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Target Corporation Company Analysis

By: Cindy Garcia

Target is a successful billion dollar company. Their net income for 2012 was US$2.929 Billion. It is the second-largest discount retailer in the United States, behind Walmart. Target Corporation is an upscale discount retailer that provides high-quality, on-trend merchandise at attractive prices in clean, spacious and guest-friendly stores. Today, Target remains committed to providing a one-stop shopping experience for guests by delivering differentiated merchandise and outstanding value with its “Expect More Pay Less” brand promise. Target has 1,781 stores located within 49 states and global locations in India and Canada. I chose Target Corporation as the company to analyze because it is my favorite store.

I was interested in seeing how the company is performing financially for 2012 and compare it to previous years. I was able to find out how Target is performing by using their financial statements: Income Statement, Balance Sheet, and Cash Flow. The method through which I did this was by solving several ratios representing four distinct categories: liquidity, activity, profitability, and coverage. The numbers needed for these ratios can be found through basic information available through a company’s annual financial statements, such as income statement, balance sheet, and statement of cash flow. All numbers used in the calculations are quoted in millions of dollars.

I. Liquidity

1. Current Ratio

Current Ratio

1,8 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0 2010 2011

Year

2012

Current Ratio=Current Assets/Current Liabilities

Year

2012 2011 2010 Calculation 16,449,000/14,287,000= 17,213,000/10,070,000= 18,424,000/11,327,000=

Solution

1.15 1.71 1.63

The current ratio is a commonly used liquidity ratio that measures a company’s ability to pay its current liabilities with its current assets. Solving for the current ratio and other liquidity ratios helps an investor assess how a company is doing (the health).

A low current ratio could suggest problems with inventory management, ineffective standards for collecting receivables, or an excessive cash burn rate . Increases in the current ratio over time may indicate a company is “growing into” its capacity.

Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses. If a company's current ratio is in this range, then it generally indicates good short-term financial strength. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. As we can see Target’s current ratio decreased for the year 2012 but it’s not less than 1, so they would be able to pay off its obligations. Target was doing well in 2010 and 2011, but then decreased in 2012. This could be due to problems with problems with inventory management.

2. Quick or Acid-Test Ratio

Quick or Acid-Test Ratio

0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 2010 2011

Year

2012

Quick or Acid-Test Ratio=Cash,Marketable Securities,and Net Receivables/Current Liabilities Year

2012 2011 2010

Calculation

6,721,000/14,287,000= 7,865,000/10,070,000= 9,166,000/11,327,000=

Solution

.47 .78 .81 The quick or acid-test ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. It is a measurement of a company’s ability to pay short term liabilities without selling inventory.

Target has a quick ratio of less than 1 which means it cannot currently pay back its current liabilities. Target’s quick ratio has been decreasing instead of improving which means they have to do something about it. There’s a problem here because Target’s current liabilities are larger than their assets. Lower values show that the company may experience problems paying short-term debts. Target should consider liquidating some inventory, refinancing short term debt with long-term debt and/or consider a sale/leaseback of fixed assets. 3. Current Cash Debt Coverage Ratio

Current Cash Debt Coverage Ratio

0,6 0,5 0,4 0,3 0,2 0,1 0 2010 2011

Year

2012

Current Cash Debt Coverage Ratio=Net Cash from Operating Activities/Avg. Current Liabilities

Year

2012 2011 2010

Calculation

5,434,000/12,178,500= 5,271,000/10,919,500= 5,881,000/10,698,500=

Solution

.45 .49 .55 Current cash debt coverage ratio measures a company’s ability to repay their current debt. Unlike the current and acid test ratio which looks at the year-end balance of assets this ratio looks at the net cash provided by operating activities. This ratio indicates a company's ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets used in operations. The higher the percentage ratio is, the better the company's ability to carry its total debt. As you can see Target has very low ratios, below 1, for the last three years which is not good because this means it cannot repay its liabilities. We also see that the liabilities amounts are higher than the net cash from operating activities and any company, just like Target, does not want this.

II. Activity

4. Receivables Turnover

Receivables Turnover

6 4 2 0 14 12 10 8 2010 2011

Year

2012

Receivables Turnover=Net Sales/Avg. Trade Net Receivables Year

2012 2011 2010

Calculation

69,865,000/5,927,000= 67,390,000/6,153,000= 65,357,000/6,966,000=

Solution

11.79 10.95 9.38 Receivables turnover is an activity ratio, measuring how efficiently a firm uses its assets. This ratio determines how quickly a company collects outstanding cash balances from its customers during an accounting period. It is an important indicator of a company's financial and operational performance and can be used to determine if a company is having difficulties collecting sales made on credit. For Target the receivables turnout is very good and has increased a lot in between 2010 and 2012. The average ratio for Target’s competitor, Walmart, is around the same average which lets us know that Target is doing very good. In this ratio it is not like the other ones where if it is below 1, it is not performing well enough. It depends on the company’s past ratios and the average for other companies in the same industry. 5. Inventory Turnover

Inventory Turnover

6,4 6,35 6,3 6,25 6,2 6,15 6,1 6,05 2010 2011

Year

2012

Inventory Turnover=Cost of Goods Sold/Average Inventory

Year

2012 2011 2010

Calculation

47,860,000/7,757,000= 45,725,000/7,387,500= 44,062,000/6,944,500=

Solution

6.17 6.19 6.34 Inventory Turnover Ratio measures company's efficiency in turning its inventory into sales. Its purpose is to measure the liquidity of the inventory. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. In this case Target has a low inventory turnover ratio but that isn’t always a negative thing. This means that Target might have poor liquidity, possible overstocking, but it also reflects a planned inventory buildup in the case of material shortages or in anticipation of rapidly rising prices. Target has to have excess inventory for when they run out of a certain product, because people count on them to have what they need available. High inventory levels are usual unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble if the prices begin to fall. 6. Asset Turnover

Asset Turnover

1,56 1,54 1,52 1,5 1,48 1,46 1,44 1,42 2010 2011

Year

2012

Asset Turnover=Net Sales/Average Total Assets

Year

2012 2011 2010

Computation

69,865,000/45,167,500 67,390,000/44,119,000 65,357,000/44,321,500

Solution

1.55 1.53 1.47 Asset turnover is a ratio that measures how well assets are used to generate sales. A high number indicates that assets are used well, while a lower number indicates that the company could probably do better with its assets. If the industry average total asset turnover ratio is 1.2 we can conclude that the company has used its asset more effectively in generating revenue. Target has been doing very good for the past three years and increasing that asset turnover ratio. Target knows how to use its assets to generate sales and have been improving each year.

III. Profitability

7. Profit Margin on Sales

Profit Margin on Sales

0,044 0,043 0,042 0,041 0,040 0,039 0,038 0,037 0,036 0,035

Year

2012 2011 2010 2010 2011

Year

2012

Profit Margin on Sales=Net Income/Net Sales Calculation

2,929,000/69,865,000= 2,920,000/67,390,000= 2,488,000/65,357,000=

Solution

4.19% 4.33% 3.81% Profit margin on sales ratio measures how much out of every dollar of sales a company actually keeps in earnings. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Walmart’s profit margin on sales ratio for 2012 is 3.51% and Target’s

is 4.19%. This tells us that Target is a more profitable company with better control over its costs than its competitor, Walmart. For 2012, Target keeps 4.19% out of every dollar of sales in its earnings and the more sales the better. Target’s ratio decreased a little this year but they could bring it up for 2013 because they are a very successful and liked company with millions of loyal customers.

It can be very useful for managers to compare their own profit margin over time in the attempt to improve it. 8. Rate of Return on Assets

Rate of Return on Assets

0,068 0,066 0,064 0,062 0,060 0,058 0,056 0,054 0,052 0,050 2010 2011

Year

2012

Rate of Return on Assets=Net Income/Average Total Assets Year

2012 2011 2010

Calculation

2,929,000/45,167,500= 2,920,000/44,119,000= 2,488,000/44,321,500=

Solution

6.48% 6.62% 5.61% Rate of Return on assets ratio indicates how profitable a company is relative to its total assets. The ROA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage. It is a measure of the company’s assets, or how much is earned per each dollar of assets the company owns. The return on assets (ROA) ratio illustrates how well management is employing the company's total assets to make a profit. Here we could see that Target is making six cents per dollar of the assets it owns in 2012. The higher the return, the more efficient management is in utilizing its asset base. Target seems to be less profitable in 2012 than 2011 and this could be due to poor use of its assets.

9. Rate of Return on Common Stock Equity

Rate of Return on Common Stock Equity

0,195 0,190 0,185 0,180 0,175 0,170 0,165 0,160 2010 2011

Year

2012

Rate of Return on Common Stock Equity=Net Income/Average Equity Year

2012 2011 2010

Calculation

2,929,000/15,654,000= 2,920,000/15,417,000= 2,488,000/14,528,500=

Solution

18.7% 18.9% 17.1% Rate of return on common stock equity is a measure of the profitability of the investments made by the company’s owners. This is very important for a stockholder, because it shows how much the company is earning per dollar invested in the company. Target is earning about 19 cents per dollar invested in the company for 2012 which is a good number for Target. The earnings per dollar were increasing in 2011 but decreased a little for 2012 but they could easily get back up, because in 2013 Target is opening more stores. 10. Earnings Per Share (EPS)

Earnings Per Share

5,00 4,50 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 2010 2011

Year

2012

Earnings Per Share=Net Income/Weighted Average Outstanding Shares Year

2012 2011 2010

Calculation

2,929/679.1 2,920/723.6 2,488/752.0

Solution

$4.31 $4.03 $3.31 Earnings per share is another ratio that is important to stockholders, as it measures the amount of net income earned by a company per outstanding share of common stock.

Earnings per share serves as an indicator of a company's profitability. The EPS for Target is increasing by year which indicates an increase in its profitability. Targets EPS for 2012 is $4.31 compared to 2010 for $3.31, an increase of $1. This is appealing to people looking into buying stocks/investing because Target is increasing their EPS. Target is a great option for people wanting to invest in Target. 11. Price-Earnings Ratio

Price-Earnings Ratio

18,00 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00 2010 2011

Year

2012

Price-Earnings Ratio=Market Price of Stock/Earnings Per Share Year

2012 2011 2010 12. Payout Ratio

Calculation

62.09/4.31 51.89/4.03 51.91/3.31

Solution

14.41 12.88 15.68 Price-earnings ratio is a comparison of the market price per share compared to the earnings per share. By comparing price and earnings per share for a company, one can analyze the market's stock valuation of a company and its shares relative to the income the company is actually generating. Stocks with higher forecast earnings growth will usually have a higher P/E, and those expected to have lower earnings growth will usually have a lower P/E. Investors can use the P/E ratio to compare the value of stocks. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. For Target we see a decrease in the P/E ratio and then an increase for 2012. We could see this increase for Target in 2012 because its stocks have a higher earnings growth forecast. In 2011 the P/E was low because the market price of stock decreased from the previous year.

Payout Ratio

0,35 0,30 0,25 0,20 0,15 0,10 0,05 0,00

Year

2012 2011 2010 2010 2011

Year

2012

Payout Ratio=Yearly Dividends Paid/Diluted Earnings Per Share Calculation

1.32/4.28 1.10/4.00 .84/3.30

Solution

31% 28% 25% The payout ratio is the amount of earnings paid out in dividends to shareholders. Investors/ shareholders can use the payout ratio to determine what companies are doing with their earnings. A very low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends. In this case for 2012 Target is paying 31% out of its earnings in dividends. This ratio is not to low it’s just perfect because it tells us that most of their earnings is being reinvested in operations. If a company is paying 75% of their earnings in dividends then only 25% is being reinvested.

IV. Coverage

13. Debt to Total Assets

Debt to Total Assets

0,380 0,375 0,370 0,365 0,360 0,355 0,350 2010 2011

Year

2012

Debt to Total Assets=Total Debts/Total Assets Year

2012 2011 2010

Calculation

17,483/46,630 15,726/43,705 16,814/44,533

Solution

37% 36% 38% Debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of total assets that were financed by creditors, liabilities, debt. For 2012 it tells you that 37% of Target’s assets are financed by creditors or debt and therefore 63% is financed by the owners. A higher percentage indicates more leverage and more risk, but that is not the case for Target. The ideal debt percentage is 30% and Target has been able to remain close to that number for the past three years.

Conclusion

After analyzing Target for the past three years using the ratios under the categories of liquidity, activity, profitability and coverage, I can conclude that the company is performing at a respectable level and remains my favorite store. I was pretty confident that Target is performing well financially because it is a successful company looking out for their customers. They seem to do better in 2013 because they are expanding and opening more stores. There were some ratios that need some work on because they were too low. For example, in the liquidity category all the ratios were low and instead of increasing they were decreasing drastically. For the quick or acid-test ratio the ratios were lower than 1, which is a problem because it means it cannot currently pay back its current liabilities. Also, for current cash debt coverage the ratio is very low. That indicates that Target has a low ability to repay its liabilities from cash generated from operating activities having to liquidate the assets used in operations. Also, for both of

these ratios the amount for liabilities is greater than assets and net cash in operating activities, which is not a good thing. Some of these ratios decreased for 2012 but nothing drastically and that Target could work on and increase. Overall, Target appears to keep succeeding and improving financially in the future. It has a bright future ahead and continues to have a great financial position and maybe one day be ahead of Walmart.

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