Due Before 11:55 pm Tonight Accounting

Course Project: Ratio Analysis

Veronica Almodovar

Rasmussen College

Section 01 Principles of Finance

This project has undertaken ratio analysis for Kellogg Company and Target Corporation over three years’ period. Using data from their annual report and other relevant sources, we are going to compute and analyze the key ratios such as liquidity, activity ratios, profitability ratios, leverage ratios and coverage ratios. The project will make use of the ratios computed to compare the competitiveness of the two companies over a similar time period and for each company over the three years period.

Both the Kellogg Company and Target Corporation are multinational companies of American origin. Kellogg is involved in food manufacturing while target Corporation is among the largest discount retailer in the country.

Ratio Analysis,

This will involve computing the key companies’ ratios analyzing them in order to make proper financial decisions. Ratio analysis is an important tool for benchmarking the financial and efficiency of operations either between similar players or over a period of time to determine how a particular company has been operating. The ratios computed are very important in determining the financial health of a company.

Liquidity Ratios

They are used to measure the ability of a firm to meet is short-term financial obligations as they fall due in addition to long-term ones when they become current. They are used to show the levels of cash of a company and how the company can convert its assets to cash in order to pay off the liabilities and other current obligations. We are going to look at current and quick ratios for both companies over three years’ period (Johnstone, 2009)

Current Ratio

Current ratio is computed by dividing current assets by current liabilities. This ratio is both liquidity and efficiency ratio used to determine the ability of firm to pay-off its short term liabilities. In order to be able to meet its financial obligations as they fall due, experts recommend that this ratio should be at least 2:1.

We compute using excel as follows

Kellogg Co
	2013	2014	2015
Current Assets	3,267,000	3,340,000	3,236,000
Current Liabilities	3,835,000	4,364,000	5,739,000
Inventory	1,248,000	1,279,000	1,250,000
Target corp
	2013	2014	2015
Current Assets	11,573,000	14,087,000	14,130,000
Current Liabilities	12,777,000	11,736,000	12,622,000
Inventory	8,766,000	8,790,000	8,601,000
Current Ratio
	2013	2014	2015
Kellogg Co	0.85	0.77	0.56
Target corp	0.91	1.20	1.12
Quick Ratio
	2013	2014	2015
Kellogg Co	0.53	0.47	0.35
Target corp	0.22	0.45	0.44

It can be noted that Kellogg had lower ratio that Target Corp. from the chart below, it can be observed that current ratio for Kellogg was always below 1 for the three years under consideration.

Quick Ratio,

It is computed as follows, Quick ratio = (current assets – inventory) / Current Liabilities.

Quick Ratio
	2013	2014	2015
Kellogg Co	0.01	0.02	0.01
Target corp	0.06	0.16	0.28

Activity Ratios

These are types of financial tools employes to determine the ability of a particular business to change assets, capital in cash sales. They include inventory turnover,

Inventory Turnover
	2013	2014	2015
Kellogg Co	(26,157/3,933.4) = 6.65	7.53	6.99
Target corp	(26,157/3,933.4) = 6.45	6.14	5.84

	Kellogg Co	Target corp
Recievables Turnover	250/20= 12.5	481.8/3= 160.6
Days Sales outstanding	250/10= 25	720/12= 60
Fixed assets turnover	240/20= 12	45/3= 15
Total Assets Turnover	10/5= 2	30/2= 15

Profitability ratios

They are used to show the ability of a firm to generate profit. They are measure of operational efficiency implying that the higher the better. We will look at the following profitability ratios, gross profit margin, operating profit margin, net profit margin, return on assets and return on equity.

Gross profit margin

It is computed by divinding gross profit by sales. It is useful indicator of how a company has used its costs of sales in profit generation.

Using excel we compute the rations as follows

Gross Margin
	2013	2014	2015
Kellogg Co	41.26%	34.73%	34.61%
Target corp	30.38%	29.53%	29.39%
Kellogg Co	2013	2014	2015
Sales	14792000	14580000	13525000
Gross Profit	6103000	5063000	4681000
Operating Profit	2837000	1024000	1091000
Net Profit	1807000	632000	614000
Kellogg Co	2013	2014	2015
Sales	3266000	4039000	3590000
Gross Profit	6103000	5063000	4681000
Operating Profit	2837000	1024000	1091000
Net Profit	1907000	632000	614000

Gross Margin
	2013	2014	2015
Kellogg Co	41.26%	34.73%	34.61%
Target corp	30.38%	29.53%	29.39%

Operating Profit margin

It helps in determining the operational efficiency of a company. It can be noted that Kellogg has done better than the target Corp.

Operating Profit Margin
	2013	2014	2015
Kellogg Co	19.18%	7.02%	8.07%
Target corp	7.33%	5.83%	6.25%

Net Profit Margin

Net Profit Margin
	2013	2014	2015
Kellogg Co	12.20%	4.33%	4.54%
Target corp	4.09%	2.72%	-2.25%

Return on Assets

Return on Assets or ROA is one of the most used profitability ratio and compares net profit with the assets used in generating it. This ratio is has connection with both the profit margin and asset turnover and it shows percentage return for both the creditors and investors of a particular company (Florenz, 2012)

We can express Return on Assets = (Net Profit / Average Total Assets)

We can multiply by Total Revenue / Total Revenue without changing anything above.

This gives,

ROA = (Net Profit / Total Revenue) * (Total Revenue / Average Total Assets)

Using the known formulas, the above expression gives

Return on Assets
	2013	2014	2015
Kellogg Co	11.79%	4.13%	4.04%
Target corp	6.33%	4.25%	-3.81%

Return on Equity

Return on Equity (ROE) also referred to as Return on Investment (ROI) is the best measure of the arrival, since it is the result of the working execution, resource turnover, and debt-equity management of the firm. On the off chance that a firm can obtain cash and utilize it to accomplish a higher return than the expense of the obligation, then the utilizing makes extra income that gathers to stockholders as expanded Equity.

It is expressed as follows,

Return on Equity = Net Profit / Average Shareholders’ Equity

Return on Equity
	2013	2014	2015
Kellogg Co	60.60%	19.96%	24.97%
Target corp	18.52%	12.02%	-10.82%

Leverage ratios

Are used to measure the mixture of debt and owners’ equity used in order to finance the operations of a company. The key leverage ratios are debt / networth and debt ratio. Debt ratio compared the company’s liabilities and assets while debt to networth compares shareholders funds and debt used.

Coverage Ratios

This is used to measure the ability of a company to fulfil its financial obligations. From the figures given, Kollegg has performed better than Target Corporation.

The analysis of ratio has made it possible to compare the performances of the two companies above. It can be noted that Kollegg has been offering higher returns hence better to invest into.

References

Florenz T (2012). A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011. International Journal of Business & Social Science. 3, pp.173-190.

Johnstone, B. (2009). Worldwide Trends in Financing Higher Education. In J. Knight, Financing Access and Equity in Higher Education. Rotterdam: Sense Publishers.