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Archive for Sunday, May 2, 2004

The Motley Fool

May 2, 2004

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Last week's answer

Founded in 1623 by an Armenian in the Near East, I moved to Massachusetts in the 1900s. I make and market musical instruments. (The secret manufacturing process involves tin, copper and silver.) In the mid-1800s, my products won awards for excellence, and I'm still the top name in my field. Jazz kept me going in the Depression, when I worked on "hi-hat," "low-sock" and "hi-sock" versions of my flagship product. Later came "Bop-Rides," "Pings" and "Sizzles." Satisfied customers have included Gene Krupa, Max Roach, Ringo Starr and Keith Moon. You can't buy stock in me because I'm a private company. Who am I? (Answer: Zildjian)

Wal-Mart's balance sheet

While a firm's sales and earnings growth is important, long-term investors also should study the balance sheet to see how sturdy the underlying business is and whether its financial health is improving or failing.

As an example, consider Wal-Mart's balance sheet for the fiscal year that ended on Jan. 31, 2004. We see $5.2 billion in cash and cash equivalents, up a whopping 90 percent from the previous year. A growing pile of cash is generally promising. (Microsoft, though, has more than $50 billion in cash and marketable securities, making some people wonder whether it should pay more of that out as dividends.)

You usually want to see little or no debt. Between 2003 and 2004, Wal-Mart's total debt dropped 5 percent, from $21.4 billion to $20.4 billion. The drop is good, but that's no small amount of debt. Still, there's enough cash on hand to pay off all short-term debt (that is due within a year). Curious investors can peek at the footnotes to see the interest rates on company debt. Low rates suggest that the firm is financing operations effectively.

Next up, inventory. Valued at $24.4 billion in 2003, it hit $26.6 billion in 2004, up about 9 percent. Rising inventories can indicate unsold products languishing on shelves, but since sales rose nearly 12 percent year-over-year, inventory appears well under control. (Ideally, sales growth should outpace inventory growth.)

It's also good to measure inventory turnover, reflecting how many times per year the firm sells out its inventory. Take 2004's cost of goods sold (from the income statement) of $199 billion and divide it by the average of 2003 and 2004 inventory ($25.5 billion). This gives us a turnover of 7.8, down from last year's number of roughly 8.1. The higher the number the better, so investors might want to watch whether a downward trend persists.

Accounts receivable represent money owed to the firm. Ideally, they shouldn't grow faster than sales. Wal-Mart's dropped by 20 percent, to $1.3 billion, suggesting that it's increasingly getting paid on time due to its clout.

You'll find balance sheets at most major companies' Web sites, among financial statements in the "Investor Relations" areas.

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