Financial Analysis Project
Target Corporation is one of the largest American merchandise retailers. As of January 31, 2016, it operated 1,792 stores in the USA. It is also a component of the Standard & Poor’s 500 Index. The company earned a net income of $3,363 million in 2015 compared to a net loss of $1,636 in 2014 (Target, 2016).
Horizontal analysis involves comparing each item on the most recent statement with the related item on the earlier statement in terms of amount and percent of increase or decrease (Warren, Reeve, & Duchac, 2009, p. 585).
Horizontal Analysis
Horizontal analysis of Target’s consolidated statements of financial position is presented in table 1. As it can be seen, the total assets value didn’t change significantly in 2016 compared to previous year. Total current assets and liabilities slightly increased, while non-current assets and liabilities as well as shareholders’ equity decreased.
The most significant changes are related to the discontinued operations. Table 1 shows that current and non-current assets of discontinued operations decreased by 70% and 90% respectively. Short-term liabilities of discontinued operations increased by 49%, while long-term liabilities of discontinued operations went down by 91%. These changes are mainly attributed to the exit of the former Canadian subsidiaries from the Group in 2015 (Target, 2016).
The company’s other current assets decreased by 44%, mostly due to the pharmacies and clinics business sale transaction in December 2015 (Target, 2016). Besides, this fact resulted in an increase of Target’s cash and cash equivalents by 83%. Another reason for such growth was attracting more short-term investments by approximately $1.5 billion. Moreover, current portion of long-term borrowings increased from $91 million to $815 million.
It should be also noted that the company’s retained earnings decreased despite the fact that 2015 year ended with a profit of $3.4 billion (loss in 2014). The reason is that Target repurchased its stock for a sum equivalent to net earnings and paid dividends to its shareholders during 2015 (Target, 2016).
Horizontal analysis of Target’s statement of financial position
Horizontal analysis of Target’s statement of operations
Vertical Analysis
Vertical analysis is a percentage analysis of the relationship of each item in the financial statement to a total within this statement (Warren, Reeve, & Duchac, 2009, p. 587). As regards the balance sheet, each component is presented as a percentage of total assets or total liabilities and equity. In income statement vertical analysis, sales are selected as a base for calculating percentages.
Vertical analysis of Target’s consolidated statements of financial position is presented in table 3. Due to the company’s business, it has a high share of inventory (21%) and fixed assets (63%), buildings in particular, in total assets value. The assets structure as of 1/31/2016 is reflected in figure 1. Besides, as it can be seen, Target is mainly financed through debt (68% of total liabilities and equity). The balance sheet structure has remained the same as at the end of 2015.
Figure 1
Target’s asset structure as at 1/31/2016
Vertical analysis of Target’s statement of financial position
Vertical analysis of Target’s statement of operations
Liquidity Evaluation
Target’s liquidity ratios for the year ended January 31, 2016
As Target’s working capital is positive, it means that it has enough short-term assets to cover its current liabilities. However, to compare the company with other firms in terms of liquidity, current ratio is a better indicator. As a rule, the greater this ratio is, the better. As its value exceeds 1.00, it also shows that the company is able to pay off its short-term debts with its current assets. However, the quick ratio which doesn’t take into account inventory is rather low, which means that the company has many assets tied up in inventory. Still, this is a normal situation for the industry in which Target Corporation operates. We should also note that Target doesn’t have any accounts receivable on its balance sheet, thereby its quick and cash ratios have the same values.
The cash conversion cycle (CCC) is a liquidity metric that indicates how quickly the company sells its inventory, collects accounts receivable, and pays off its payables. The lower the ratio is, the better (Loth, n.d.). Thereby, we can conclude that the company manages its assets effectively enough as its CCC is only 6 days.
The DSO component of CCC is zero as the company has no receivables on its statements of financial position. As regards other CCC components, according to CSIMarket data, the average industry inventory turnover ratio for 2015 was 4.67 (CSIMarket, 2016a). Thereby, the average industry DIO was 365 / 4.67 = 78. This means that the company uses its inventory more efficiently than most of its competitors as its DIO was 59 as at January 31, 2016.
Summary of financial conditions
Target’s total assets at January 31, 2016 were $40,262 million representing a decrease of $910 million, or 2%, from the figure as at January 31, 2015. The company’s long-term debt decreased in 2016 from $12.6 billion to approximately $11.9 billion, but this was accompanied by a growth in current portion of long-term borrowings from $91 million to $815 million. The total shareholders’ equity was approximately $13 billion as at January 31, 2016. It dropped by $1 billion, or 7%, mainly due to lower retained earnings in 2016 compared to 2015. Table 6 shows some of the key financial ratios for Target Corporation.
Target’s financial ratios
ROA and ROE are among the most commonly used ratios to measure the profitability of a company. Target Corporation has a rather good return on equity ratio of 25% which is higher than the industry average of 22%. However, its ROA of 8% is 2% lower than the industry average (CSIMarket, 2016b).
The equity-to-assets ratio shows that the company is mainly financed through debt. High leverage increases the investors’ risk, but may bring additional income to the shareholders in case of accepting profitable investment projects.
Times-interest-earned ratio shows that Target Corporation is able to pay off its interest 9 times with the help of its operating income. Finally, the company has a relatively high price-to-earnings ratio. According to Yahoo Finance, Target’s market share price was $81.33 as at April 29, 2016 (Yahoo Finance, 2016). The company’s earnings per share (EPS) are indicated in its statements of operations ($5.35 in 2015). Thereby, P/E ratio is equal to $81.33 / $5.35 = 15.2. Thus, each $1 of Target’s earnings is worth $15.2 to the stock market.
Besides, Target Corp. has enough liquid assets to cover its current liabilities and manages its assets efficiently. Moreover, the balance sheet and income statement structure hasn’t changed significantly in 2015 apart from the variations related to the Canada exit and pharmacy and clinics transaction described above. This fact proves that the company is a stable and safe investment.
References
CSIMarket (2016). Target Efficiency Comparisons. Retrieved from http://csimarket.com/stocks/TGT-Efficiency-Comparisons.html.
CSIMarket (2016). Target Management Effectiveness Comparisons. Retrieved from http://csimarket.com/stocks/TGT-Management-Effectiveness-Comparisons.html.
CSIMarket (2016). TGT’s cumulative twelve months Net Margin by quarter. Retrieved from http://csimarket.com/stocks/singleProfitabilityRatiosttm.php?code=TGT&net.
Loth, R. (n.d.). Liquidity Measurement Ratios: Cash Conversion Cycle. Retrieved from Investopedia, http://www.investopedia.com/university/ratios/liquidity-measurement/ratio4.asp.
Target (2016). 2015 Annual Report. Retrieved from http://investors.target.com/phoenix.zhtml?c=65828&p=irol-reportsannual.
Yahoo Finance (2016). Target Corp. (TGT). Retrieved from http://finance.yahoo.com/q?s=TGT.
Warren, C. S., Reeve, J. M., & Duchac, J. E. (2009). Managerial accounting (2nd ed.). Mason: South-Western Cengage Learning
