Comparing the Financial Ratios of Wal-Mart, Target, and, Costco:
The Big Three
Introduction
The three Top U.S. Discount, Variety Stores Companies by Market Cap and Revenue are
Wal-Mart, Target, and Costco as of this year. Although they are the largest sellers in their
industry and operate similarly, their financial statements show that they generate wealth and
fund operations quit differently. It also shows why Wal-Mart is much larger than the other two
companies, and how the other two smaller companies compete. Using financial analysis ratios
and trend analysis, we can see the different aspects that make these companies attractive or
unattractive to stakeholders with different needs.
Profitability
When looking at the performance of these companies, profitability is a concern to all
stakeholders. Largely because of economies of scale, Wal-Mart not only had a larger net profit
than Target and Costco, but it also turned a higher return on equity of 22% as of January 31,
2012. Wal-Mart was also the only of the three to sustain improvement in ROE from 2008 until
2012. Target was able to keep up with Wal-Mart’s net profit margin at around 4%. Costco, who
uses less debt to fund its assets, had the lowest profit margin at 2%. Because of this plus the
fact that Wal-Mart makes more income per dollar of invested equity, it would be safe to
assume that Wal-Mart is the best performer when it comes to profitability. Between Target and
Costco, Target’s average ROE over the five year period from 2008 until January 31, 2012 was
17.8%, while Costco’s was lower at about 12.4%.
Short-term Liquidity and Coverage
Since stakeholders like creditors are even more concerned with the companies ability to
pay its bills when due than they are with profitability, Target and Costco are not out of the
competition. Looking at the short-term liquidity ratios, we can see that Target is the safest bet
for creditors looking for a more secure short-term investment. As of 2012, Target is able to pay
its short-term obligations 1.15 times. Costco’s current ratio was 1.14, while Wal-Mart was the
lowest at .88. This means that Target and Costco may be the best choice creditors looking to
make short-term loans.
Creditors may also be more concerned with a company’s coverage ratios than any other
that has a stake in the business. Although these are all high-performing companies, the
creditors of Wal-Mart, Target, and Costco need to proof that they have the earnings available
to pay owed interest, even if financial problems occur. Judging from the coverage ratios, Costco
is more able to pay their interest expenses. The Earnings before interest and taxes that Costco
earned allowed it to be able to pay its interest an average of 20.19 times and an average of
27.48 times before EBITDA over the 5 year period. This is almost double the times Wal-Mart
and more than triple the times Target is able to pay interest. For creditors worried about
getting their interest payments, Costco proves itself again to be the safest bet.
Efficiency
The stakeholders that manage these companies are probably more worried about the
trends of their efficiency ratios. How efficiently these companies’ turnover assets is key to
comparing their overall performance. When it comes to squeezing the most money out of its
assets, Costco wins with a total asset turnover ratio of more than $3.20 cents in sales for every
dollar in assets over the last 5 years. This is compared to Wall-Mart’s total asset turnover of less
than $2.50 and Target’s less than $1.60 per dollar of assets. This could mean that Costco’s
management may be efficient performers than the managers of Wal-Mart and Target. When it
comes to inventory turnover, Costco beat out Wal-Mart last year while turning over inventory
11.71 times compared to Wal-Mart’s 8.23 and Target’s 6.10 times. Costco is also more efficient
at collecting receivables. According to its accounts receivable turnover ratio, Costco loaned out
and collected an amount equal to its outstanding accounts receivable 92.14 times in the last
year. With Target having an A/C turnover ratio of 11.79 and being close competition with
Costco, Target should be worried about how management is dealing with loans. The system for
dealing with accounts receivable may be flawed. Or, Target may be giving credit to people that
are unable to pay the loan back. Plus, it takes Target more than 30 days to collect, while Costco
and Wal-Mart sales remain outstanding for about three and four days respectively. This might
seem to be a clear sign to Target that something is wrong. Target has a dollar amount almost
equal to that of Wal-Mart in accounts receivable (5.92b and 5.93b respectively). But, Wal-Mart
has more than six times Targets revenue. Why is Target’s Accounts receivable so large? Because
unlike other major retailers, it owns much of its credit card portfolio and people are just not
paying their bills. Target is aware of its credit problems, and they did something about it.
According to Time Magazine (2009), Target sold 47% of its A/C account to JPMorgan Chase for
$3.6 billion; Target still has to strengthen its collection efforts to stabilize its A/C account.
Leverage
One area where all three companies are similar is in their use of debt to fund their
companies. Like many large corporations, more than half of each of these companies’ assets is
funded by debt. Target has been more heavily financed by debt than the other two companies
in the last year, with a total debt ratio of 66%. As for all three companies, there is more debt
than equity. In 2009 Target’s debt to equity ratio reached $2.22 in debt for every dollar of
equity. Costco used a higher percent of equity and a lower percent debt than both Target and
Wal-Mart to finance assets. Of course since Target has a lower percentage of equity, they have
more assets per dollar of equity than Wal-Mart and Costco. Target’s equity multiplier was 3.22
in 2009. Since the overall value of these companies are high, these debt ratios, low or high, may
be beneficial and necessary to the capital structure, financial strategy, and the overall company
strategy. Since all of these companies are low- price strategy companies, a high debt ratio may
be necessary to lower production costs.
Trend Analysis: Wal-Mart
Over the last five years, Wal-Mart has seen an overall improvement in profitability ratios. This is
because it increased its net profit margin ratio from 3% to 4%, its EBIT return on assets ratio
from 13% to 14%, and its return on equity ratio from 20% to 22% in that time. This is good
considering it’s a wholesale retailer. Its operating profit margin remained constant throughout
the five-year period. Return on asset peaked at 9% in the year ending 1/30/ 2008, but went
back to a usual 8% for the year ending 1/30/2012.
Wal-Mart became more liquid over the last five years. Looking at the financial ratios, its
current ratio increases each year from 82 times for the year ending 1/30/ 2008 to 88 times for
the year ending 1/30/2012. Its quick ratio increased from 20 and 23 times in that same time
period. This may be a result of the increase in the inventory turnover. This is because inventory
is the least liquid of current assets, and the company is turning over inventory for cash and
other more liquid current assets more frequently.
Most of the efficiency ratios of Wal-Mart gradually decreased over the five year period
with the exception being the inventory turnover ratio. It peaked at 8.23 times in the last year.
However, there has been a big decrease in the accounts receivable turnover ratio. The accounts
receivable turnover ratio has been decreasing each year and the accounts receivables has been
increasing each year. Also, day’s sales outstanding have been increasing over the period, which
is not good. The increase in accounts receivables may be because economic reasons like the
recession following 2007 and peoples inability to pay on time. Total asset turnover peeked for
the year ending 1/30/2009 at 2.47 times, but by the period ending 1/30/2012, it had dropped
back down to 2.31 times.
All of Wall-Mart’s leverage ratios ultimately increased from the beginning to the end of
the five year period. The total debt ratio and the debt-to-equity ratio, and the equity multiplier
ratio peeked in the last year. This is a sign of increased use of debt. However, the times interest
earned and the cash coverage ratio peeked in the year ending 1/30/ 2010 at 11.75 times and
15.22 times respectively. This means that the company should be able to stay on top of the
additional interest payments due to the additional debt.
When looking at market-value indicators, Wall-Mart’s earnings per share has been
increasing over the years. On the other hand the price earnings ratio has seen a decrease over
the years. This means that the value on a stock per dollar of income has been decreasing.
Trend Analysis: Target
Over the last five years, Target’s profitability ratios have remained relatively constant,
but EBIT return on assets decreased from 12% at the beginning of the period to 11% in the last
year. The lowest profit ratios accorded in the year ending 1/30/2009. Wal-Mart became more
liquid over the last five years.
Target became less liquid over the last five years. Its current ratio increased steadily
from the beginning of the period until the year ending 1/30 2011, but decrease to a five year
low of 1.15 times for the last year. Its quick ratio decreased steadily from the beginning of the
period until last year, ending at 0.60 times. These ratios coincide with the trend of its
decreasing inventory turnover ratio and it increase in overall inventory.
Most of the efficiency ratios of Target gradually improved over the five year period with
the exception being the inventory turnover ratio, which peeked in the year ending 1/30/2009 at
6.83 times. But hit a five year low of 6.10 times in the last year. Target has been gradually
improving in collecting accounts receivables.
All of Target’s leverage ratios differ in trends from the beginning to the end of the five
year period.
The total debt ratio peaked at 69 percent in the year ending 1/30/2009, but
remained relatively constant over the five year period. The Debt-to-equity ratio moved rather
sporadically during the five year period. It jumped to 2.22 the year ending 1/30/2009 from 1.91
the year ending 1/30/2008. It settled at 1.95 in the last year, and a low of 1.82 the year ending
1/30/2011. The ROE and ROA ratios remained almost constant at about 19 and 6 percent
respectively over the 5 year period.
When looking at market-value indicators, Target’s earnings per share have been
increasing over the years. On the other hand the price earnings ratio has seen a decrease over
the years. This means that the value on a stock per dollar of income has been decreasing.
Trend Analysis: Costco
Over the last five years, Costco’s profitability ratios have remained relatively constant.
Its operating profit margin ratio did not change from three percent in the entire five year
period. The same goes for Target’s net profit margin at 2 percent. ROE and ROA both saw a one
percent decrease over the past five years.
Judging by the trends in liquidity ratios, Costco became more liquid over the last five
years. This change is relatively small but still significant. The current ratio was at 1.09 times at
1/30/2008, and 1.14 in the last year. The quick ratio was 0.52 times after the first year in the
period and 0.59 in the last period.
All of the efficiency ratios of Costco gradually increased over the five year period. This
means that Costco has been becoming more efficient over this period of time. Costco’s most
efficient year was the year ending 1/30/2009 when its inventory turnover ratio was 12.6, its A/C
Turnover ratio was 96.91, its days sales outstanding was 3.77, and its total asset turnover was
3.50 times.
When looking at market-value indicators, Costco’s earnings per share have been
increasing over the years. On the other hand the price earnings ratio has seen a decrease over
the years. This means that the value on a stock per dollar of income has been decreasing. For
the year ending 1/30/2009, the price earnings ratio dropped way below the other years, but
gradually increased until it got closer to what seems to be normal for the company during the 5
year period.
Conclusion
Judging by these ratios, some reasonable assumptions can be made about the three
companies. Costco seems to be the safest for creditors because they take fewer risks. But,
because they take fewer risks, they also turn less profit than Target and Wal-Mart. Target,
although good at making profits, it is least efficient in using its assets than Wal-Mart and
Costco. But probably more problematic for Target is the amount of time it takes to collect
payment on its credited sells. If this is normal and is expected, the company’s strategy to
differentiate itself by offering a more upscale shopping experience my may justify the low rate
of return on receivables.