WalMart

1
WalMart

• WalMart had a Market to Book ratio of 7.6
• Market Capitalization (price x of shares) is
  7.6 times its book value (assets-liabilities).
• Why?
• The Gap had a Market to Book ratio of 4.0 in
  February 2001 down from 9.5 in February 2000!
• Why?
• WalMart had Net Income of 6,671 before
  extraordinary items in FY2002 (1/31/02).
• It used 8,383 to purchase new plant and
  equipment.
• It also had a net outflow of investing activity
  and a net outflow from financing activity

2
Review Financial Reporting

• How are finance and accounting different?
• Book Value does not equal Market Value
• Net Income does not equal Cash Flow

3
The WalMart Income Statement

• Total Revenues
• Less
• Costs of sales
• Operating, selling, general and admin costs
• Interest costs ___________
• Earnings before tax and minority interest
• Provision for income taxes
• Minority interest ___________
• Net income

4
WalMart Cash Flow

• In 2002, WalMart had Net Income before
  extraordinary items of 6,671.
• The Statement of Cash flows shows the firm had a
  net cash inflow of 107 for the year.
• Why is cash flow so different from net income?

5
Review Financial Reporting

• What is the difference in the income and cash
  flow?
• Net income must be increased by all non-cash
  items, such as depreciation and amortization, as
  well as changes to deferred taxes
• The increase or decrease in operating assets will
  either increase or decrease net income to arrive
  at the net change in cash. Think of the effect on
  cash as the other side of a T-account entry
• Increases in assets reduce cash
• Decreases in assets increase cash
• Increases in liabilities increase cash
• Decreases in liabilities decrease cash
• Net Investing activities will typically decrease
  cash

6
Free Cash Flow

• Free cash flow (FCF) is cash from business
  activities.
• It tells your cash over and above your normal
  investments.
• It does not consider cash distributed, used to
  retire debt or received from borrowings or
  security issuances.
• Rather, it is used to determine how much you have
  to distribute and repay debt or how much you
  need from financing.
• Recall investment and financing decisions are
  separate
• FCF operating cash flow in excess of
  investments needed for business activity.
• Free Cash Flow
• Cash flow from operations
• Cash used for investments in PPE and other
  operating
• investments

7
Free Cash Flow

• What is cash flow from operations?
• Cash flow related to the investment side (ongoing
  business activity) rather than financing side of
  the business.
• Does income operating cash flow?
• NO!
• Non-cash expenses and revenues
• Non-operating expenses and income (ex. Interest)

8
Free Cash Flow

• Income does NOT operating cash flow?
• The typical Cash Flow has the following
  adjustments to Net Income
• Non-cash expenses Depreciation, amortization
• Income not yet collected Accounts Receivables
• Operating Items paid for but not expensed
  Inventory
• Expenses not yet paid Accounts and Taxes Payable
• Non-operating income / expenses Interest (after
  tax)
• Cash from operations
• This is not an exhaustive list, but used only to
  provide examples!
• Note Increases in assets are cash outflows and
  increases in liabilities are cash inflows

9
Free Cash Flow

• Methods of calculating focus on indirect
  (Exhibit 2.3)
• Direct and Indirect get to same free cash flow
• Direct restates Income Statement
• Indirect starts with Net Income and adjusts for
  non-cash items
• How does free cash flow differ from the firms
  statement of cash flow?
• A Statement of Cash Flow is like a bank
  reconciliation. It shows where the funds came
  from and went. It ties last years and this
  years cash balance.
• Free Cash Flow tells you what cash is available
  from your business activities.

10
WalMart Free Cash Flow 2002(Do in Class)
11
Review Financial Reporting

• Is one cash flow more important than the other in
  determining the value of the business?
• No, both are vital to business operations
• Accounting provides most of the information we
  have about a firm
• Do you really need to know how to be an
  accountant to be a good financial analyst?
• Definitely!

12
Key Points

• Financial Analysis relies on Accounting
  information
• Accounting information must be adjusted to use in
  financial analysis
• Accountants record the value of the firm.
  However, often the market value is not clear so
  the accountants so rely on historical cost
  accounting.
• Accountants use accrual accounting In finance,
  we are concerned with cash flow.
• Specifically, we want to value the free cash flow
  of the company, i.e. the cash flow related to
  operations.