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Financial Analysis for Managers - Case Study Example

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Summary
This comparative study examines the differences in business ratios of two leading business companies i.e. Wal-Mart and Target. The collected data contains the effects of different factors on the performance of these companies. Against the backdrop of various market forces, it highlights the ratio trends as well as the innovative retail formats put in place by such numbers…
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Financial Analysis for Managers
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Download file to see previous pages Wal-Mart registers nearly $20,000 profit every minute of every day. Last fiscal year, Wal-Mart recorded profits of $10.3 billion. For comparison, Target's profit per minute is $6,084. To say Wal-Mart is a money-making machine would be an understatement.
The calculations given as Appendices A, B and C are based on Wal-Mart and Target's past four years annual data from the 10K and Hoovers. Some are calculated by author as well. (Dollars are listed in thousands).
Net Profit Margin is an indication of how effective a company is at cost control. The higher the net profit, the more effective the company is at converting revenue into actual profit. Target has greatly improved on this number over the last few years and reached the high number of 3.8 in 2002 from its low of 3.4 in 1999. In comparison to Wal-Mart, it has outperformed it during this period.
Operating Profit Margin shows how effective a company controls its cost and expenses associated with the normal business operations. Target's OPM remained consistent from 1999 to 2001 and improved from 2001 to 2002 due to the stronger supplier relationships, restructuring of stores and more effective inventory management. Wal-Mart remained below during the entire period. It has large overhead costs to maintain its many stores.
Return on Assets determi...
(c). Return on Assets
Net Income + Interest
Return on Assets =
Average Total Assets
Return on Assets determines how many dollars of profits can be achieved for each dollar of assets under control. Target's return on assets ranges between $8 to $9 which is compareable to Wal-Mart's ranges.
(d). Return on Equity
Net Income
Return on Equity =
Average Equity
Return on Equity is one of the most important profitability measures. ROE reveals how much a company earned in comparison to the total amount of the shareholder equity found on the balance sheet. ROE encompasses the three main levers by which the management can better the corporation. These levers are profitability. Asset management and financial leverage. Again although Wal-Mart is ahead of Target during the whole period but the figures are even compareable as walmart ranges from $20 to $23 while Target' figures ranges between $19 to $21.
2. Efficiency ratios of Wal-Mart & Target
Efficiency ratios of Wal-Mart & Target are calculated by applying the following formulae.
(a). Asset Turnover Ratio
Sales
Asset Turnover Ratio =
Average Total Assets
Asset Turnover Ratio measures how efficiently a company uses its average total assets to generate sales. The figures show that Target has gone down in this number over the past four years from a high of 2.054 to 1.665. Sales for Target are not increasing as fast as the number of assets within the corporation. Wal-Mart has outperformed Target in this field as its minimum value was 2.601 in 2000 which is higher than the Target's highest value.
(b). Inventory Turnover Ratio
Coast of Goods Sold
Inventory Turnover Ratio =
Average Inventory
Inventory Turnover Ratio measures the number of times that ...Download file to see next pagesRead More
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