assets Turnover



2008



2007



2006



2008



2007



2006



1.8%

4.2%

3.7%



2.6%

5.2%

3.9%



2.8%

5.4%

4.0%



1.7

1.4

2.5



1.7

1.5

2.4



1.6

1.6

2.4

(Continued )



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330



CHAPTER 4



Profitability Analysis



Exhibit 4.53 (Continued)

Carrefour

2008

Sales

Other revenues

Cost of goods sold

Selling and

administrative

Income taxes

Profit margin for ROA*

Receivables turnover

Inventory turnover

Fixed assets turnover



2007



Target

2006



2008



Walmart



2007



2006



2008



2007



2006



100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

1.4

1.4

1.3

3.3

2.1

2.8

1.1

1.1

1.0

(79.0)

(78.6)

(78.6)

(70.2)

(69.8)

(69.7)

(76.3)

(76.5)

(76.6)

(19.2)

(18.7)

(18.6)

(26.1)

(24.7)

(24.3)

(19.1)

(18.7)

(18.5)

(0.9)

1.8%



(1.0)

2.6%



(1.1)

2.8%



(2.1)

4.2%



(2.9)

5.2%



(3.0)

5.4%



27.4

10.0

5.9



23.3

10.0

5.8



21.7

9.9

5.7



7.8

6.5

2.5



8.6

6.6

2.7



9.8

6.7

2.9



(1.8)

3.7%

107.5

8.8

4.2



(1.8)

3.9%

116.8

8.3

4.1



(1.8)

4.0%

128.7

8.0

4.2



*Amounts do not sum because profit margin for ROA is reduced by taxes on operating profits, which do not equal total taxes reported on the income statement.



Exhibit 4.54

Carrefour, Target, and Walmart

Cross-Section ROCE Profitability Analysis

(Case 4.2, Part B)

ROCE



Carrefour

Target

Walmart



2008



2007



2006



14.8%

15.3%

20.4%



24.6%

18.4%

20.4%



27.2%

18.7%

21.2%



Profit Margin for ROCE



Carrefour

Target

Walmart



Capital Structure

Leverage



Asset Turnover



2008



2007



2006



2008



2007



2006



2008



2007



2006



1.8%

3.5%

3.3%



3.0%

4.6%

3.4%



3.2%

4.8%

3.5%



1.7

1.4

2.5



1.7

1.5

2.4



1.6

1.6

2.4



5.0

3.1

2.5



4.9

2.6

2.5



5.2

2.4

2.5



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Short-Term Liquidity

Current ratio

Quick ratio

Cash flow from operations/

Average current liabilities

Days receivables

Days inventory

Days payable

Long-Term Solvency

Long-term debt ratio

Total liabilities/Total assets ratio

Cash flow from operations/

Average total liabilities

Interest coverage ratio

0.65

0.36

14.2%

27

39

95

41.3%

77.3%

10.2%

8.4



24

37

92

46.5%

79.0%

9.9%

6.4



2007



0.70

0.39

14.1%



2008



Carrefour



9.1



41.8%

77.9%

9.4%



29

37

99



0.66

0.37

13.1%



2006



5.9



56.1%

68.9%

14.9%



47

55

52



1.66

0.85

39.7%



2008



9.6



49.7%

65.6%

16.2%



48

58

56



1.60

0.89

36.0%



2007



Target



Carrefour, Target, and Walmart

Cross-Section Risk Analysis for

(Case 4.2, Part B)



Exhibit 4.55



10.0



35.7%

58.1%

22.9%



49

57

59



1.32

0.63

47.0%



2006



10.6



34.6%

58.7%

24.0%



3

42

35



0.88

0.20

40.7%



2008



10.5



34.1%

59.3%

22.4%



3

44

37



0.82

0.16

37.5%



2007



Walmart



11.0



33.3%

57.8%

23.7%



3

45

37



0.90

0.20

40.2%



2006

Profitability and Risk Analysis of Walmart Stores

331



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332



CHAPTER 4



Profitability Analysis



Exhibit 4.56

Carrefour, Target, and Walmart

Selected Other Financial Data

(Case 4.2, Part B)

2008

Growth Rate in Sales

Carrefour

Target

Walmart

Number of Stores

Carrefour

Target

Walmart

Square Footage (000’s)

Carrefour

Target

Walmart



2007



2006



5.9%

2.3%

9.4%



6.8%

6.2%

7.2%



5.2%

12.9%

8.6%



15,430

1,682

7,873



14,991

1,591

7,239



12,547

1,488

6,756



192,801

222,588

921,000



181,900

207,945

867,400



164,350

192,064

805,100



Sales per Square Foot

Carrefour

Target

Walmart



E

$

$



Sales per Store

Carrefour

Target

Walmart



E 5,636,215

$ 37,386,445

$ 51,518,735



E 5,479,855

$ 38,636,706

$ 52,282,912



E 6,127,919

$ 38,896,505

$ 51,564,239



12,495

132,335

116,982



12,134

130,701

119,823



13,099

129,075

119,168



Square Feet per Store

Carrefour

Target

Walmart



451

283

440



E

$

$



452

296

436



E

$

$



468

301

433



Fixed Assets per Square Foot

Carrefour

Target

Walmart



E

$

$



77

116

104



E

$

$



81

116

112



E

$

$



84

112

110



Sales per Employee

Carrefour

Target

Walmart



E

$

$



175,589

179,157

193,146



E

$

$



167,636

167,954

180,227



E

$

$



168,503

164,426

183,352



Exchange Rate

U.S. dollars per euro (E)



$



1.4097



$



1.4728



$



1.3200



Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has

deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.



Profitability and Risk Analysis of Walmart Stores



333



statements include the present value of commitments under all leases in property, plant, and

equipment and in long-term debt.



REQUIRED

a. Walmart and Target follow somewhat different strategies. Walmart consistently has a

higher ROA compared to Target. Using information in Exhibits 4.53 and 4.56, suggest

reasons for these differences in operating profitability.

b. Walmart and Carrefour follow similar strategies. Walmart consistently outperforms Carrefour on ROA. Using information in Exhibits 4.53 and 4.56, suggest reasons for these differences in operating profitability.

c. Refer to Exhibit 4.54. Which firm appears to have used financial leverage most effectively

in enhancing the rate of ROCE? Explain your reasoning.

Note: Requirements d and e require coverage of material from Chapter 5.

d. Refer to Exhibit 4.55. Rank-order these firms in terms of their short-term liquidity risk. Do

any of these firms appear unduly risky as of the end of fiscal 2008? Explain.

e. Refer to Exhibit 4.55. Rank-order these firms in terms of their long-term liquidity risk. Do

any of these firms appear unduly risky as of the end of fiscal Year 4? Explain.



Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has

deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.



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