Abstract
Perceptive investors, lenders and stakeholders have a major role in conducting fundamental financial analysis in order to ascertain any firm’s financial health, prior to settling for some form of investment. The financial analysis involves the quantitative scrutiny of the filed financial statements across a specified fiscal period. Stakeholders normally apply ratios to examine the firm’s financial performance.
From the ratio analysis, the firm’s profitability, valuation, and operational measures as well as the general performances are indicated. In the context of Target Corporation, investors can only ascertain whether the firm is eligible for investment after the analysis of their financial statements. In order to determine whether the firm is appropriate for future investments and to provide investors with full information on which of the firm has a future prospect for business growth and productivity, profitability, liquidity, activity, debt and market ratios would be performed.
Introduction
Target Corporation came into existence in 1902 and became a public company in the same year. The firm is within the retail industry and operates as department stores majorly within US and Canada. The firm’s retail segment stores wide variety of differentiated products including women, men and children clothing, electrical appliances, furniture, children products such as toys, household products and accessories, general merchandise as well as cosmetics and other beauty products (Target Corporation, 2011). Besides, the firm offers credit card and visa facility to its quality customers.
With over 40 distribution stores spread all over USA and Canada, the firm is currently boasting of over two billion dollars in sales revenue with market capitalization of over two billion (Yahoo Finance, 2014). The distribution stores operate under the name Target Corporation, the Corporation or Target. However, the firm’s online store operates under the name Target.com.
Financial Analysis of the Firm
Profitability ratios
The profitability ratios of any firm typically begin with the profit margins. The profit margins generally indicate the profit quantity on sales that the firm generates. In fact, profit margins indicate the return on sales at various points in the firm’s balance sheet (Gibson, 2010). All profits margins are analyzed in this report including gross, operating and net profit margins, returns on equity, returns on total assets and earnings per share. Generally, the firm’s profitability ratios do not indicate a promising trend. The low margins could mean that the firm’s cost of sales have been rising due to various factors such as the exchange rates and managerial decisions.
Gross profit margin
The ratio is the percentage of net sales based on the cost of sales. Besides, firms have used the margin to measure their ability to meet theirs supplementary expenses as well to save for the future. Higher profit margins indicate that the firm is efficient and effective (Gibson, 2010). Like all other profitability margins, the gross profit margin has indicated a decreasing trend in the last three financial years. In fact, there has been a change in the gross margins by nearly 10%. The indication is that the firm has not been generating enough sales to offset the rising costs of production.
Return on equity
Return on equity is the net income that is returned as a proportion of the investor’s equity. The ratio indicates the generated returns on investments. This can only be achieved through return on equity ratio. The calculated ratios indicate a considerable drop from the last financial periods by about 7%.
Return on assets
The Return-on-assets is another important profitability ratio used by the firms to show their net income as a percentage of assets they hold. The companies use return-on-assets to evaluate their profitability by indicating the amount of profit they have generated from their assets (Guerard & Schwartz, 2007). The returns on assets have also decreased by about 2% from the previous financial periods. The net earnings of the firm have also been decreasing due to external factors causing the slight changes in the net income per asset the firm hold.
Liquidity Ratios
Liquidity rations are used to indicate the current financial position of the firm. In other words, the ratios indicate the capability of the firm to meet its short-term obligations (Gibson, 2010). The liquidity ratios analyzed under this category includes the current ratio and the quick asset ratio.
Current ratio
The current ratio is the proportion of the current assets to current liabilities. The current ratio measures the rate at which the firm meets its interim financial commitments. The higher current ratios indicate that the firm can easily offset its short-term debts hence the liquidity of the firm (Guerard & Schwartz, 2007). Even though the trend analysis does not indicate consistency, the indication is that the rate at which the firm turns its current assets to offset the current liabilities is favorable. The firm is fairly liquid, which means that it does not experience difficulties in offsetting its immediate financial needs.
Activity Ratios
The activity ratios indicate how the firms have managed their resources or assets to generate sales. In other words, it shows how the firms have been effective in managing their assets and liabilities to increase revenues. Not only is it used to measure the asset management but also to offer more understanding on the firm’s success over its credit policy (Lee, Lee & Lee, 2009). Under this category, the ratios that have been analyzed include inventory turnover, total assets turnover, the debtors’ turnover and the creditors’ turnover.
Inventory turnover
The inventory turnover ratio indicates the manner in which the firm has used its inventory in order to generate sales. In other words, the rate at which inventory has been turned into sales. Higher inventory turnovers indicate increased rate in which the firm has turned its inventory into sales. According to the analysis, the rate at which the firm is turning its inventory into sales is average ranging between 6.3 in 2011 financial year to 6.47 in the current period. Even though the changes are small, there is an indication of an improvement (Target Corporation, 2011).
The debtor’s turnover
The ratio indicates how the firm is managing its accounts receivable as well as its credit policy. Generally, greater receivable turnover is better because higher receivable turnovers indicate that the firm is collecting quickly on its accounts receivables (Lee et al., 2009). However, extremely high ratios may not be healthy for the firm. The trends indicates average collection periods. The number of days has been improving from the previous financial years to the current period. The trend is favorable for the firm.
Debt Ratios
The debt ratios indicate the manner in which the firm offset its long-term debts. In other words, the ratios show how the firm is managing its long-term debts. Essentially, the debt ratios indicate the manner in which the firm’s assets can be used to offset its liabilities (Gibson, 2010). Under this category, the debt ratio, times interest earned ratio and the fixed payment coverage ratio was analyzed.
Debt ratio
The debt ratio indicates the proportion of the firms’ total liabilities against the total assets. A debt that bears interests is what is being considered in this ratio. Therefore, it is long-term debt to shareholders-equity that both firms will use to measure the proportion of their equity being financed by debt (Yahoo Finance, 2014). The target corporation has indicated a decreasing trend in its debt ratio. The firm’s amount of debt that is used to finance its equity has been considerably reducing from 20111 to 2013 financial years. The trend is healthy for the firm.
Market Ratios
Market ratios indicate the value of the current stock prices in relation to the firm’s value as indicated in the balance sheet and income statements. Besides, market ratios indicate the performance of the firm compared with other firms in the industry (Gibson, 2010). The reason is that the stock prices are always an indication of the firm’s performance at that particular time. The most important market ratio is the price earnings ratio. The other important ratio that has been analyzed is the price to book value ratio, which indicates the share price in relation to the book value of the firm.
Price earnings ratio
The ratio indicates what the investors would be earning per share of their investments. Higher ratios indicate greater returns for the shareholders and increased performance of the firm (Gibson, 2010). In this case, the price earnings ratio for the Target Corporation has shown an increasing trend from the previous financial period. The increase is coupled with the rise in the share prices. The indication is that the firm has been performing well compared with competing firms in the industry.
References
Gibson, C. (2010). Financial reporting & analysis: using financial accounting information. Farmington Hills, OH: Cengage Learning.
Guerard, J., & Schwartz, E. (2007). Quantitative corporate finance. Chicago, Springer.
Lee, A., Lee, J., & Lee, C. (2009). Financial analysis, planning & forecasting theory and application. Hackensack, NJ: World Scientific.
Target Corporation (2011). Annual report 2011. Web.
Yahoo Finance (2014). Business and finance. Web.