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JWI 530: Financial Management

Financial Analysis

Target Corporation & Wall Mart

Assignment 2: Annual Report Review

Annual Report Review has been conducted on two companies, Walmart and Target

The Annual reports have been taken from their websites:

http://stock.walmart.com/annual-reports

http://investors.target.com/phoenix.zhtml?c=65828&p=irol-reportsannual

All the data / information used in this analysis has been taken from the Annual report.

Financial Ratios:

Profitability ratios

Gross Margin ratio - Gross profit is the total profit earned from the sales. This is computed by deducting cost of goods sold from the net sales. The formula for Gross profit margin is

Gross profit Margin = (Sales – Cost of goods sold) / Sales

Target Corporation has gross margin ratio of 31 – 32 %, whereas Walmart has the gross margin of 25%. Hence the performance of Target Corporation towards earning gross profit is better than Walmart.

Profit Margin ratio - Profit margin ratio is the net profit earned from the business. This is computed by deducting cost of goods sold and all the expenses from the net sales. The formula for Profit margin ratio is

Profit Margin ratio

= (Sales – Cost of goods sold - expenses) / Sales

Target Corporation has profit margin ratio of 4 %, whereas Walmart has the profit margin of less than 4%. Hence the performance of Target Corporation towards earning net profit is better than Walmart.

Working Capital – Working capital is the amount available to the business for day to day operations. This amount should be to the level required.

Working capital is the difference between current Assets and current liabilities.

Working Capital = Current assets – Current Liabilities

Target Corporation has working capital as the current assets are more than the current liabilities. In 2012 the working capital is $2,357.

However, Walmart has no working capital as the current liabilities are more than the current assets. In 2012 the working capital is ($16,878). Since this company has cash sales only, they are working on the suppliers funds and using the supplier’s funds for other assets.

Current Ratio – Current ratio is the liquidity ratio computed to assess the liquid position of the company. The formula to calculate the ratio is

Current Assets = Current Assets / Current Liabilities

Target Corporation has a current ratio of more than 1, whereas Walmart has the current ratio below 1. Ideal current ratio is 2:1. Hence the current ratio of both companies is less than the ideal ratio.

Acid Test ratio – Acid test ratio is the liquidity ratio computed to assess the cash liquid position of the company. The formula to calculate the ratio is

Acid test ratio = Liquid Assets / Current Liabilities

Target Corporation has an Acid test ratio of less than 0.5, whereas Walmart has the current ratio below 0.25. Ideal Acid test ratio is 1:1. Hence the Acid test ratio of both companies is less than the ideal ratio.

The acid test ratio of both companies needs to be improved.

Accounts receivable turnover – Accounts receivable turnover ratio indicates the relation between the credit sales and Accounts receivable. The computation of this ratio is carried our as:

Accounts receivable turnover ratio

= Credit Sales / Average Accounts receivable

Target Corporation has increased the ratio from 9.38 times in 2009 to 12.55 times in 2012. The increase in this ratio indicates the efficiency of the management.

However, Walmart has decreased the ratio from 98.48 times in 2009 to 69.12 in 2012. This indicates that the company has either increased the credit period or has not been able to collect the outstanding in time.

Days in receivables – Days in receivable indicates the number of days sales remained outstanding at the end of the year. This ratio is computed as given below:

Days in receivables = 365 / Accounts receivable turnover ratio

Target Corporation has decreased the ratio from 38.90 days in 2009 to 29.09 days in 2012. The decrease in this ratio indicates the efficiency of the management.

However, Walmart has increased the ratio from 3.71dyas in 2009 to 5.28 days in 2012. This indicates that the company has either increased the credit period or has not been able to collect the outstanding in time.

Inventory Turnover ratio: Inventory turnover ratio is the relation between the inventory and the cost of goods sold. The inventory should be as per the requirement of the sales, but there should not be idle or excess inventory. Hence this ratio is computed as per formula given below:

Inventory Turnover ratio = Cost of goods sold / Average inventory

Target Corporation has a uniform level of inventory turnover at 6 to 6.5 times. This is an achievement for the company that although sales have been increased, but inventory level has been kept under control

Wall Mart has decreased its inventory turnover ratio from 9.31 times in 2009 to 8.04 times in 2012. This indicates the inefficiency of the management.

Days of Inventory – Days in inventory indicates the number of days, inventory takes to be converted in sales. The minimum period or reduction in this period is treated as an efficiency of the management.

Target Corporation has been able to maintain the days in inventory, to 57 – 60 days. This is the efficiency of the management to maintain the inventory level, with the increase in sales.

Walmart had not been able to keep the control over inventory and therefore the days in inventory ratio has increased from 39.22 days in 2009 to 45.38 days in 2012.

Assets Turnover ratio – Assets turnover ratio is a relation of Assets with turnover. The company invests more funds (capital expenditure) for the increase in sales.

This ratio is computed as follows:

Assets turnover ratio = Net sales / total Assets

Target Corporation has assets turnover ratio of 1.47 times in 2009, which has increased to 1.52 times in 2012. This indicates that company has increased the turnover without any increase in total assets.

Walmart has not able to achieve the increase sales in relation to Assets and therefore the ratio has decreased from 2.39 times in 2009 to 2.31 times in 2011 and 2012.

Recommendations:

In view of the ratio analysis carried above, it can be concluded that the performance of Target Corporation is better than Walmart.