Target, but grown substantially. In 2013, Target expanded into

Target, the second-largest discount retailer in the United
States, was founded in 1902 by George D. Dayton. Then, it was known
as Dayton Dry Goods Company and later renamed Dayton Hudson Corporation. The
first named Target store opened in 1962 in Roseville, Minnesota. Since then, it
has done nothing but grown substantially. In 2013, Target expanded into Canada
and now operates in nearly 100 locations through its Canadian subsidiary. A
little fun fact about Target: It’s bulls eye trademark is licensed to
Wesfarmers, owners of an Australian retail chain which is actually
unrelated to Target Corporation. (“Through
the years,” 2017)

My objective for this project is to analyze
Target’s income and financial statements within the last two years. Based
on the ratio analysis, I will inspect Target’s liquidity, profit,
financial decisions, and utilization of their assets.  I will
also take a look at their main competitor, Walmart and discuss and
compare their ratios.  

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

In class, we learned a lot about financial ratios. Financial
ratios are numbers that express the value of one financial variable relative to
another (Gallagher pg.81). Figuring out these ratios will help
measure a company’s performance by comparing their information.  The
five main categories of ratios are profitability ratios, liquidity ratios, debt
ratios, asset activity ratios, and market value ratios. First, we’re going to
look at Target’s profitability ratio verses Walmart’s profitability ratio.

As we learned, profitability ratios are used to evaluate a firm’s
ability to generate income compared to their expenses. (Gallagher, 2010) The gross profit
margin, operating profit margin, and net profit margin all asses this at
different points on the income statement. The differences between each of these
percentages can/will help to indicate to a company where and how their profit
is being shaved down. Target has better percentages in all of their
categories than Walmart. While Walmart renders 25.1% of revenue into gross
profit, Target renders 29.5%.

Liquidity ratios show the ability Walmart and Target have to pay
debt obligations. First, the current ratio measures the ability to pay
short-term and long-term debts. (Gallagher,
2010) Target has a higher current ratio than Walmart meaning that Target
has a greater ability to pay back these debts. The quick ratio and current
ratio are very similar. However, because a company’s inventories are harder to
liquidate than their other assets, the quick ratio indicates the ability to pay
short-term and long-term debts without liquidating their inventories. Target also
tops Walmart in this category. Net Working Capital is a measure used by a
company to determine a company’s efficiency and its short-term financial
health.(Gallagher, 2010) It shows
how much more/less current assets are worth compared to a company’s current
liabilities. At $1,508,000 Target is much healthier short term than Walmart’s
negative $4,380,000. So, Walmart’s big negative net working capital should be
of some concern for the company from a short-term aspect.

Debt management ratios are similar to liquidity ratios in that
they measure a firms’ use of financial leverage and ability to avoid financial
distress. (Wall, 2017) However, while liquidity ratios measure things for the
short-term, debt management ratios measure for long-term. The debt to capital
ratio is the first of these, and is used here to measure Walmart and Target’s financial
leverage as it relates to its capital. Usually, the higher the ratio the
riskier the company, which we all know to be true. Both Target and Walmart do a
very great job of keeping their risk to a minimum. However, Target does have a
slightly bigger debt to capital ratio.

The Debt to Equity ratio indicates how much debt these companies
are using to finance their assets associated with the amount of value
represented in stockholder’s equity. (Gallagher,
2010) Target is a bit higher in this ratio than Walmart meaning that Target
is more hostile in its leveraging practices. The equity multiplier measures how
heavily a company relies on financing from debt and other liabilities. (Gallagher, 2010) Target’s equity
multiplier of 3.11 suggests that, compared to Walmart’s 2.48, Target relies
more on financing from debt and liabilities than their competitor, Walmart.
This is probably because Walmart is more of an established business and can
more comfortably service debt. Walmart is also less focused on expansion right
now than Target, which helps.

Asset Management Ratios measure Target and Walmart’s success in
managing their assets to generate sales. (Wall, 2017)  The Inventory Turnover ratio tells how many
times the companies’ inventory is sold and replaced. (Gallagher, 2010) A low
inventory turnover rate implies subpar sales and can indicate a lot of
inventory. Walmart has an inventory turnover of 10.84 while Target comes in at 8.58
meaning that Target has more inadequate sales than Walmart. Days sales
outstanding gives the average number of days it takes a firm to collect revenue
after a sale is complete. (Wall, 2017)
Target does not report their net receivables on their 2016 balance sheet, so
their day’s sales outstanding can’t be calculated. Walmart’s days sales
outstanding are on average, 4.26, which is a very healthy number. The
total asset turnover ratio tells how much revenue is being generated by Walmart
and Target per dollar of assets. (Wall,
2017) At 2.42, Walmart nearly doubled Target’s ratio meaning that
Walmart is generating almost double the revenue per dollar of asset compared
Target.

So the question is, does Target use its assets more efficiently?
Though Target’s day’s sales outstanding could not be calculated due their net
receivables not being reported in their 2016 balance sheet, their inventory
turnover; 8.58, and their total asset turnover; 1.83 is quite a bit worse than
Walmart’s 10.84 and 2.42. On the other hand, Walmart is a very efficient company
and Target isn’t too far off, but Target could definitely learn from Walmart in
how they efficiently use their assets. This is a very important area to excel
in, and Target has currently fallen behind Walmart.

In my research, I found that Target is much more profitable than
Walmart when gross profit margins, operating profit margins, net profit
margins, ROA, and ROE are considered. But, as I mentioned before, this isn’t a
full indicator that Target is doing better than Walmart because Walmart is
paying their dividends of $7,013,000 and Target is only paying $1,362,000. So,
as far as investors go, they would prefer Walmart over Target. However, overall
Target’s gross profit margin; 29.5%, operating profit margin; 7.5%, and net
profit margin; 4.6% are better than Walmart’s 25.1%, 5.0%, and 3.0%. Target
also is more profitable in terms to its asset and equity use. With an ROA of
8.4% and an ROE of 26.0%, Target gets returns much better than Walmart with
their ROA of 7.4% and ROE of 18.2%.

So if I was an investor, I would invest in Walmart rather than
Target. Walmart pays much greater total dividends than Target. Also, Walmart
attributes 40.4% of its total assets to stockholder equity while Target only
attributes 32.2%

Some of my recommendations are that Target’s biggest downside compared
to Walmart is their asset management. Target does not use its assets as
efficiently as Walmart. They could do much better. They must do better if they
want to beat their main competitor, Walmart. Target has a total asset turnover
ratio of 1.83 while Walmart has almost double at 2.42. My advice to Target is
to focus more on that. Walmart having such a greater ratio here is concerning.
The asset turnover ratio is one of the primary indicators of a company’s
efficiency and productivity. To increase this ratio, Target needs to work on
constantly using their assets, while limiting purchases of more inventories and
increasing sales without purchasing new assets.

Bottom line is Target has better liquidity than Walmart. They also
have better debt management and better profitability ratios. Target has
sufficient liquidity compared to Walmart. They are more profitable with what it
has than Walmart and have a good amount of debt to stimulate growth. They are
also managing the return to shareholders properly. Walmart is definitely doing
better than Target at asset management. Target needs to learn from Walmart in
this aspect. Not properly managing assets can be a big inhibitor to a company.
Target’s assets must be better managed if they want to overtake their
competitor, Walmart. In the end, Target is doing very well. Target is a very
effective company and they work very well with what they have. I was once a Target
team member, and if I still was, I would be more proud knowing that they are a
really stable company to work for.