Historical Return on Invested Capital
It’s been some time since I posted about Walmart and its business during the first half of the 1970’s, a period where Walmart enjoyed really high growth and high return on invested capital, measured as operating profit divided by average invested capital (see below for calculation of invested capital). But as expansion kept going and the company grew bigger, return on invested capital headed in the opposite direction, peaking at a record high of almost 55% in 1972 and from there on decreasing to 22% in 1997. From 1998 to 2014 return on invested capital has averaged approximately 28%, peaking at 32% in 2001 and and reaching a low of 26% in 2014.
So what we can see here is that growth clearly comes at a price, even for such a great business as Walmart. The question then is, why did Walmart’s return on invested capital deteriorate?
The straight answer to that question is that Walmart did not enjoy as strong a competitive advantage as it had in the beginning of the 70’s. Greenwald explains Walmart’s shrinking return as it grew bigger in the following way in the book Competition Demystified.
“The only explanation we find convincing to account for the shrinking return is that, as it expanded across the country and overseas, it was unable to replicate the most significant competitive advantage it enjoyed in these early years: local economies of scale combined with enough customer loyalty to make it difficult for competitors to cut into this base.”
Components of Return on Invested Capital
Return on invested capital is determined by two components, the operating profit margin of a business and its invested capital turnover.
Looking at these metrics we can see that both of them has trended downward during the period 1972 to 2014. Walmart enjoyed its highest invested capital turnover in the 70’s. The operating profit margin held up pretty good until the middle of the 80’s, peaking at 8.5% in 1985. From there on it deteriorated to 5.4% in 1997. The operating profit margin has averaged about 5.8% in the following years up until today.
All calculations done from data in annual reports provided by Walmart. Annual reports can be found here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.