final paper

1) computed the following ratios for two years

2) DuPont Analysis of ROE for two years

To perform DuPont analysis for the return on assets, we first compute the return on sales and the asset turnover. The formula for return on sales is net income divided by revenues. Meanwhile, asset turnover is calculated as revenues divided by total assets. Suppose the return on sales and asset turnover is multiplied by each other. In that case, the result will be equal to the return on assets, calculated as net income divided by total assets.

To perform DuPont analysis for the return on equity, we first compute the return on sales, total asset turnover, and financial leverage (equity multiplier). As said earlier, the return on sales is equal to net income divided by revenues. Total asset turnover is equal to revenues divided by total assets. Financial leverage (equity multiplier) is computed as total assets divided by total equity. If you multiply the return on sales by the total asset turnover and by the financial leverage, we can calculate the return on equity, which can alternatively be computed as net income divided by total equity

Evaluation of Ratio Trends

Introduction:

Target is an American based merchandise retail corporation. It owns a store in all of the 50 states of the United States. Target's tagline is "expect more, pay less, " which shows how their focus is on providing the best quality products at a limited price range. It also works on corporate social responsibility, as 5% of its profits go back into the communities. Moreover, its total revenue was $75.4 billion in 2018. The purpose of the target is to help the families discover the joy of every day's life

Analysis of Ratio Trends:

The part A of the paper covered the ratios of the company for the year 2019 and 2020. In this part, the ratio trends are discussed and analyzed. The ratio trend analysis examines a financial ratio compared to the same ratio of the previous year/years. It helps analyze the company's financial position, showing whether the company is doing good, threatening, or average. It also helps in figuring out whether the company's growth is slow or quick, if the financial statements are stronger or weaker, and helps in evaluating the risk level that the company currently has. It also shows how the company has been performing over time and identifying what measures a company can take to improve its current financial performance. Although the trend analysis is usually shown in percentages, seeing the exact amount is comparatively more helpful in analyzing its performance.

Debt ratio:

The debt ratio calculated in part A of this assignment shows that the total debt ratio can be calculated with current total liabilities and real assets. The total debt ratio turned out to be 72.64% for 2019 and 72.34% for 2020. This shows that the debt ratio has dropped by 0.3%.

The debt ratios of 0.4 or under that, according to the risk perspective, are considered acceptable. If the debt ratio is higher than 0.6%, it seems to cause companies' problems, especially when it comes to borrowing money, as a higher debt ratio shows lower creditworthiness. This ratio can be seen as less risky. Moreover, companies carrying small debts are also perceived to be dangerous.

Gross Profit margin:

The gross profit margin of a company indicates good sales and more incredible company wealth. To maintain the right profit margin, a company has to improve its sales and keep reasonable control over its costs to make the best of the lowest investments. According to the worksheet, the gross profit margin of Target Corporation is 29.27% in the year 2019 and 29.76% in 2020. This indicates an increase of 0.49% in the profit margin of Target.

Technically, the right profit margin has to be at least 10%, but looking from a retail store's perspective, expecting profit improvements to this extent seems somewhat questionable. The company still would be seen as having a weaker and slower gross profit margin.

Free Cash Flow:

The cash produced by a company through its operations, subtracting the expenditure cost on assets, is known as free cash flow. It can also be understood as the cash leftover that a company has after paying off the capital and operating expenses. Although it sounds similar to profit, it is the amount that indicates the net flow of cash in and out of business. The worksheet shows that operations' cash flow has increased from the previous year, reducing capital expenditures. The overall free cash flow has grown and is often seen as an indicator showing how the company has the cash to spend on new products or operations and is a healthy company.

Time Interest Earned Ratio:

This ratio works as an indicator to show if a company is jumping into a financial crisis. If the percentage is higher, it means that a company is capable of meeting its interest requirements. It also means that a company has a lower risk to creditors and investors when it comes to solvency. From an investor's perspective, the organization has a ratio greater than 2.5 can be considered an acceptable risk. The Time Interest Earned Ratio of 2019 is 9.47%, whereas, in 2020, it is 9.95%, almost equivalent to 10%. This is a sign that the company is working on reducing its interest levels, and the liquidity of the company can also be considered exceptional

Receivables Turnover:

Receivables turnover quantifies the effectiveness of a company in collecting its receivables. It also includes collecting money owed by clients. The ratio indicates how properly a company manages the credit extending to its consumers (Rusdiyanto et al., 2019). If the receivables turnover ratio is low, the company has an imperfect collection process or not so good credit policies. In this case, the company should assess its credit policies again to ensure timeliness while collecting its receivables. According to the worksheet, the turnover rate is not defined; the company needs to look into its matters and even reassess its policies.

Inventory Turnover:

Inventory turnover shows the amount of time a company has replaced or sold its inventory in a given period. With this, a company can understand if it has made the right decisions related to manufacturing or purchasing new inventory (Sunjoko & ARILYN, 2016). Since Target is a retail store, it usually has its suppliers and products fixed. However, new products keep coming into the market, and the consumers often desire to change some of them. Due to this, retail stores keep adding new products and removing products that don't do good while keeping their regulars available. However, a reasonable turnover rate lies between 5 to 10%. As the company has a turnover rate of 6.10 this year, it indicates that the company restocks or sells its inventory every 1 to 2 months, which is a good indicator of its sales.

Return on Equity:

The return on equity ratio calculates the return rate received by the owners of common stock. Equity return shows the company's performance by looking at the returns generated by it (Kharatyan, 2016). Moreover, an ROE shows the management's ability to generate income with the available equity. If the ROE is between 15 to 20%, it is considered acceptable. ROE is essential because it discloses the company's profit concerning the shareholder equity amount. As Target shows a return of 27.73% in 2020, it is an indicator that the company offers impressive performance to generate income.

Conclusion

According to the Ratio Trends Analysis, Target is doing well when it comes to profit and income generation. There are a few areas where the company needs some work, like receivables turnover. The company can improve some of its ratios by reassessing its policies and improving its liquidity. However, the company's solvency has been enhanced concerning the previous year. Moreover, Target has also been able to retain its position in the market and perform exceptionally well among the retail stores in the US.

References:

Kharatyan, D. (2016). Ratios and indicators that determine the return on equity (Doctoral dissertation).

Rusdiyanto, R., Agustia, D., Soetedjo, S., Septiarini, D. F., Susetyorini, S., Elan, U., ... & Rahayu, D. I. (2019). Effects of Sales, Receivables Turnover, and Cash Flow on Liquidity.

Sunjoko, M. I., & ARILYN, E. J. (2016). Effects of inventory turnover, total asset turnover, fixed asset turnover, current ratio, and average collection period on profitability. Jurnal Bisnis dan Akuntansi, 18(1), 79-83.