Introduction
The return on asset ratio shows the profitability of the company in relation to its total assets (Gibson). It also indicates how efficient management is employing the total assets of the company to generate profits. Therefore, the higher the ratio, the higher the return on assets ratio, the more there will be an efficient utilization of the asset base of the company. This ratio is generated by making a comparison between the net income and the average of the total assets in a percentage form. For instance, in the case of a capital intensive company such as Walmart with a relatively larger asset base, ROA is calculated based on the large number in the denominator of this ratio. On the other hand, low intensive businesses will favor higher ROA since there is a low denominator figure.
Source: Case Study
The table above from the case study indicates that Walmart has higher ROA throughout the three years than Target. However, this ratio is quite challenging because a company that has higher ROA does not mean that the company is performing better than other companies in the same industry. Since Walmart has a higher return on assets during all the presented years (2008, 2007, and 2006), it implies that it is more profitable than Target because it is the largest retail store all over the world. Therefore, it has successful investments since it experience bigger proceeds from its total assets as compared to Target. According to the information provided in the case study regarding Target and Walmart, Target is decorated with wider lanes aimed at providing better shopping experience. On the other hand, Walmart is major focusing on the provision of cheap and affordable products instead of the fancy shopping experience. Therefore, Target has more selling and general administrative expenses (SG&A) than Walmart. Hence, Walmart is more profitable than Target.
Question (b)
The table above indicates that Walmart higher profit margin ratio on the return on assets as compared to its competitor, Carrefour throughout the three financial years (2008, 2007, and 2006). Therefore, Walmart is more profitable than Carrefour despite the application of similar business strategies. Moreover, the selling and general administrative expenses are similar between the two companies, but Walmart is having a low cost of goods available for sale. Secondly, while comparing the asset turnover ratio between Walmart and Carrefour, Walmart has higher asset turnover ratio than Carrefour in all three fiscal years. That is receivable turnover, inventory turnover, and fixed asset turnover ratios for Walmart is higher than that of Carrefour retail stores in 2008, 2007, and 2006. This is why Walmart has more operating profit than Carrefour despite the use of similar business strategies.
Question (c)
Source: Case Study
According to the above table, it is not doubtable that the Carrefour retail Store is using its financial leverage in a most effective manner in improving the rate of return on capital and equity than other competitors like Walmart and Target. This is because it has the highest financial leverage across the three years than the other retail stores (Walmart and Target).
Work Cited
Gibson, Charles. Financial Reporting and Analysis. 13th ed. Cengage Learning, 2012. Print.
