Liquidity: The first classification of financial ratios focuses on a company’s ability to meet short-term obligations. The two ratios used for this classification are the current ratio and the quick ratio. The current ratio measures a company’s ability to pay off its short-term liabilities with its current assets. The quick ratio is similar to the current ratio, but it excludes inventory from current assets, as it is considered less liquid. A higher current ratio and quick ratio indicate better liquidity.
Activity: The second classification of financial ratios focuses on a company’s efficiency in managing its assets and liabilities. The two ratios used for this classification are the inventory turnover ratio and the fixed asset turnover ratio. The inventory turnover ratio measures how quickly a company is able to sell its inventory. The fixed asset turnover ratio measures how efficiently a company is using its fixed assets to generate sales. Higher ratios in these areas indicate better management of assets and liabilities.
Financing: The third classification of financial ratios focuses on a company’s debt and equity structure. The two ratios used for this classification are the debt-to-equity ratio and the times interest earned ratio. The debt-to-equity ratio measures the proportion of debt financing to equity financing. The times interest earned ratio measures a company’s ability to pay its interest expenses with its earnings. Lower ratios in these areas indicate a stronger financial position.
Profitability: The fourth classification of financial ratios focuses on a company’s profitability. The two ratios used for this classification are the gross profit margin and the return on equity. The gross profit margin measures a company’s profitability before accounting for overhead expenses. The return on equity measures a company’s profitability in relation to the amount of money invested by shareholders. Higher ratios in these areas indicate better profitability.
Market: The fifth classification of financial ratios focuses on a company’s performance in the market. The two ratios used for this classification are the price-to-earnings ratio and the market-to-book ratio. The price-to-earnings ratio measures the market’s expectation of a company’s future performance. The market-to-book ratio measures a company’s market value in relation to its book value. Higher ratios in these areas indicate better market performance.
By analyzing these financial ratios, we can gain insight into Walmart’s financial performance in terms of liquidity, asset management, debt and equity structure, profitability, and market performance. From this analysis, we can make informed decisions about the company’s financial health and potential for growth.