MBA FPX 5014 Assessment 3 Finals
Current Ratio: The current ratio measures a company’s liquidity and ability to meet short-term obligations. As shown in Table I, Target’s current ratio for the review period is slightly higher than Walmart’s but generally below the industry average of 1, which is acceptable for the retail industry. Despite the lower ratio, Target’s balance sheet indicates sufficient cash reserves to meet obligations and fund operations.
| Year | Target | Walmart | Industry |
|---|---|---|---|
| 2018 | 0.95 | 0.76 | 0.99 |
| 2019 | 0.83 | 0.80 | 0.96 |
| 2020 | 0.89 | 0.79 | 1.01 |
Inventory Turnover: Inventory turnover ratios reflect how efficiently a company manages inventory. Target’s ratios are lower than Walmart’s and the industry average, indicating room for improvement. Enhancing inventory turnover without heavy discounting can boost sales and cash flow, optimizing overall performance.
| Year | Target | Walmart | Industry |
|---|---|---|---|
| 2018 | 5.91 | 8.53 | 8.51 |
| 2019 | 5.61 | 8.70 | 8.81 |
| 2020 | 6.10 | 8.88 | 9.13 |
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Appendix A
The company’s cash management is efficient, with Target keeping significant cash reserves that allow it to invest in opportunities such as expanding its product and service lines and store locations. Accounts receivable, though moderate compared to other current assets, are reported at $468 million in 2019 and $464 million in 2020 (Target Corp., 2021). Target could further optimize its cash management by extending its payment terms and implementing aggressive collection procedures.
Debt to Equity Ratio
The debt-to-equity ratio measures financial leverage, indicating the extent to which a company uses debt to finance its operations. Table III provides a comparative view of Target’s debt-to-equity ratio relative to its main competitor and the industry average.
Table III: Comparative View – Debt to Equity Ratio
| Year | Target | Walmart | Industry Average |
|---|---|---|---|
| 2018 | 0.99 | 0.60 | 1.27 |
| 2019 | 1.00 | 0.80 | 1.24 |
| 2020 | 0.97 | 0.73 | 1.00 |
Note. Target Corp. (NYSE:TGT) (2021).
The industry average debt-to-equity ratio decreased from 1.27 to 1.0 and was consistently higher than both Target and Walmart. Target’s ratio is consistently around 1.0, which suggests a moderately favorable financial position, enabling the company to comfortably meet its long-term debt obligations. A lower debt-to-equity ratio indicates reliance on equity rather than debt, which may not be the most efficient strategy. Target may consider paying down some of its debt in the long term while maintaining current levels for flexibility in short-term borrowings.
Return on Equity
The return-on-equity (ROE) ratio measures how well a company uses its equity to generate profits. It is calculated as Net Income after tax divided by Shareholders’ Equity. Table IV provides a comparative view of Target’s ROE.
Table IV: Comparative View – Return on Equity Ratios
| Year | Target | Walmart |
|---|---|---|
| 2018 | 25.06% | 12.66% |
| 2019 | 26.00% | 9.20% |
| 2020 | 27.73% | 19.93% |
Note. Target Corp. (NYSE:TGT) (2021).
Target’s ROE ranges from 22% to 27% over the review period, which is particularly strong as the desired ROE for companies is between 15% and 20%. A high ROE is often attributed to high financial leverage, but this is not applicable to Target given its debt-to-equity ratio and debt levels discussed earlier.
Earnings per Share
Earnings per Share (EPS) is a key indicator of profitability, cal