Investment analysis is the process of evaluating investments, industry sectors, and economic trends. It involves evaluating the performance of a company and selecting the type of investment that best suits an investor’s needs. Investment analysis is very important to any individual who is considering an investment. Investment analysis involves evaluating three factors, namely, risk, cash flows, and resale value. By evaluating these three factors, an investor can make an informed decision. In the paper, the financial statements of three companies, namely, Walmart, Amazon, and Target, will be examined. The financial statements will then be used to conduct an investment analysis. But before delving into investment analysis, a brief description of each company will be provided.
Walmart
Walmart is a multinational company that operates a chain of hypermarkets, discount department stores, and grocery stores. The company was founded in 1962 by Sam Walton, and it was incorporated in 1969 (Walmart Corporation, 2020). Walmart is headquartered in Bentonville, Arkansas. The current Chief Executive Officer (CEO) of Walmart is Doug McMillon. Walmart employs over 2.2 million associates around the world (Walmart Corporation, 2020). With regard to revenue, the company generated total revenue of $524 billion for the fiscal year (FY) ended January 31, 2020 (Walmart Corporation, 2020).
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Amazon
Amazon is a multinational technology company that deals in e-commerce, cloud computing, digital streaming, and artificial intelligence. The company was founded by Jeff Bezos in 1994 and is headquartered in Bellevue, Washington. Amazon employs over 798,000 associates around the world (Fortune, 2020). With regard to revenue, the company generated total revenue of $280,522 for the FY ended January 31, 2020 (Fortune, 2020).
Target
Target is an American retail corporation that offers food assortment, beauty essentials, and household essentials. The company distributes apparel for women, men, children, jewelry, home furnishings, and décor, among other apparels. The company was founded by George Dayton and John Geisse in 1902 and is headquartered in Minneapolis, Minnesota (Fortune, 2020b). As of 2019, the company had over 1,868 stores around the world (Fortune, 2020b) Target employs over 368,000 associates around the world. With regard to revenue, the company generated a total revenue of $78 billion during the FY ended January 31, 2020 (Fortune, 2020b).
Investment Analysis -Ration Analysis
Earnings Per Share (EPS)
Earnings per share (EPS) is a financial measure which indicates the profitability of a company. Simply put, EPS is the portion of a firm’s or organization’s profit allocated to each outstanding share of common stock. Financial analysis and traders use this financial measure to gauge the financial strength of a company. The formula for calculating EPS is shown below:
Walmart
Amazon
Target
Amazon has a higher EPS ($23.01) than Walmart ($1.26) and Target ($5.29). Based on this financial measure, Amazon is more profitable and financially stronger than Walmart and Target.
Price-Earnings Ratio (P/E Ratio)
The price-earnings ratio (P/E ratio) is a financial measure that gives investors and traders a better sense of the value of the company. This financial ratio helps investors know if a company is profitable as well as how profitable the company will be in the future. The formula for calculation P/E ratio is shown below:
Walmart
Amazon
Target
Amazon has a higher P/E ratio than Walmart and Target. This indicates that Amazon is more profitable.
Dividend Payout
The dividend payout ratio (DPR) refers to the dividends paid to shareholders relative to the total revenue generated by the company. Simply put, DPR measures the proportion of net income that is paid to shareholders in the form of dividends. This financial measure gives an indication of how much money a company returns to its shareholders versus how much it holds to reinvest in growth, pay off debts, or add to cash reserves. The formula for calculation DPR is shown below:
Walmart
Amazon
Target
Walmart has a higher DPR (40.64%) than Amazon (40.57%). This indicates that Walmart returns more money to its shareholders than Amazon. On the other hand, Amazon reinvests more than Walmart.
Dividend Yield
The dividend yield is a financial measure that measures the quantum of cash dividends paid out to shareholders relative to the market value per share. Simply put, dividend yield shows how much a company pays out in dividends each year relative to its stock price. The formula for calculating dividends yield is shown below:
Walmart
Amazon
Target
Target pays more dividends than Walmart and Amazon.
Leverage Ratio
Leverage ratio is a financial ratio that measures the level of debt incurred by a company against various other accounts in its financial statements. There are three leverage ratios, namely, Debt to Equity, Debt to Capital, and Debt to Assets. In this case, only the debt to equity ratio will be considered as the ratio that is widely used by investors to make investment decisions. The formula for calculating debt to equity ratio is given below:
Walmart
Amazon
Target
Walmart has a good debt to equity ratio than Amazon and Target.
Gross Margin
Gross margin is a company’s income after paying off all expenses. It is a company’s net sales revenue minus its costs of goods sold (COGS). Simply put, the gross margin of a company is the sales revenue a company retains after incurring direct costs. As such, the higher the gross margin, the more capital a company retains. The formula for calculating the gross margin of a company is shown below:
Walmart
Amazon
Target
Amazon has a higher gross margin than Walmart and Target. This indicates that Amazon retains more capital than Walmart and Target.
Net Profit Margin
Net Profit Margin is a financial ratio that indicates the proportion of profit a company produces from its total revenue. A higher Net Profit Margin indicates that a company is making more money per sale. The formula for calculating Net Profit Margin is shown below:
Walmart
Amazon
Target
Target has a higher net profit margin than Walmart and Amazon. The net profit margin of Amazon and Target are very close.
Return on Asset (ROA)
Return on Asset (ROA) is a financial measure that indicates how profitable a company is relative to its total assets. This financial indicator gives an investor an idea of how efficient the management of a company utilizes its assets to generate income. ROA is often expressed as a percentage. The higher the ratio, the more efficient a company’s management is when it comes to utilizing a company’s assets. The formula for calculating ROA is shown below:
Walmart
Amazon
Target
Target has a higher ROA (7.78%) than Walmart (6.29%) and Amazon (5.84%). This indicates that Target is more efficient in utilizing its assets to generate revenue than Walmart and Amazon.
Return on Equity (ROE)
Return on Equity (ROE) is a financial measure that indicates how efficiently the management of a company handles the money that shareholders have contributed to it. Simply put, ROE is a financial measure that indicates the profitability of a company in relation to stockholders’ equity. A company with a higher ROE is more efficient when it comes to generating income and growth from its equity financing. The formula for calculating ROE is given below:
Walmart
Amazon
Target
Target has a higher ROE than Walmart and Amazon. This indicates that Target is more efficient in handling the money provided by shareholders than Walmart and Amazon.
Summary of the Financial Ratios
Table 1: Summary of Financial Rations
| Ratio | Walmart | Amazon | Target |
| Earnings per share (EPS) |
$1.25 |
$23.01 |
$5.29 |
| Price- earnings ratio (P/E) |
22.06 |
80.31 |
17.38 |
| Dividend Payout |
40.64% |
- |
40.57% |
| Dividend Yield |
1.63% |
0.00% |
1.93% |
| Leverage ratio |
0.79 |
0.38 |
1.15 |
| Gross Margin |
24.68% |
40.99% |
29.76% |
| Net Profit Margin |
2.84% |
4.13% |
4.2% |
| Return on total assets (ROA) |
6.29% |
5.84% |
7.78% |
| Return on equity (ROE) |
19.08% |
21.07% |
28.33% |
Investment Choice
Based on the ratio analysis, I would invest in Amazon. This is because the company is more financially healthy compared to Walmart and Target Corporation. Amazon has a higher EPS, P/E Ratio, Gross Margin, and ROE than Walmart and Target. Its Net Profit Margin and ROA is also high. Thus, based on this analysis, it would be advisable to invest in Amazon as it is financially healthier than the other two companies.
References
Amazon. (2020). Annual reports. Retrieved August 17, 2020, from, https://www.annualreports.com/Click/23782
Fortune. (2020). Amazon.com. [Online]. Retrieved August 17, 2020, from https://fortune.com/company/amazon-com/
Fortune. (2020b). Target. [Online]. Retrieved August 17, 2020, from, https://fortune.com/company/target/
Target. (2020). Annual report. Retrieved August 17, 2020, from, https://corporate.target.com/annual-reports/2019
Walmart. (2020b). Financial information. Retrieved August 17, 2020, from, https://stock.walmart.com/investors/financial-information/annual-reports-and-proxies/default.aspx .
