Introduction: What is Financial Statement Analysis?

Financial statement analysis is a process that examines past and current financial data for the purpose of evaluating performance and estimating future risk and potentials. Financial statement analysis is used by investors, creditor, security analysts, bank lending officers, managers, governmental agencies, suppliers, and many other parties who rely on financial data for making economic decisions about a company. Analysis of financial statements focuses primarily on data provided in external reports plus supplementary information provided by management. The analysis should identify major changes or turning points in trends, amounts, and relationships financial statements are merely summaries of detailed financial information. Many different groups are interested in getting inside financial statements, especially investors and creditors. Their objectives are sometimes different but often related. However, the basic tools and techniques of financial statement analysis can be applied effectively by all of the interested groups. Financial statement analysis can assist investors in finding the type of information they require for making decisions to their interests in a particular company. Financial statement analysis is an evaluative method of determining the past, current and projected performance of a company. Several techniques are commonly used as part of financial statement analysis including horizontal analysis, which compares two or more years of financial data in both dollar and percentage form; vertical analysis, where each category of accounts on the balance sheet is shown as a percentage of the total account; and ratio analysis, which calculates statistical relationships between data.

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Financial reports are the primary means by which managers communicate company results to investors, creditors and analysts. These parties use the reports to judge company performance, to assess creditworthiness, to predict future financial performance, and to analyze possible acquisitions and take-over. Users of financial statements must be able to meaningfully interpret financial reports, construct measures of financial performance and analyze the reporting choices made by companies. Also, since company managers choose accounting techniques when making their reports, users must learn to undo the effects of these accounting choices. It is the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. Financial statement analysis is a study of accounting ratios between various items in financial statements. Ratios are classified as profitability ratios, liquidity ratios, asset utilization ratios, leverage ratios and valuation ratios based on the indications they provide. Balance sheet, Income Statement and Cash Flow Statements are the most important financial statements and if properly analyzed and interpreted can provide valuable insights into a companys business.

Income Statement a financial statement that shows the revenues, expenses and net income of a firm over a period of time

Balance Sheet a financial statement that shows the value of the firms assets and liabilities at a particular time

Statement of Cash Flows a financial statement that tracks cash coming into and flowing out of a firm over a period of time

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A comprehensive financial statement analysis can highlight some of the more important issues and questions a savvy investor will usually ask such as

Does the company have enough liquidity to overcome any short-term market fluctuations?

How was the performance relative to the industry it belongs to? How risky is it to invest in this company? How does the company handle its working capital? How did the company perform over the last couple of years and what were the returns it generated for the previous stakeholders?

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Objective of Financial Statement Analysis: All financial statements are essentially historically historical documents. They tell what has happened during a particular period of time. However most users of financial statements are concerned about what will happen in the future. Stockholders are concerned with future earnings and dividends. Creditors are concerned with the company's future ability to repay its debts. Managers are concerned with the company's ability to finance future expansion. Despite the fact that financial statements are historical documents, they can still provide valuable information bearing on all of these concerns. Financial statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios. Managers are also widely concerned with the financial ratios. First the ratios provide indicators of how well the company and its business units are performing. Some of these ratios would ordinarily be used in a balanced scorecard approach. The specific ratios selected depend on the company's strategy. For example a company that wants to emphasize responsiveness to customers may closely monitor the inventory turnover ratio. Since managers must report to shareholders and may wish to raise funds from external sources, managers must pay attention to the financial ratios used by external inventories to evaluate the company's investment potential and creditworthiness. Although financial statement analysis is a highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios. Comparison of one company with another can provide valuable clues about the financial health of an organization. Unfortunately, differences in accounting methods between companies sometime make it difficult to compare the companies' financial

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data. For example if one company values its inventories by the LIFO method and another firm by average cost method, then direct comparisons of financial data such as inventory valuations are and cost of goods sold between the two firms may be misleading. Sometimes enough data are presented in foot notes to the financial statements to restate data to a comparable basis. Otherwise, the analyst should keep in mind the lack of comparability of the data before drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios with other companies and with industry averages often suggest avenues for further investigation. An inexperienced analyst may assume that ratios are sufficient in themselves as a basis for judgment about the future. Nothing could be further from the truth. Conclusions based on ratio analysis must be regarded as tentative. Ratios should not be viewed as an end, but rather they should be viewed as a starting point, as indicators of what to pursue in greater depth. They raise may questions, but they rarely answer any question by themselves. In addition to ratios, other sources of data should be analyzed in order to make judgments about the future of an organization. They analyst should look, for example, at industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself. A recent change in a key management position, for example, might provide a basis for optimism about the future, even though the past performance of the firm may have been mediocre. Few figures appearing on financial statements have much significance standing by themselves. It is the relationship of one figure to another and the amount and direction of change over time that are important in financial statement analysis. How does the analyst key in on significant relationship? How does the analyst dig out the important trends and changes in a company? Three analytical techniques are widely used; dollar and percentage changes on statements, common-size statements, and financial ratios formula.

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Overview of the Company: Wal-Mart Stores, Inc. (Wal-Mart, the Company, they or it) operates retail stores in various formats around the world and is committed to saving people money so they can live better. It earns the trust of customers every day by providing a broad assortment of quality merchandise and services at everyday low prices (EDLP), while fostering a culture that rewards and embraces mutual respect, integrity and diversity. EDLP is Companys pricing philosophy under which they price items at a low price every day so the customers trust that their prices will not change under frequent promotional activity. Our focus for Sams Club is to provide exceptional value on brand name and private label merchandise at members only prices for both business and personal use. Internationally, they operate with similar philosophies. Their fiscal year ends on January 31 for U.S. and Canada operations and on December 31 for all other operations. They discuss how the results of their various operations are consolidated for financial reporting purposes in Note 1 in the Notes to Consolidated Financial Statements. They intend for this discussion to provide the reader with information that will assist in understanding the financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect their financial statements. They also discuss certain performance metrics that management uses to assess their performance. The discussion also provides information about the financial results of the various segments of their business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole. This discussion should be read in conjunction with our Consolidated Financial Statements as of January 31, 2011, and the fiscal year then ended and accompanying notes. Currently, our operations consist of three reportable business segments: (1) the Wal-Mart U.S. segment; (2) the Wal-Mart International segment; and (3) the Sams Club segment. The Wal-Mart U.S.

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segment includes the Companys mass merchant concept in the United States and Puerto Rico, operating under the Wal-Mart or Wal-Mart brand, as well as walmart.com. The Wal-Mart International segment consists of the Companys operations outside of the United States and Puerto Rico. The Sams Club segment includes the warehouse membership clubs in the United States and Puerto Rico, as well as samsclub.com. Throughout this Managements Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income and comparable store and club sales. The Company measures the results of its segments using, among other measures, each segments operating income, including certain corporate overhead allocations. From time to time, we revise the measurement of each segments operating income, including any corporate overhead allocations, as dictated by the information regularly reviewed by our chief operating decision maker. When we do so, the prior period amounts for segment operating income are reclassified to conform to the current periods presentation.

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The significant Recent Events: 1. Wal-Mart Closes Investment in 51% Stake in Massmart Company looks forward to lowering prices, creating jobs and working with stakeholders BENTONVILLE, Ark., June 20, 2011 /PRNewswire via COMTEX/ -- Wal-Mart Stores, Inc. (NYSE:WMT) announced today that the company has completed its investment for a 51% stake in South African-based Massmart Holdings Limited (JSE:MSM) for ZAR148.00 per Massmart ordinary share. 2. 2. Wal-Mart Board Approves New $15 Billion Share Repurchase Program BENTONVILLE, Ark.--(BUSINESS WIRE)-- Wal-Mart Stores, Inc. (NYSE:WMT - News) announced at its 41st Annual Meeting of Shareholders today that its Board of Directors approved a new program authorizing the company to repurchase $15 billion of its shares. This program replaces the previous $15 billion program, announced on June 4, 2010, that had approximately $2 billion of remaining authorization. Under the program, repurchased shares are constructively retired and returned to unissued status. 3. The South African Competition Tribunal approves merger and accepts conditions proposed by Wal-Mart and Massmart The Competition Tribunal today announced that the Wal-Mart and Massmart merger can proceed to finality and has accepted the conditions proposed by Wal-Mart and Massmart, which include the set-up of a R100 million supplier development fund, no merger-related retrenchments for a period of two years as well as continued recognition of SACCAWU for three years post the merger. The Competition Tribunal further acknowledged the undertaking made by the merging parties that preference would be given to re-employing the 503 workers that were retrenched in 2010 prior to the proposed merger being announced.

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Auditors Report: [Wal-Mart have retained Ernst & Young LLP, an independent registered public accounting firm, to audit their Consolidated Financial Statements found in this Annual Report to the Shareholders. The Auditors Report is mentioned below:]

We have audited the accompanying consolidated balance sheets of Wal-Mart Stores, Inc. as of January 31, 2011 and 2010, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended January 31, 2011. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant Estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wal-Mart Stores, Inc. at January 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three

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years in the period ended January 31, 2011, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective May 1, 2010, the Company has elected to change its method of accounting for inventory under the retail inventory method.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Wal-Mart Stores, Inc.s internal control over financial reporting as of January 31, 2011, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way Commission and our report dated March 30, 2011 expressed an unqualified opinion thereon.

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References:
1. 2. 3. 4.

http://www.financialstatementanalysis.org http://EzineArticles.com/1893455 http://investors.walmartstores.com Wal-Mart 2011 Annual Report.

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