Wal-Mart Stock: Capital Structure Analysis (WMT)

Wal-Mart Stores Inc. (NYSE: WMT) is a large discount variety store chain with multinational operations. The company's capital structure includes some debt, but it is much more heavily skewed toward equity capital, and Wal-Mart is reducing its debt load. Competitors such as Target Corp. (NYSE: TGT) and Dollar Tree Inc. (NASDAQ: DLTR) had significantly more financial leverage in their capital structures as of January 2016. Wal-Mart's enterprise value has been volatile, with investor sentiment causing fluctuations in its stock price and debt reduction exerting downward pressure.

Equity refers to the financing available to a company that is generated through the issuance of stock and the accumulated net earnings to which shareholders have claim. In the shareholder equity section of the balance sheet, entries such as common stock, treasury stock, and retained earnings are common entries. As of January 2016, Wal-Mart's total shareholder equity was $83.6 billion. This includes $317 million of common stock at par value, capital in excess of par value of $1.8 billion, retained earnings of $90 billion, accumulated other comprehensive loss of $11.6 billion and nonredeemable non-controlling interest of $3.1 billion.

Wal-Mart's January 2016 equity capital of $83.6 billion marks a reduction from $85.9 billion in January 2015, though it is higher than the 2014 balance of $81.3 billion. Accumulated other comprehensive loss played a role in the reduction, rising from $3 billion in 2014 to $7.2 billion in 2015 and $11.6 billion in 2016, due primarily to currency translation. Retained earnings increased from $76.6 billion in 2014 to $85.8 billion in 2015 and $90 billion in 2016, though a $4.1 billion share repurchase during the fiscal year that ended in January 2016 helped push shareholder equity value lower in the year.

Debt refers to financing from instruments such as bonds, notes and bank loans that do not give financers a claim to company profits, compensating them with interest instead. As of January 2016, Wal-Mart had long-term debt of $38.2 billion. The firm's short-term debt consists of current maturities of long-term debts of $2.7 billion and $2.7 billion of short-term borrowings, resulting in a total debt of $43.6 billion. The company's long-term debt consists of unsecured notes denominated in U.S. dollars, euros, British pounds, and Japanese yen. The notes bear average interest rates ranging from 1.6 to 5.3%, and maturities from 2017 to 2039.

Wal-Mart's total debt was $47.3 billion as of January 2015 and $53.6 billion in 2014, so the three-year trend leading to 2016 was clearly toward lower debt load. Proceeds from the issuance of long-term debt declined from $7.1 billion in the fiscal year that ended in January 2014 to $5.2 billion in 2015 and $39 million in 2016, meaning the company has not been taking out new debt as notes become due. This might reflect a changing outlook related to Wal-Mart's new expense structure, as it revamps employee compensation and enhances its e-commerce platform.

Financial leverage is the extent to which debt capital is used to finance a business, and it can be measured with the total debt-to-capital ratio. This is calculated by dividing the book value of debt capital by the combined book values of debt capital and equity capital. Wal-Mart's debt-to-capital ratio was 0.34 as of January 2016, down slightly from 0.36 in 2015 and 0.4 in 2014. The decrease in financial leverage coincides with the reduction of total debt, as equity capital has not been directionally constant. Wal-Mart's most comparable peer, Target, had a debt-to-capital ratio of 0.5 as of January 2016.

Wal-Mart had an enterprise value (EV) of $253 billion and a Fmarket cap of $214 billion as of April 2016. Like market capitalization, EV measures a company's market value, but it also includes the market value of net debt. This is especially useful when comparing companies with different amounts of financial leverage, which is common in cross-industry comparisons or acquisition valuations. Wal-Mart's EV fell significantly over the three years that ended in April 2016. In April 2013, the company's EV was $299 billion, and it reached a high of $339 billion before falling to a low at $226 billion.