Executive Summary

Solvent

Solvency is another significant category of step to take when you want to determine a company’s health of finance. Kimmel & Weygandt say that, “Solvency ratios measure the ability of the company to survive over a long period of time. Long-term creditors and stockholders are interested in a company’s long-run solvency, particularly its ability to pay interest as it comes due and to repay the balance of debt at its maturity.” (pg. 385) I discovered two ways to calculate the solvency at MSN.com/en-us/money. Solvency calculation is having the debt to asset ratio. This can also be calculated by using the debt-to-equity. Listed below is the display of the calculations. Figuring this out requires the ratios of total liabilities (current and long-term) dividing it by stockholders’ equity. (pg. 54)

Every $1 of stockholder’s equity was financed by $0.96 of debt; that’s how Target’s ratio of 0.96 was found, whereas, Wal-Mart’s ratio is every $1 of stockholders’ equity was financed by $0.64 of debt. “The higher the ration, the more reliant the company is on debt financing.” (pg. 72)

Profitability

The companies’ financial health is significant to be determined. This is where the last category of Profitability comes in. Kimmel & Weygandt wrote that, “Profitability ratios measure the income or operating success of a company for a given period. A company’s income, or lack of it, affects its ability to get debt and equity financing, its liquidity position, and its ability to grow. As a consequence, creditors and investors alike are interested in evaluating profitability. Profitability is frequently used as the ultimate test of management’s operating effectiveness.” (pg. 367) A company’s profitability must be figured out, and in doing so, the price-to-earnings ratio must be used as a calculated method. In doing so, the calculation can be done by the division of the market share price by the earnings per share. I demonstrated this below, displaying the current numbers which are provided by MSN.com/en-us/money.

Kenton (2019) states that, “For most profitability ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a previous period indicates that the company is doing well.” In that case, this tells us that Wal-Mart has the higher ratio.

We have seen how important a company’s financial health is through solvency, liquidity, and profitability. This tells us rather or not this is going to fail or survive somewhere down the path.

Help from liquidity can avail in proving if a company is able to carry its short-term duties; meanwhile the long-terms liabilities can simply be proven by the solvency. If there is sufficient solvent, a higher chance a company has in surviving longer as they go. As mentioned, the profitability of a company is calculated from stockholders’ equity. With this, a company’s strength can be gathered in creating a shareholders’ profit with the usage of their existing assets.

From what I have gathered from MSN.com/en-us/money, I have proven data showing that Wal-Mart is financially healthier than Target. When it comes to liquidity, Wal-Mart and Target are two companies that are below the industry average. From viewing liquidity, I can tell Target would survive longer than Wal-Mart. When it comes to Solvent, Target is proven to be higher in solvency than that of Wal-Mart. At last, profitability shows that Wal-Mart is now higher than Target. Profitability is the correct method to use when one is trying to manage a company’s effectiveness. In having to choose between the two companies to invest, I will go along with Wal-Mart.

References

Kimmel, P. & Weygandt, J. (2017). Survey of Accounting. Retrieved from

https://viewer.gcu.edu/cXwxqt

Harold Averkamp (CPA, MBA)