In the stock market, the rise in the stock price of a listed company is largely driven by its profit growth. However, in the US stock market, many well-known star companies, despite the long-term stagnation of net profits, have seen decent stock price increases. Does that sound a bit unusual?

Walmart is one such company. From fiscal year 2006 to fiscal year 2024, during these 17 years, Walmart's net profit has hardly grown, even showing a decline in recent years. However, during this period, Walmart's stock price has increased by 3.7 times, surpassing the S&P 500 index's 3.1 times increase, displaying a very stable long-term bullish trend.

On November 19, Walmart will release its latest earnings report. Every time the company announces its performance, it may also signify a good trading or investment opportunity. Prior to this, investors need to understand how to interpret its performance.

Since net profit performance is lackluster, even dragging behind, what is driving Walmart's stock price increase? The answer lies hidden in its performance data. What are the key points to focus on regarding Walmart's performance? What factors influence Walmart's long-term stock price trend? Which factors impact its short-term stock price movement?

Buffett once said that in the long term, stock returns are consistent with a company's ROE. Therefore, to answer this question, we need to pay attention to a very critical performance indicator: Return on Equity (ROE).

Walmart's average ROE level during the period from fiscal year 2006 to fiscal year 2024 reached about 19%, significantly exceeding the overall ROE level of the S&P 500 index components of less than 15% during the same period. It is precisely because of this that despite Walmart's unsatisfactory net profit performance, it can still outperform the S&P 500 index in terms of stock price performance.

So how can we grasp the future changes in Walmart's ROE? Can its current ROE level be maintained? We can break it down through DuPont analysis.

The results of the breakdown from the chart show that there are mainly 3 factors affecting ROE: net profit margin, total asset turnover ratio, and equity multiplier. Let's look at each one separately.

1. Net profit margin.

Net profit margin represents the company's ultimate profitability. A positive net profit margin is a prerequisite for discussing ROE. Otherwise, no matter how many "0"s are added at the end, it's useless.

In the retail chain industry, net profit margins are generally low, and even industry leader Walmart is no exception. Over the past decade, Walmart's net profit margin has been consistently below 4% and has been on a downward trend overall, declining from 3.56% in the 2006 fiscal year to 2.39% in the 2024 fiscal year. This is mainly due to Walmart's net profit margin not increasing much despite doubling its revenue during the same period.

So why has Walmart's net profit margin been declining? Looking at past performance data, Walmart's gross margin has fluctuated around 24%. However, operating expenses as a percentage of revenue have been steadily increasing, reaching 20.2% in the 2024 fiscal year, an increase of over 2 percentage points from the 2006 fiscal year. Considering Walmart's very low net profit margin, even a slight increase in operating expenses will have a significant impact on the net profit margin.

The good news is that since the 2017 fiscal year, Walmart's operating expenses as a percentage of revenue have remained stable. In the latest financial performance, we need to continue monitoring whether the operating expense ratio continues to remain stable and the impact this has on the net profit margin.

2. Total asset turnover ratio.

Total asset turnover ratio is the ratio of total revenue to average total assets within a fiscal year, representing the company's operational capability. For Walmart, maintaining a high ROE level in the case of very low net profit margins puts a great deal of pressure on the management's operational capabilities.

Among all listed companies on the US stock market, the average total asset turnover ratio is less than 0.7 times. However, in the retail chain industry, this indicator is generally higher. Futu's financial indicators data show that Walmart's latest total asset turnover ratio remains at 2.6 times, which is only average in the retail chain industry, far below Costco's 3.6 times.

Another indicator that measures operational capability is inventory turnover rate. Unlike the relatively stable total asset turnover rate, Walmart's inventory turnover rate has relatively larger fluctuations.

Inventory turnover rate is a very important indicator for chain retail enterprises as it can measure the efficiency of inventory sales. A significant decrease in this indicator implies that the company may face sales pressure, which could impact the stock price in the short term. Additionally, as inventory is part of total assets, a decrease in inventory turnover rate may also lead to a decline in total asset turnover rate.

Taking Walmart's Q1 financial report for the 2022 fiscal year as an example, its inventory turnover rate is approximately 8 times, a significant year-on-year decline of 16.5%. This decline also caused the total asset turnover rate to decrease. Consequently, the market is concerned about its sales prospects. After the earnings release, the stock price dropped nearly 20% within 3 days.

Therefore, in Walmart's latest performance, we need to observe whether there are significant changes in its inventory turnover rate and if the total asset turnover rate can maintain its previous stable state.

3. Equity Multiplier

In the previous analysis, we saw that among the three factors affecting ROE, Walmart's net profit margin is declining, acting as a drag. The total asset turnover rate is relatively stable, playing a neutral role. Therefore, for Walmart to maintain a high ROE, it can only rely on the equity multiplier, which is indeed the case.

From the fiscal year 2006 to 2024, Walmart's equity multiplier increased from 2.52 times to 3.09 times, thereby maintaining a decent ROE level amidst the background of declining net profit margin.

So how did Walmart improve its equity multiplier? According to the formula Equity Multiplier = Average Total Assets / Average Common Equity, a crucial method is to reduce common equity.

Walmart's main way of reducing net assets is through share buybacks and dividends, which are often carried out by mature companies in the US stock market. Through buybacks and dividends, the company not only improves ROE, but also rewards shareholders, increases earnings per share, and injects additional liquidity into the market, making it a win-win situation.

From fiscal year 2006 to fiscal year 2024, Walmart's total net profit was $254.56 billion, while the cumulative share buybacks and dividends amounted to $218.48 billion, accounting for 86% of the cumulative earnings during that period.

It is worth noting that there has been a significant change in the proportion of Walmart's buybacks and dividends to net profits and the average ROE level since the fiscal year 2015. From fiscal year 2006 to 2015, the average of this ratio was 0.71, and the average ROE was 21.4%; however, from fiscal year 2016 to 2024, the average of this ratio rose to 1.04, while the average ROE fell to 16.1%.

In other words, although Walmart has tried to maintain a higher ROE level by increasing buybacks and dividends, the faster decline in net profit margin has inevitably led to a decline in its ROE level.

While the situation of buybacks and dividends exceeding net profits can be sustained in the short term, it is not sustainable in the long term. Therefore, if Walmart's net profit margin continues to decline in the future, its ROE level may continue to decline, putting pressure on its long-term stock price.

In fact, during the period of higher ROE from fiscal year 2006 to 2015, Walmart's stock price doubled, significantly outperforming the S&P 500 index, which rose by 69% during the same period; while in the period of lower ROE from fiscal year 2016 to 2024, Walmart's stock price only performed in line with the S&P 500.

Seeing this, you may have some new insights on how to interpret Walmart's performance. It is worth mentioning that every time a star company releases its performance results, it may represent a rare trading opportunity for different types of investors.

For example, if investors interpret past performance and combine it with the latest developments to believe that a company's latest performance will release some positive signals and benefit the short-term stock price, investors may consider going long. Going long can involve buying actual stocks or considering buying options.

Conversely, if investors believe that the latest performance of a company will not be optimistic and will put pressure on the short-term stock price, investors may consider short selling, which can be done through securities borrowing for short selling, or considering buying put options.

Of course, if investors feel uncertain about the direction of a company's performance, but anticipate significant post-earnings release price volatility, investors may consider taking a position in the stock's volatility, considering a straddle strategy of simultaneously buying call options and put options to seize potential opportunities.

In summary:

walmart has maintained a good stock price performance even as its net profit growth stagnates, mainly due to its higher ROE levels.

The factors affecting ROE include net profit margin, total assets turnover rate, and equity multiplier.

Increasing operating expenses and a continuous decline in net profit margin have dragged down ROE performance for walmart.

Changes in walmart's inventory turnover rate can impact short-term stock prices and total assets turnover rate. Its total assets turnover rate has historically been more stable.

walmart's high share buybacks and dividends have driven an increase in the equity multiplier, but have struggled to offset the negative impact of declining net profit margins on ROE.

Every time the company releases its financial performance, it may bring potential trading opportunities. Investors can consider suitable types of trades based on their individual risk tolerance.

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