In-depth Financial Analysis of Target Corporation

Financial Ratio Analysis 

Target Corporation profile 

Target corporation is a general merchandise retailer offering its products through its stores and online platforms. Products offered by the company include perishable groceries, dry groceries, and frozen items. The company main competitor is Walmart. Walmart engages in retail operations, wholesale operations, and other units in various formats across the globe. The analysis is for the current year 2019 and the ratios are compared to the previous year’s ratios to measures the company current year’s performance. 

Financial ratios 

Financial ratio analysis 

Liquidity ratios 

Current Ratio 

Current ratio measures the ability of the company to pay off its current liabilities using current assets. The ratio above 1 shows that a company is able to pay off its current liabilities fully when they fall due (Liang, 2016) . Current ratio increased in 2019 even though the ratio is less than 1; this shows that the company’s current assets is not sufficient enough to pay off 100% of its current liabilities when they fall due. Therefore, the company is not liquid. 

Accounts receivable turnover 

Accounts receivable turnover measure the ability of the company to collects its receivables effectively. The ratio measures the number of times per year the company collects cash from its customers. Accounts receivable for 2019 is 162 times, the turnover increased in 2019; this shows that the company tightened its credit policies and maintains customers with good pay rate. 

Average collection period measures the period, usually in days, the company covers to collect cash from its customers in a financial year. the shorter the duration the more liquid the company is. Average collection period decreased to 2 days in 2019 from 4 days in 2018; this shows that the company credit policies are tightened to improve its liquidity. 

Inventory turnover and days sales in inventory 

Inventory turnover measures how efficiently the company handles its inventory. The ratio measures the number times the company sells inventory in a year. A higher turnover shows that the company takes less days to sell off its inventories in a year. inventory turnover for 2018 and 20189 is 6 times and days sale in inventory for 2018 is 61 days and for 2019 is 64 days. The company sell its inventory more frequently in a year and takes less days to sell of inventory. This shows that the company efficiently handles its inventory. 

Current cash coverage measures the ability of the company to pay off its current liabilities using cash generated from operations. The ratio of or above 1 is consider favorable because the company will be able to pay all of its current liabilities using cash from operations. Current cash debt coverage decreased in 2019 to 0.42 from 0.53. The ratio is less than 1; this shows that the company’s cash flow from operations cannot be used to pay all of its current liabilities. 

Solvency Analysis 

Debt ratio measures the level of financial risk that the company operates under. Debt ratio greater than 0.5 is favorable because it means that the company total assets are enough to set off its liabilities. Debt ratio of the company is higher than 0.5 for both 2018 and 2019; this shows that company total liabilities is more than half of its total assets. 

Times interest earned measures the ability of the company to pay off future interest expense using operating income. Lenders use the ratio to understand the ability of the company to pay interest on loans. A higher ratio is favorable because it shows high profitability. Times interest earned ratio increased in 2019 to 8.92 times from 8.11 times. Most investors prefer a ratio of 5, therefore, the company ability to pay off interest on outstanding loans is not in doubt. 

Cash debt coverage measures the ability of the company to pay off its average total liabilities using cash generated from operations (Laitinen, 2018) . The ratio of or above 1 is consider favorable because the company will be able to pay all of its liabilities using cash from operations. Cash debt coverage decreased in 2019 to 0.21 from 0.26. The ratio is less than 1; this shows that the company’s cash flow from operations cannot be used to pay all of its total liabilities. 

Profitability ratios 

Profit margin ratio measures the percentage of net income over sales. The ratio measures the portion of sales remaining after deducting all the expenses. Higher ratio is favorable because it shows that a higher percentage of net sales is net income. Profit margin in 2019 reduced to 3.90% from 4.08% in 2018. The decrease in profit is caused by an increased total operating expenses. Despite of the decrease, profit margin is positive; this shows that the company is making profit from the level of sales generated. 

Asset turnover measures the ability of the company to efficiently generate sales from its assets. The ratio compares net sales with total assets (Easton, 2018) . A higher ratio is favorable because it shows that the company uses its assets well to generate high sales. Asset turnover for 2019 is 1.89, this means that the company generate $1.89 of sales for every dollar of asset. Asset turnover ratio is high; this shows that the company is efficiently using its assets to generate sales. 

Return on assets and return on equity 

Return on assets and equity measures how effectively the company management uses its assets. The higher the ratio the more effective the management is in using assets. Despite of the decrease in return on assets for 2019, the ratio is high; this shows that the company management utilized the company assets more effectively to support the company operations and generate profit. 

Return on equity 

Return equity measures how effectively the company management uses its equity fund. The higher the ratio the more effective the management is in using equity capital (Laitinen, 2018) . Return on equity decreased in 2019 even though the ratio is very high; this shows that the company management utilized equity fund more effectively to support the company operations and generate profit. 

Improve financial performance of Target Corporation 

The company total operating costs increased in 2019. In order for the company to increase its financial performance, it should increase selling price of its products. The company should consolidate its debt into a lower interest, the company should for cheaper sources of capital next time its requires external financing. Under cash flow improvement, the company should extend payment terms with suppliers, reduce further the average collection period, give its customers cash discounts, identifies and disposes off obsolete inventories, reduce interest expense on loans, and permanently reviews its gross margin. 

References 

Easton, M. &. (2018). Financial Statement Analysis & Valuation, 5e. 

Laitinen, E. K. (2018). Financial Reporting: Long-Term Change of Financial Ratios. American Journal of Industrial and Business Management , 8(09), 1893. 

Liang, D. L. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research , 252(2), 561-572. 

Penman, S. H. (2015). Financial Ratios and Equity Valuation. Wiley Encyclopedia of Management , 1-7.