Description of Wal-Mart Leverage Ratios

Description of Wal-Mart Leverage Ratios

Name

FIN/324

November 16, 2011

Instructor

Wal-Marts Leverage Ratios

A company's leverage relates to how much debt it has on its balance sheet, and it is another measure of financial health. Generally the more debt a company has, the riskier its stock is, because debt holders have first claim to a company's assets. Ratios calculate the financial leverage of a company and to obtain an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several ratios, but the main factors looked at include debt, equity, assets, and times interest earned. Current ratios are an indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is.

Debt/equity ratio is a measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholder equity. The data from the prior fiscal year is typically used in the calculation. For example, Wal-Mart's 2010 annual balance sheet reports long-term debt of $88,774 million and shareholders' equity of $ 72,648 million, the debt/equity ratio would be 88,774,000 divided by 72,648,000 = 1.22. If the ratio is greater than 1, the majority of assets are financed through debt.

If the ratio is smaller than 1, assets are primarily financed through equity. Companies with high debt/asset ratios are said to be "highly leveraged" may be at risk of bankruptcy and could be in danger if creditors start to demand repayment debt. Assuming everything else is identical, companies with lower debt/equity ratios are less risky than those with higher such ratios. Figure 1, shows an example of Wal-Mart's current Debt/to Equity ratios for years 2010, and 2011.

Figure 1 Debt to Equity as of January 31

2011 2010

Total liabilities plus long-term debt

(amount in millions) $109,416 $97,759

Current Equity

(amount in millions) $71,247 $72,648

Debt/Equity ratio 1.53 1.34

Formula = Debt divided by equity equals to ratio

The table above shows that Wal-Mart has a debt to equity ratio above 1, which means assets, is mainly financed with debt and less than one means equity provides a majority of the financing. If the ratio is high the company is in a risky position, especially if interest rates are on the rise. Figure 2 shows an example of Wal-Mart's current Debt to Asset ratio for years 2010 and 2011

Figure 2 Debt to Asset as of January 31