Corporations are in business to make a profit and compete in the ever-changing economy. Challenges are inherent when the consumers are in economic turmoil and businesses suffer. “Financial advisors rely on ratio tools to assess a firm’s financial condition, using calculations and financial ratios developed from the firm’s financial statements” (Nickels, McHugh, and McHugh, 2010, Chapter 17, Understanding Accounting and Financial Information). Financial ratios are especially useful in comparing the company’s performance to its financial objectives and the performance of other firms in its industry. Target, Wal-Mart, and Sears are fierce competitors in the retail industry. Wal-Mart is currently number one of the three in companies in comparison based on total revenue and net earnings, Target is positioned at number two, and Sears is ranked in the top 10 retailers.
Analyzing liquidity (current), leverage (debt), and profitability (return on assets) ratios to know the financial positioning of the corporations are essential because companies vary in size. Throughout the history of business, companies rely on traditional and new ways to remain profitable. Many corporations depend on successful best practices, technological advantages, global expansion, and providing customers with quality products and service. Ultimately these entities are what keep a business successful and profitable for decades and possibly centuries.
Target Corporation financial statements appear to be in good standing. The company in the last five years has consistently grown excluding free cash flow and working capital. In the past five years monies has decreased from a high of 3.6 billion to currently 316 million dollars in free cash flow and working capital from 7 billion to 2.1 billion on the balance sheet. Unclear of what caused free cash and working capital to deplete drastically. Potential reasoning could be the expansion internationally or building and renovating stores domestically. However, Wal-Mart has (11.7 billion) in negative working capital and Sears (707 million) in negative free cash flow (Forbes, 2012).
Target is financially healthy and has shown steady growth in revenue sales since 2009. Target’s net income is nearing three billion dollars in the past two fiscal years. Target has room to grow recently expanding interest internationally to Canada and eventually to India. Target’s current ratio is 1.3 and currently more profitable than Wal-Mart (.80) and Sears Holdings (1.1) (Forbes, 2012). Ideally businesses look for larger profit margins but in the current economy this still shows promise of profits and successful future earnings. This is particularly importance to lenders of the firm who expect to be paid on time (Nickels, McHugh, and McHugh, 2010, Chapter 17, Understanding Accounting and Financial Information).
Leverage Ratio Target and Wal-Mart current have identical ratios of 2.9 whereas Sears is significantly larger at 4.8. According to Nickels, McHugh, and McHugh (2010), any number exceeding 100 is considered to be a financial risk when debt is higher than the equity of a company (Chapter 17, Understanding Accounting and Financial Information). However, with the current downturn of the economy many businesses, especially the retail business will incur higher leverage ratios. It is also important to measure the risk in similar companies. In this case Target’s D/E ratio is parallel to top competitor Wal-Mart.
Return on Equity According to Nickels, McHugh, and McHugh (2010) return on equity (ROE) considered profitable if the numbers are above 15 (Chapter 17, Understanding Accounting and Financial Information). In the last 12 months Target has 18.5% of ROE from total operations making them profitable in the current fiscal year. Target’s five -year average ROE is 17.7% and generates equity of 98% in a five -year period. Wal-Mart has slightly more…