final paper

Part 1

1) Target Corporation of Minneapolis, MN 55403 operates primarily in SIC Code 5311 - Department Stores

2) For purposes of this research, Target's ratios have been compared to other industry averages of the belonging to the same SIC Code.

For further comparison, We have acquired the ratios of Target's closest competitors, such as:

· Destination XL Group of Canton, MA 02021;

· Colgate-Palmolive Company of New York, NY 10022;

· Urban Outfitters Inc of Philadelphia, PA 19112; and

· Walmart Inc of Bentonville, AR 72716

3) SIC Code 5311 Industry Average vs. Target Corporation:

1) Current ratio - Target's current ratio indicates its ability to meet short-term debt obligations lesser than that of the industry.

2) Debt ratio - Target's debt ratio indicates its debts to assets proportion are greater than those of the industry. This may also suggest that Target must be more leveraged than the industry (Bloomenthal, A, 2020).

3) Gross profit margin & Net profit margin- Target's more significant net profit margin than the industry indicates that it can reinvest more earnings, which might lead to faster expansions than the industry. However, it is noted that Target's gross profit margin is almost the same as the industry average, which might indicate that it has lesser expenses than the rest (Bloomenthal, A, 2020).

4) Times interest earned - N/A

5) Accounts receivable turnover - N/A

6) Inventory turnover - Target's inventory turnover is 62, whereas the industry average is 22 days. This indicates that Target still has room to be more aggressive towards sales.

7) Return on Sales - N/A

8) Asset Turnover - Target's asset turnover is 196 days compared to the industry average of 60 days. This indicates that Target can still maximize its assets to generate more sales.

9) Return on Assets - Target's return on assets less than the industry average. This indicates that it has to revisit its pricing model or its asset utilization.

10) Financial Leverage - N/A

11) Return on Equity - Target's return on equity is less than the industry average. This indicates that they can still maximize shareholder investments.

Part 2

Introduction:

Target is a merchandise retail store having around 50 stores throughout the United States. It is so close to people's homes that 75% of the U.S. population lives in a radius of 10 miles of a Target store. Target's main motto is to provide the best quality products at the lowest price range. To work on this, the company has to pay a lot of attention to its financial affairs. Moreover, Target also owns DermStore, Shipt, Roundel, etc. Its hometown is Minneapolis, Minnesota (Bloomenthal, A, 2020).

Ratio Trends Analysis:

The first part of this paper emphasized the different years 2019 and 2020, where gross profit margin, debt ratio, interest expense, turnovers, and other essential ratios were computed. The analysis of those ratios will be conducted, and the conclusion will be driven. According to Investopedia, Ratio analysis is a technique in which insights of a company are gained. These insights include liquidity, profitability, and efficiency of operations. The senses are driven by the financial statements of the company (Bloomenthal, 2020). In simpler terms, ratio trend analysis helps understand the company's current position, performance, and whether it would make profits or not in the long run in the future. Alongside that, it also assists in determining the speed at which the company is growing. Through ratio trend analysis, a company gets an idea of what decisions to make that would lead to better financial performance. These trends are represented both in percentages and figures (Bloomenthal, A, 2020).

Debt ratio:

Given below is the debt ratio of Target for the year 2019 and 2020:

Total liabilities and total assets help in calculating the total debt ratio. The total debt ratio calculated is 72.64% for 2019 and 72.34% for 2020. There is a drop of 0.3% in the debt ratio understood by the above table. Following the risk perspective, a percentage of 0.4% or under is seen as acceptable. If there are fluctuations in it, and the debt ratio rises, it can cause the company to lose potential investors or other financial resources. If the debt ratio is high, the trust automatically goes low. Maintaining a debt ratio of 0.3 would be ideal in this case (Bloomenthal, A, 2020).

Gross Profit Margin:

Given below is Target's gross profit margin for the year 2019 and 2020.

A company's gross profit margin shows the sales value and wealth of the company. If the profit margin is high, it is understood that the company is doing good and its wealth accumulation is also in good condition. Maintaining the right gross profit margin is more important than having good sales just for a year. To support it, what a company can do is cut down or lower all the unnecessary costs so that they don't lose a decent amount of money without any reason. The table indicates that the gross profit margin of Target Corporation in the year 2019 is 29.27%, and in 2020, it's 29.76%. According to this, there is an increase in the profit equivalent to 0.49%. Target is a retail store, and expecting high increases in its profit margin is not a good idea, as retail stores follow specific patterns and work around them. However, the company has slower growth in this area than the profit ratio (Bloomenthal, A, 2020).

Free Cash Flow:

Cash flow can be expressed as the cash produced by the company through its operations. In cash flow, we subtract the expenditure spent on the assets. Cash flows and profit are often confused with each other, but they are different, as cash flow talks about the cash flowing in and out of the company.

As per the table, the cash flow of Target has increased as compared to the previous year. However, there is a decrease in capital expenditures. Free cash flow overall has shown an improvement compared with last year. If the cash flow is more, it shows that a company is improving its current inventory and other things, which eventually would benefit it, as customer choices keep changing day by day (Bloomenthal, A, 2020).

Time Interest Earned Ratio:

The time interest earned ratio indicates the financial condition of a company. It shows whether a company is performing well in terms of finances or not. The higher the percentage, the more capable the company is of getting interested from its investors. Alongside that, if the company plans on getting solvent, it would be easier for it. From an investor's perspective, a ratio of more than 2.5 is seen as a safe zone. As per the table, the time Interest Earned Ratio in 2020 is 9.95%, and in 2019, it is 9.47%. A difference of 0.48% indicates that the company has reduced its interest ratio, which is a good sign (Bloomenthal, A, 2020).

Receivables Turnover:

This part identifies how effective the company is at collecting receivables. The money usually is collected from its clients. This ratio is used to determine the company's management of the credit. According to the table, even though the credit sale has dropped, the receivables turnover is labeled as "not defined." This is due to the turnover is equivalent to zero. In general, a low ratio indicates that the company's collection process is below average and work needs to be done on it. Credit policies can be improved for the improvement of turnover rate (Bloomenthal, A, 2020).

Inventory Turnover:

This ratio is used to recognize the time taken to replace or sell the inventory in a certain period. The inventory turnover formula can calculate the number of days it will take for the stock on hand to get sold. Inventory turnover is beneficial when making decisions related to budgeting, pricing, constructing or manufacturing, and buying new inventory (Hargrave, 2020). Because Target is a retail store, the supplies coming in and going out of the company are almost the same. Companies tend to deal with the suppliers and product manufacturers for putting up their product, due to which the majority of the products are usual. In this situation, retail stores need to keep track of customer's purchasing patterns as well, because eventually, it's the customer that helps them run. To tackle this, stores add new or in-demand products and get rid of the old ones. Overall, a reasonable turnover rate lies between 2 and 4%. Lower inventory turnover is an indicator of weaker performance by the sales team. It can also indicate a reduction in product popularity. Technically, if the turnover rate is higher, that shows that the business is meeting the goals. As Target's turnover rate is 6.10, its performance is good (Bloomenthal, A, 2020).

ROE Analysis and DuPont Analysis:

To perform the DuPont Analysis, first, the return on sales is calculated. It is calculated by dividing income by revenues. First, the return on sales, total assets turnover, and financial leverage is calculated. When the return on sales and total assets turnover is multiplied, the result is called the return on equity. This can be calculated as net income divided by total equity. Apart from the calculation, it is crucial to understand its result, which is taken out with its analysis. However, it is essential to consider all the small elements that make up the ROE analysis because they help identify the company's profitability better (Bloomenthal, A, 2020).

In this part, the return rate by owners of common stock is calculated. Equity returns indicate the company's performance as per the return generation. It also shows that the management is capable of generating income by available equity. Target's return on equity is 27.72% in 2020, which shows that its performance is exceptional. The importance of ROE is immense as it shows the company's profit as per the shareholder equity amount (Bloomenthal, A, 2020).

Conclusion:

Target's overall performance as per the ratio trends analysis is good, as it is doing well in generating income. All the other areas discussed in the study are exceptional, keeping in mind that Target is recognized as a retail store. Even though most areas covered had a good impact, there is room for improvement around certain areas. The company's improvement areas are mostly around the receivables turnover, as the table showed zero. As discussed above, specific measures are needed to be taken by the company to improve its turnover, like reassessing its policies. Overall, the company's liquidity and solvency have gotten enhanced as compared to 2019. Target has managed to retain its position in the market as one of the convenient and most approachable stores of the United States and is keeping in mind its motto and working around it (Bloomenthal, A, 2020).

References:

Bloomenthal, A. (2020). Ratio Analysis. Investopedia. Retrieved 7 November 2020, from https://www.investopedia.com/terms/r/ratioanalysis.asp.

Hargrave, M. (2020). Inventory Turnover. Investopedia. Retrieved 7 November 2020, from https://www.investopedia.com/terms/i/inventoryturnover.asp.

Nicasio, F. (2020). Inventory Turnover 101: What It Is And How to Get It Right - Vend Retail Blog. Vend Retail Blog. Retrieved 7 November 2020, from https://www.vendhq.com/blog/inventory-turnover/.