Stock Analysis

This Comparison Shows Why Walmart (NYSE:WMT) Lags Behind Competitors

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Walmart's ( NYSE:WMT ) stock is up by 4.8% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we will analyze Walmart's Return on Equity and see how it stacks up with competitors in this industry. We will compare Walmart ( NYSE:WMT ), Target ( NYSE:TGT ), Costco ( NASDAQ:COST ), Dollar General ( NYSE:DG ), Walgreens Boots Alliance ( NASDAQ:WBA ), and Kroger ( NYSE:KG ).

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money.In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Walmart

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Walmart is:

12% = US$10b ÷ US$87b (Based on the trailing twelve months to July 2021).

The 'return' refers to a company's earnings over the last year.One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability.Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits.Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Walmart's Earnings Growth And 12% ROE

To begin with, Walmart seems to have a respectable ROE.

It's in line with the industry average of 12%, so that's reassuring.

Despite the returns, Walmart's five-year net income growth was quite low, averaging at only 3.4%. So, even though we would expect a larger net income growth rate, there seem to be factors that prevent this. For instance, the company pays out 47% (three-year median) of earnings as dividends, is faced with competitive pressures, and is currently in an abnormal period with the pandemic.

Additionally, Walmart has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 35% over the next three years. The fact that the company's ROE is expected to rise to 20% over the same period might be explained by that drop in the payout ratio.

Returns Comparison

In order to make smart decisions, we need more than just the company's return performance. We also need to see how competitors perform and get a better sense if the company is doing well in comparison.

We stacked up the return measures of Walmart's competitors in the table below (scroll for details):

Company WMT COST TGT WBA DG KR Market Cap Weighted Average
ROE (%) 11.9 28.2 42.4 9.7 41 16.5 21.7
ROCE (%) 19 23.7 26.6 6.3 17 7.9 19.9
Market Cap (Billions) 415 201.4 120.5 43.9 52 34.4

As we can see, Walmart is lagging behind competitors, with Target being the company that manages to make the most out of their debt and equity. 

To balance out our analysis, we also included a secondary measure that is similar to ROE - the Return on Capital Employed. Ideally, we want to see consistency between ROE and ROCE for a company. In this analysis the ROCE number, tells us that while Dollar General is close to Target in the ROE measure, it lacks significantly with regard to ROCE, indicating that Dollar General isn't utilizing debt as effectively.

Keep in mind that this is a small sample of companies that are used to conduct this analysis. If you pick different companies, you may come out with a different result. Also note, that this is not anything that should influence someone's investment decision-making. Rather, look at it more like an intro as to which companies you should further analyze.

We got these companies by filtering our Stocks Page. It's a great and easy-to-use tool, that gives you comparisons like this across multiple metrics!


In total, it does look like Walmart has some positive aspects to its business and a decent 12% ROE. This is great for existing investors, but people should also consider to include other comparable companies in their watchlist.

Our relative comparison revealed that Target and Costco are clearly ahead of Walmart, and if we look at their stock performance, we can see that other investors are also quite interested in the companies.

Yet, the low earnings growth is a bit concerning, especially given that the company has a good rate of return and is reinvesting a decent portion of its profits.

Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're helping make it simple.

Find out whether Walmart is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Goran Damchevski

Goran Damchevski

Goran is an Equity Analyst and Writer at Simply Wall St over 4 years of experience in financial analysis and company research. Personally, Goran has over 4 years of experience in financial analysis and company research, where he previously worked in a seed-stage startup as a capital markets research analyst and product lead and developed a financial data platform for equity investors. 



Walmart Inc. engages in the operation of retail, wholesale, and other units worldwide.

Average dividend payer with mediocre balance sheet.