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Basically, you can think of a rise in stock prices as a result of earnings growth. However, there are companies famous in the US stock market that are rising in stock prices even without a long-term increase in net profit. Isn't it very strange to some people?
Walmart is one such company. Walmart's net profit barely increased between fiscal 2006 and fiscal 2023; rather, it has declined in recent years. However, during this period, Walmart's stock price has tripled, surpassed the S&P 500's performance by 2.5 times, and has formed a very stable long-term upward trend.
Is there a possibility that Walmart's stock price will rise even if the details of the net profit announcement do not greatly exceed expectations or fall below expectations? The answer is hidden in financial report data. What are the key points to look out for in Walmart's earnings report? What factors influence the long-term trend of Walmart's stock prices? Or what are the factors that affect short-term stock prices?
What you should pay attention to when looking at Walmart's financial results is ROE (return on equity)!
Walmart's average ROE over a long period of time from 2006 to 2023 was approximately 19%. Meanwhile, the overall ROE level of S&P 500 constituent stocks over the same period was less than 15%. In other words,Walmart had a relative advantage in its high ROEI can say that. Therefore, despite having poor net profit growth potential, Walmart has been able to surpass the S&P 500 in terms of stock price performance.
How can we figure out Walmart's ROE future prospects?Dupont analysisIt can be interpreted through
The main factors affecting ROE are:Net profit ratio, total asset turnover ratio, financial leverage (equity multiplier)There are three of them. ROE = Net Profit Ratio x Total Asset Turnover x Financial Leverage
1. Net profit margin
Net profit is the profit that remains at the end after deducting all expenses from the money earned by a company. Thus, the net profit margin represents the ultimate profitability of a company.A positive net profit margin is a prerequisite for discussing ROE.
In the chain retail industry, net profit margins are generally low, and industry leader Walmart is no exception. Over the past 10 years or so, Walmart's net profit margin has remained below 4%. There was an overall downward trend, falling from 3.56% in fiscal 2006 to less than 2% in fiscal 2023. This is also the main reason why Walmart's net profit hasn't increased much, despite sales doubling over the same period. (Operating costs weigh on profits)
Let's take a closer look at why Walmart's net profit margin is declining. If you look at past financial results data, Walmart'sgross profit marginhas fluctuated around 24%,The ratio of operating expenses to sales increased steadilyIt has reached 20.8% in fiscal 2023, and has risen by about 3% from fiscal 2006. Walmart'sNet profit marginSince the base of is already very low,Even a small increase in operating expenses has a big impact on net profit marginsI can think of that.
The good news is that judging from the situation since fiscal 2017, Walmart's operating cost to sales ratio has basically stabilized. In the latest financial results report, it is necessary to continue to observe whether the operating expenses to sales ratio remains stable and its impact on net profit margins.
2. Total asset turnover
Total asset turnoveris the ratio of total revenue for one fiscal year divided by average total assets, and represents the ability of a company to operate. In the case of Walmart, it is not a business model where profits increase even if sales increase. Furthermore, maintaining a high ROE with a background of extremely low net profit margins will clearly put a lot of pressure on management teams to show strong operational capabilities.
Among all companies listed on the US stock market, the average total asset turnover ratio is less than 0.7 times. However, in the chain retail industry, this indicator is generally higher. According to Moomoo's financial data, Walmart's total asset turnover ratio remains around 2.4 times, which is only the average level of the chain retail industry, and far less than 3.7 times that of Costco.
Another indicator that measures operational capacityInventory turnover ratioThat's it. Unlike the relatively stable total asset turnover ratio, Walmart's inventory turnover rate fluctuates more widely.
Inventory turnover ratio is a very important indicator for measuring the efficiency of inventory sales. A significant drop in this indicator could indicate that a company is facing sales pressure, which may have a short-term impact on stock prices. At the same time,Since inventory is part of total assets, a decrease in inventory turnover may also lead to a decrease in total asset turnoverThere is.
Taking Walmart's 2022 Q1 as an example, the inventory turnover ratio was about 8 times, a sharp drop of 16.5% compared to the same period last year, which also caused a decline in total asset turnover. As a result, the market was concerned about sales prospects, and after financial results were announced, stock prices fell almost 20% in 3 days.
3. Financial leverage (equity multiplier)
Among the three factors affecting ROE, Walmart's net profit margin is on a downward trend, which is thought to be a drag on ROE. Meanwhile, the total asset turnover ratio is relatively stable and is a neutral factor. Therefore,Walmart's recourse to maintaining a high ROE is financial leverageSo that's actually the case.
In the period from 2006 to 2023, Walmart's financial leverage increased from 2.52 times to 3.05 times, and despite the decline in net profit margins, it was still able to maintain a good ROE level.
How did Walmart increase its financial leverage? As you can see from average total assets ÷ average net assets, which is the formula for financial leverage,Reducing net worth is one of the key measures.
The main methods Walmart has taken to reduce its net worth are share buybacks and dividend payments. This is a method often used not only by Walmart, but also by mature American companies.Through share buybacks and dividend payments, companies can not only increase ROE, but also return back to shareholders, improve earnings per share, and bring liquidity to the market. Indeed, it can be said that this is a win-win situation between companies and shareholders.
In the period from 2006 to 2023, Walmart's cumulative net profit was $243.07 billion, and cumulative share repurchases and dividend payments were $209.52 billion, accounting for 86% of the cumulative profit for this period.
What should be noted here is that the ratio of Walmart stock buybacks to dividend payments and the level of average ROEThere have been major changes since 2015That's the point. In the period from fiscal 2006 to fiscal 2015, the average net profit ratio between share buybacks and dividend payments was 0.71, and the average ROE was 21.4%. Meanwhile, in the period from fiscal 2016 to fiscal 2023, the average ratio between stock buybacks and dividend payments rose to 1.15, and the average ROE fell to 15.7%.
In other words, Walmart tried to maintain a high ROE by increasing share buybacks and dividend payments, but due to the rapid decline in net profit margins, a decline in ROE levels could not be avoided.
Stock buybacks and dividend payments may be maintained at levels above net profit in the short term, but they cannot be sustained over the long term. Therefore, ifIf Walmart's net profit margin continues to decline in the future, the level of ROE is likely to continue to declineThere is a possibility that it will create long-term pressure on stock prices.
In fact, during the period from fiscal 2006 to fiscal 2015, when Walmart maintained a high ROE level, stock prices doubled, and it can be said that success was achieved when it came to showing outperformance that was 69% higher than the S&P 500. However, during the period from fiscal 2016 to fiscal 2023, when the ROE level declined, Walmart's stock price remained at almost the same level as the S&P 500.
Walmart has maintained a high level of ROE despite net profit growth, which has been slowing. As a result, we were able to maintain good stock price performance.
There are three factors that affect ROE: net profit margin, total asset turnover ratio, and financial leverage.
Walmart's continued decline in net profit margins due to rising operating expenses is a factor that is dragging down the company's ROE performance.
Changes in Walmart's inventory turnover ratio may have an impact on short-term stock prices, and may also affect total asset turnover. However, Walmart's total asset turnover ratio has shown relatively stable performance in the past.
Walmart's high share buybacks and dividend payments are driving the company's increase in financial leverage, but there is a possibility it will not be able to offset the negative impact of lower net profit margins on ROE. Did you know that what is important when looking at Walmart's financial results is ROE? Charlie Munger once said that in the long run, there will be stock returns consistent with a company's ROE. I'm looking forward to matching the answers after the accounts are settled! If you have any opinions or analyses, please share them with the community.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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