In the stock market, the share price of a listed company rose, largely driven by its earnings growth. But in US stocks, many of the star companies we know, have not grown in net profits over the long term, but the share price has risen quite well, doesn't it sound a bit counterintuitive?

Walmart is such a company that from FY2006-2024, during the middle of the 17 years, Walmart's net profit has barely grown, and has even declined in recent years. But during this period, Walmart's share price rose 3.7 times, outpacing the 3.1-fold increase in the benchmark S&P 500 index, exiting a very solid bull run.

With net profit underperforming, even dragging its feet, what is driving Walmart's share price rise? The answer is hidden in its financial data. What are the main points of concern about Walmart's financial statements? What factors influence the long-term movement of Walmart's stock price? What factors are the left and right hand of its short-term share price?

In the long run, stock returns remain consistent with the company's ROE, Munger said. Therefore, to answer this question, we need to focus on a very critical financial metric: the net return on assets (ROE).

Walmart achieved an average ROE of approximately 19% for FY2006-2024, significantly exceeding the overall ROE level of less than 15% for S&P 500 index constituents during the same period. For this reason, Walmart is also able to beat the S&P 500 Index on its share price performance in the case of a surprisingly poor net profit performance.

So how do you get a handle on future changes in Walmart ROE? Can it maintain its current ROE level? We can deconstruct by Dupont analysis.

FROM THE RESULTS DISASSEMBLED IN THE FIGURE, THERE ARE THREE MAIN FACTORS THAT AFFECT ROE: NET PROFIT RATE, TOTAL ASSET TURNOVER, AND EQUITY MULTIPLIER. Let's take a look separately.

1. Net Profit Ratio

The net profit ratio represents the ultimate profitability of the company. The net profit ratio is positive, which is a prerequisite for ROE. Otherwise, the first “1” is less than the previous “1” and the “0” in the latter.

In the retail chain industry, net profit margins are generally low, and Walmart, as the industry leader, is no exception. For the past few decades, Walmart's net profit margin has been below 4% and overall has remained on a downward trend, falling from 3.56% in FY2006 to 2.39% in FY2024. This is also the main reason why Walmart's net profit has doubled in the same period, but its net profit has not grown much.

So why is Walmart's net profit rate slipping? According to past financial reports, Walmart's gross profit margin has basically fluctuated around 24%, but the share of operating expenses in revenue has been steadily climbing, reaching 20.2% in FY 2024, up more than 2 percentage points from FY 2006. Given that Walmart's net profit margin base is too low, a slight increase in operating expenses would have a bigger impact on net profit margins.

The good news is that Walmart's operating expenses have remained broadly stable since fiscal 2017. In the latest financial report, we need to continue to observe whether the operating expense rate continues to remain stable and the resulting impact on net profit margins.

2. Total asset turnover rate

The total asset turnover rate is the ratio of total revenue and average total assets in a fiscal year, which represents a company's operating capacity. In the case of extremely low net profit margins, Walmart is a great test of the operational capacity of management to maintain a high level of ROE.

Across all listed companies in the US, the average total asset turnover is no less than 0.7 times. However, in the connected retail industry, this indicator is high. Futu's financial indicators data show that Volmar's latest total asset turnover ratio remained at 2.6 times, but it was only about the average level in the connected retail sector, far from 3.6 times as good as the market.

Another indicator that measures operational capacity is inventory turnover rate. Walmart's inventory turnover fluctuates quite a bit compared to its total asset turnover, which is relatively stable.

Inventory weekly turnover is a very important indicator for retail chains, as it measures the efficiency with which inventory is sold, and if this indicator falls significantly, it means that the company may face selling pressure, resulting in a short line shock to the stock price. At the same time, inventory as a part of total assets, a decrease in the weekly turnover of inventories may also result in a decrease in the weekly turnover of total assets.

As an example, Walmart reported Q1 2022, its inventory weekly turnover rate of about 8 times, down 16.5% year-on-year, also causing a drop in the total asset week turnover. The market was concerned about its sales outlook, and the share price fell nearly 20% in 3 days after the announcement.

Therefore, in Walmart's latest financial report, we need to look at whether its inventory turnover rate has changed significantly and whether total asset turnover will remain stable in the past.

3. Equity multiplier

In the previous analysis, we have seen that of the three factors that influence ROE, Walmart's net profit margin is on a downward trend, which is a drag on the back foot, and the total asset turnover rate is basically flat, even a neutral role. If it is important to maintain a high ROE, it can only support the equity multiplier. In fact, the same is true.

From FY2006-2024, Walmart's equity multiplier increased from 2.52 times to 3.09 times, and therefore maintained a good ROE level against a background of declining net profit margins.

Then How did Walmart increase the equity multiplier? According to the formula of Equity Multiplier = Average Total Assets/Average Net Assets, an important means is to reduce net assets.

The main way Walmart reduces its net worth is through stock buybacks and dividends that some of the older companies in the US stock market often do. With repurchases and dividends, in addition to improving ROE, companies are able to give back to shareholders, increase profit per share, and inject additional liquidity into the market, so to speak, a lot.

From FY 2006 to FY 2024, Walmart's net profit was $2545.6 billion, and cumulative stock repurchases and dividends added up to $2184.8 million, accounting for 86% of cumulative earnings during the period.

Notably, there was a marked change in the ratio of Walmart repurchases and dividends to net profit, as well as the average ROE level as a watershed for fiscal 2015. In FY2006-2015, the ratio averaged 0.71 and the average ROE was 21.4%; and in FY2016-2024, the average value of this ratio climbed to 1.04, while the average ROE slipped to 16.1%.

That is, while Walmart tries to maintain a higher ROE level by increasing repurchases and dividends, its ROE levels inevitably slide underground as net profit rates fall faster.

While buybacks and dividends can be sustained in the short term, they cannot be sustained in the long term, so if Walmart's net profit levels continue to decline in the future, its ROE level may continue to slide, putting pressure on its long-term share price.

In fact, during the higher ROE levels of FY2006-2015, Walmart's stock price doubled, narrowly beating the S&P 500's 69% year-on-year gain, and at a lower ROE level in FY2016-2024, Walmart's share price was only flat with the S&P 500.

Writing here, you may have some new insights into how to read Walmart's report. It is worth mentioning that every time many star companies publish a report, it can mean a difficult trading opportunity for different types of investors.

For example, if an investor thinks that a company's latest report releases some positive signals and favors short-term stock prices by interpreting past reports and incorporating recent developments, investors may consider doing more, and doing more could be to consider buying a positive stock, or considering buying a buy, etc.

Conversely, if investors feel that a company's latest news will be unoptimistic and put pressure on short-term stock prices, investors may consider going blank, or consider buying bearish options, etc.

Of course, if investors feel that the direction of a company's report is not very clear, but the stock price may fluctuate significantly upwards or downwards after the report is released, then investors may consider doing more of its share price volatility and consider buying both bullish and bearish cross strategies to gain a foothold In Opportunity.

Finally to summarize:

Walmart also maintained a good share price performance in the face of stagnant net profit growth, mainly due to higher ROE levels.

Factors affecting ROE include net profit ratio, total asset turnover rate, and equity multiplier.

Walmart's operating expenses increased and net profit margins continued to decline, dragging down ROE performance.

VOLMAR'S INVENTORY TURNOVER CHANGES AFFECT SHORT-TERM STOCK PRICES AS WELL AS TOTAL ASSET TURNOVER. ITS TOTAL ASSET TURNOVER HAS BEEN STABLE IN THE PAST.

Walmart's high buybacks and dividends drove gains in equity multipliers, but it was hard to undo the negative impact of falling net profit margins on ROE.

Each time a company publishes a report, it can lead to potential trading opportunities. Investors can consider the right types of trades based on their individual risk tolerance.

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