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I need a comparison of the balance sheets of Amazon (AMZN) and Wal-Mart Stores (WMT) using the most recent annual data. Compare their ratios of real to total assets. For comparison purposes, consider cash and cash equivalents, short-term investments, net receivables, and long-term investments as financial assets. Treat the other assets as real assets. Interpret the results. Do the ratios make sense? If there was a general market downturn, which stock might be affected most based on the balance sheet and why? How does inventory hurt or help either?
Relevant financial data from the balance sheets for Amazon and Walmart in 2016 have been compiled for easy comparison in the attached spreadsheet. Amazon's revenue in 2016 was $135.99 billion, while Walmart's revenue was $482.13 billion. We calculated five ratios, which provide a more nuanced understanding of the overall financial health of a company, including the real to total assets ratio, current ratio, debt ratio, debt-to-equity ratio, and inventory turnover ratio. The inventory turnover ratio did not provide a meaningful analysis of financial health in the case of Walmart and Amazon in 2016. However, Walmart's debt ratio and debt-to-equity ratio suggest the company devotes a small portion of its assets to servicing debt than Amazon, whereas Amazon has aggressively financed the company's growth with potentially high-risk debt. Walmart's higher real to total assets ratio indicates the company's overall financial health is greater than Amazon's in this respect, while Amazon's minimally higher current ratio indicates Amazon is slightly better prepared to meet short-term debt obligations than Walmart. Based on these findings, we predict that Walmart would be better prepared to weather a general market downturn than Amazon.
OVERVIEW OF FINDINGS
In order to assess the overall strength of each company's balance sheet, we identified three key indicators of financial performance for Amazon and Walmart, based on findings obtained from each company's 2016 annual financial report, which is the most current data available. These figures are identified in the attached spreadsheet, and include total assets, defined as cash and cash equivalents, marketable securities, inventories, accounts receivable (net, prepaid expenses and other), property and equipment (net), goodwill, and "other assets." We also identified total liabilities and stockholders' equity, which we defined as current liabilities, long-term debt and long-term liabilities, and total stockholders' equity.
Utilizing this information, we calculated total revenue for each company in 2016, in billions of United States dollars. Finally, utilizing the above figures, we calculated five ratios, which provide a more nuanced understanding of the overall financial health of a company. These indicators include the real to total assets ratio, current ratio, debt ratio, debt-to-equity ratio, and inventory turnover ratio. Each of these indicators of financial performance are discussed and compared in a separate section below, and we have also explained our finding of which company is predicted to more successfully weather a general market downturn.
REVENUE
Our findings revealed that Amazon's revenue in 2016 was $135.99 billion, while Walmart's revenue was $482.13 billion. Utilizing only revenue as an indicator of financial health, Walmart outperformed Amazon in 2016.
Real to Total Assets Ratio
At your request, in calculating financial assets for each company, we considered cash and cash equivalents, short-term investments, net receivables, and long-term investments as financial assets. All other assets were classified as real assets. Utilizing the data obtained from Amazon's and Walmart's 2016 annual financial statements, which we have compiled into the attached spreadsheet, we calculated the real to total assets ratio for each company. Our findings revealed that Amazon has a real to total assets ratio of 0.59, while Walmart has a real to total assets ratio of 0.92. A company in full production is expected to have a higher real to total assets ratio, suggesting Walmart's overall financial health is greater than Amazon's in this respect. However, while real assets are considered more stable than financial assets, and they are less susceptible to inflation and changes in currency values, there are drawbacks to having a higher ratio of real to financial assets. Real assets are less liquid, making them more difficult and time-consuming to sell (when needed), and they produce higher transaction fees when sold and generally incur higher storage costs.
Current Ratio
The current ratio, which is defined as current assets divided by current liabilities, predicts a company's ability to pay short-term debt obligations using short-term assets, generally over a period of 12 months. In general, a higher current ratio reflects more liquidity and thus increased ability to meet short-term liabilities, while a lower current ratio may suggest the company would struggle to pay short-term debts. According to our findings, a current ratio of two is considered "a comfortable financial position for most enterprises," but a current ratio greater than one for retail companies suggests "a company can cover its short-term debt with its most liquid assets." In comparing Amazon's current ratio of 1.04 with Walmart's current ratio of 0.93, we would conclude that Amazon is slightly better prepared to meet short-term debt obligations than Walmart.
Debt Ratios
The debt ratio is defined as total long-term and short-term debt divided by total assets, and it is a reflection of the company's assets compared to liabilities. An alternative method of interpreting the debt ratio is "the proportion of a company’s assets that are financed by debt." A debt ratio less than one indicates the company has more assets than liabilities, but a lower debt ratio is preferred. Our findings revealed that Amazon has a debt ratio of 0.77, while Walmart has a debt ratio of 0.58. Thus, Walmart devotes a smaller portion of its assets to servicing debt than Amazon, which suggests the company has not over-leveraged itself.
The debt-to-equity ratio measures "how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity." In other words, the debt-to-equity ratio reflects the company's debt relative to the total value of its stock. The average debt-to-equity ratio in the retail sector is 1.30. In comparing Amazon's debt-to-equity ratio of 3.39 to Walmart's debt-to-equity ratio of 1.39, we can conclude that Walmart's debt relative to the value of company stock is roughly average in this industry. On the other hand, Amazon has aggressively financed the company's growth with debt, and "these leveraging practices are often associated with high levels of risk."
Inventory Turnover
Inventory turnover is defined as "a measurement of the efficiency of inventory management," and it is useful to consider as an indicator of financial health for retail companies because maintaining inventory on hand requires investments in security and protection. A company that maintains older inventory runs the risk of inventory becoming obsolete, so it is generally agreed that a "higher inventory turnover is favorable for management as well as investors." In contrast, low inventory turnover rates may suggest the company "is inefficiently holding too much inventory" or failing to generate sales. Unfortunately, it is generally agreed that inventory turnover ratios may not be the best predictor of overall financial health in the retail sector, and comparisons should only be made between companies selling similar products. Amazon's inventory turnover ratio was determined to be 11.87, while Walmart's inventory turnover ratio is 10.84. As their inventory turnover ratios are so similar, it is not clear that either company's financial health is greater based on this factor alone.
SUMMARY ANALYSIS OF FINANCIAL HEALTH
Our research suggests there are four key factors that can assist in predicting each company's ability to survive an economic downturn. First, Walmart's revenues were higher than Amazon's in 2016. Second, Walmart's higher real to total assets ratio suggests the company is more stable than Amazon, although there are some drawbacks of maintaining a high ratio of real assets. Second, in considering the company's ability to meet its short-term debt obligations with short-term assets, we observe that Amazon has a slightly higher current ratio and is minimally better prepared in this aspect. Third, in examining the debt ratio of each company, we can conclude that Walmart has fewer outstanding debt obligations, and in addition, Amazon's substantially higher debt-to-equity ratio may put the company at risk of being unable to borrow money, due to having possibly over-leveraged itself with high-risk debt. Finally, inventory turnover rates were too similar for Walmart and Amazon in 2016, so we concluded that inventory turnover ratios do not significant impact the determination of overall financial health in this case. Based on the above factors, we would predict that Walmart is better prepared than Amazon to survive a general economic downturn.
In conclusion, based on Walmart's higher revenue in 2016, a higher ratio of real to total assets, and stronger indicators of healthy debt management than Amazon, we would speculate that Walmart's stock is less likely to be impacted by a serious economic downturn than Amazon. Our findings suggested that inventory turnover ratios are too similar for each company to substantially contribute to the determination of overall financial health. We have attached detailed financial findings in the attached spreadsheet, for comparison.