Debt ratios assist investors in determining a company’s capacity to pay principal and interest on existing debt. They indicate how a corporation funds asset acquisitions and its capacity to weather economic upheaval. Debt ratios can show if a corporation is utilizing debt responsibly to build its business or whether it is depending on debt excessively to fulfill essential responsibilities. The latter might indicate that trouble is on the way in the near future.
Certain debt ratios should be compared to benchmarks, but others are more subjective and should be compared to industry peers and the overall market. The debt-to-equity ratio, interest coverage ratio, and cash flow-to-debt ratio are the most dependable debt ratios to examine for a large-cap retailer like Walmart (WMT).
- Debt ratios are used by investors to assess how a firm funds asset acquisitions and its capacity to repay existing debt.
- The debt-to-equity ratio, interest coverage ratio, and cash flow-to-debt ratio are three debt ratios widely used to analyze a corporation.
- A high debt-to-equity ratio shows that a corporation uses debt rather than equity to fund asset acquisitions.
- Walmart’s debt-to-equity ratio was 1.89 as of July 31, 2022, indicating that the corporation was financing asset acquisitions with more debt than equity.
The debt-to-equity (D/E) ratio compares the proportion of a company’s assets funded by debt to equity, which is computed by dividing total liabilities by total shareholders’ equity. A high D/E ratio indicates that a corporation is highly indebted and heavily dependent on debt to fund asset acquisitions. While utilizing leverage is not necessarily harmful, applying too much leverage may put a firm in jeopardy.
Walmart’s D/E ratio was 1.89 in the third quarter of 2022, as of July 31, 2022. This is a good number that has stayed quite stable over the last decade. It shows that the firm is utilizing more debt than equity to fund asset acquisitions, but its debt management methods have not changed in many years, and the company has refrained from using excess debt even during a time of economic uncertainty.
For the fiscal quarter ending July 31, 2022, Walmart had a lower D/E ratio than its primary rival, Target, which was 3.95.
Interest Coverage Ratio
The interest coverage ratio calculates how many times a company’s current profits can cover the interest on its outstanding debt. It is determined by dividing earnings before interest and taxes (EBIT) by interest expenditure.
A high ratio indicates that a corporation is unlikely to fail on its debt commitments in the foreseeable future. The very lowest acceptable interest coverage ratio, according to most experts, is 1.5, however value investors prefer firms with a substantially higher figure.
For the fiscal second quarter of 2022, Walmart’s interest coverage ratio was 11.95. Target has an interest coverage ratio of 5.54.
Walmart’s interest coverage ratio was 7.8 in the first quarter of 2022. Target’s for the same time period was 11.15. Overall, Walmart has greater EBIT to cover interest expenditures for the fiscal year.
Cash Flow-to-Debt Ratio
The cash flow-to-debt ratio, measured as cash flow from operations divided by total debt, determines how much of a company’s total debt can be paid using current cash flow. Because it includes only profits that have really manifested in cash, this is an appropriate indicator to analyze with the interest coverage ratio.
This metric works best when derived with full-year data. Thus, Walmart’s cash flow-to-debt ratio in fiscal year 2021 (ending January 31, 2021) was 0.69, indicating that its yearly current cash flow from operations could cover 69% of its debt. This tendency should be closely monitored in the future as a measure of the company’s commitment to careful debt management. For fiscal year 2020, Target had a cash flow-to-debt ratio of 0.64. (ended Jan. 29, 2021).
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