This report provides an analysis of Target’s financial performance for the fiscal years 2017, 2018, and 2019. The horizontal and vertical analyses, as well as the financial ratios, are the analysis tools that are used. The following sections present these analyses:
Horizontal Analyses
The horizontal analysis involves the comparison of the items of the financial statements across the fiscal years to get the overview of changes of those financial entries (Lessambo, 2018). This analysis would give the company a trend in its performance and will be able to incorporate appropriate actions to maintain or improve its performance.
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In the financial year 2018, net sales increased by 3.48% in comparison to the prior year of 2017. Similarly, the cost of goods sold increased by 4.03%, and there is a positive change in gross profit, amounting to 2.19% increase from 2017. Also, the selling general and administrative expenses rose by 6.42%. This increase in expenses is higher than the increase in sales, implying that it did not boost the 2018 sales to the required level irrespective of the fact that the sales increased in this fiscal year. The company’s sales in 2018 had more potential of higher increase than the resultant increase.
In the financial year 2019, net sales increased by 3.63% in comparison to the prior year of 2018. Similarly, the cost of goods sold increased significantly by 4.25%, and there is a positive change in gross profit, amounting to a 2.17% increase from 2018. Also, the selling general and administrative expenses rose by 4.11%. Notably, this increase in costs is higher than the sales increase, implying that this change did not boost the 2019 sales to the required level irrespective of the fact that the sales increased in this fiscal year. In other words, Target’s sales in 2019 had more potential for further increase than the resultant increase.
The increase in the selling general and administrative expenses resulted in a 4.08% increase in total operating expenses and the operating loss of 3.36%. The interest expense in 2019 decreased by 13.02% from 2018, indicating that the company avoided heavy borrowing in 2019, which is a positive direction to debt reduction by the company. This reduction in borrowing probably contributed to 0.79% increase in the net income for 2019.
The increase in the selling general and administrative expenses resulted in a 4.69% increase in total operating expenses and an operating loss of 12.43%. The interest expense in 2018 decreased by 6.85% from 2018, indicating that Target Corporation reduced the amount of borrowing in 2018, which implies an increase in the company’s performance or improvement in its ability to generate more revenue for operating activities. This reduction in borrowing probably contributed to 6.58% increase in the net income for 2018.
The horizontal analysis shows that the general performance of Target Corporation had a positive trend from financial 2017 to the fiscal year 2019. This positive change can be seen from the fact the increase in sales of the company in 2019 was higher than the rise in 2019. Therefore, the company is making more revenue every year as compared to the previous financial year. Besides, the analysis shows that the company’s operating expenses exhibit an increasing trend, but still, it can make higher revenue; this shows an improvement in performance. However, the rising expenses can be the major factor hindering the potential of the company to make even higher sales, and the accounting department would need to work on the budgeting of expenses so that the expenses do not exhibit a significant increasing trend.
From the horizontal analysis of the balance sheet, in the financial year 2018, the accounts receivable rose by 24.03%; this means that the company did not have good control over bad debt loss in this fiscal year. This significant increase implies that the company did not have the required level of drive to collect the accounts receivables, and most probably, a large portion of accounts receivables turned into bad debts. Besides, the total current assets of the company increased in 2018 by 4.59%, which means that the working capital requirement increased from 2017 to 2018.
Target’s performance was not well in the financial year 2019 since the company did not have good control over bad debt loss. Notably, the accounts receivable rose by 18.41% from 2018 to 2019 fiscal year. This increase indicates that the drive of the company to collect the accounts receivables was low. Also, the total current assets of the company decreased in 2019 by 0.17%, which means that the working capital requirement decreased during this financial year. Moreover, Target’s investment in goodwill rises by 0.48%, and the shareholder’s equity decreased by 3.04% in 2019 in comparison with that of 2018.
On average, the net sales increased by 7.24% from 2017 to 2019 financial year. The cost of goods sold increased significantly by 8.45% and the gross profit increased by 4.41% from 2017 to 2019. Moreover, the selling general and administrative expenses rose by 10.79%. This increase in expenses is higher than the overall sales increase, which implies that most of these expenses did not boost the average sales from 2017 to 2019.
Vertical Analysis
The vertical analysis involves the determination of proportions of financial statement entries (Pike, Neale, Linsley, and Akbar, 2018). In the balance sheet, the assets and liabilities are express as the proportions of the total assets and liabilities respectively, while in the income statement, all the cash flows are expressed as the proportion of sales revenue.
From the vertical analysis of the income statement, the company’s cost of goods sold constitutes 70.31% of sales in 2019, 70.31% in 2018, and 69.94% in 2017. These proportions exhibit an increasing trend, resulting in the reduction of gross profit from 30.06% in 2017 to 29.69% and 29.27% in 2018 and 2019 respectively. The total operating expenses take significantly large proportions of sales during the three financial years at 92.89%, 93.98% and 94.39% for 2017, 2018 and 2019 respectively. Besides, the 2019 net income is 3.90%, a reduction from 4.01% in 2017. This reduction in net earnings can be associated with the company’s significant expenses.
From the vertical analysis of the balance sheet, the 2019 total current assets constitute 30.32% of the total assets, which is less than the proportions of 2018 and 2017 total current assets which were 31.11% and 32.04% respectively. These proportions show a decrease in Target’s working capital from 2017 to 2019.
Ratio Analysis and Altman’s Z-score
Ratio analysis is one of the useful tools in performance analysis of a company (Sofat & Hiro, 2015). The ratio analysis of Target Corporation shows that the debt to asset ratio is 73% in 2019 and 71% in 2017 and 2018. These ratios are above the industry average of 50%, which implies that the company is in a favorable position in the industry. The company’s current ratios for 2017, 2018, and 2019 are 94%, 96%, and 83% respectively. These ratios are relatively high implying that the company’s ability to pay off its debts is at the required level. The return on assets of the company seems to be constant at 7%.
Similarly, the net profit margin has been constant over the past three financial years at 4%. On the other hand, Altman’s Z-score of the company for the three years is relatively high. Notably, all the Altman’s Z-scores are greater than 2.99, which implies that the company has been on the “safe” zone or favorable position for the last three years.
Conclusion and Recommendations
The general trend of Target’s performance from 2017 to 2019 can be said to be positive. First, the change in the account receivables exhibits a decreasing trend, even though the changes are positive. Notably, there was an increase of 24.03% in 2018 and increase of 18.42% in 2019, which is a reducing trend. It means that Target Corporation was able to improve its drive in the collection of the accounts receivable in 2019, and if a similar pattern is maintained, the company is going to reduce the amount of bad debts loss in future financial years (Management Association; Information Resources). However, from changes in total currents assets, the general trend of the required working capital of the company seems to be reducing. Therefore, the company would need to check on its current assets while studying the financial statements to determine ways of improving its working capital and ability to pay off debts.
On average, the company’s operating expenses are significantly large, which makes it use almost all the sales revenue for expenses. Target needs to check its operating expenses as they exhibit an increasing trend from the past three financial years. Although the position of the company from the current ratio is favorable, it needs to improve on its investment so that the return will increase instead of remaining constant over the years. In addition, based on the profit margin, the company need to increase its sales or enhance its revenue sources and minimize expenditure to attain a position of increasing profit over the years.
References
Lessambo, F. I. (2018). Consolidated Financial Statements. Financial Statements , 269-276. doi:10.1007/978-3-319-99984-5_20
Management Association; Information Resources. (2014). Banking, Finance, and Accounting: Concepts, Methodologies, Tools, and Applications: Concepts, Methodologies, Tools, and Applications . Hershey, PA: IGI Global.
Pike, R., Neale, B., Linsley, P., & Akbar, S. (2018). Corporate Finance and Investment: Decisions and Strategies . Harlow, United Kingdom: Pearson UK.
Sofat, R., & Hiro, P. (2015). Strategic Financial Management, Second Edition . New Delhi, Delhi: PHI Learning Pvt.
