The paper attempts to analyze the financial performance of Wal-Mart Inc. and Target Inc., for the financial year 2014. Wal-Mart Inc. and Target Inc. are giant industry retailers of US and are the close rival of each other. Selective financial ratios are considered in this paper in order to evaluate the financial performance of the entity and to decide on the investment decisions.
Return on the capital employed ratio is used to determine the firm's capability to revenue by making use of its invested capital. Return on capital employed of Target was 9% which was considerably lower as compared to Wal-Mart’s 13%. In 2014, the board of governance of the company decided to roll back its operations in Canada that was the primary reason for the decline in target's ratio. The company now did not possess any control over subsidiaries in Canada and has also applied for the protection under Companies Creditors Arrangement Act. Return on capital employed of Wal-Mart was also lower as compared to previous periods, because of the decline in revenue from operations, and investments made in property, plant and equipment. The company also made acquisitions in the current year that resulted in the decline of ROCE.
Target Inc.’s gross margin was 30%, higher than its rival’s 25%. However, the slight decrease in Target’s gross margin was evidenced in the current year, in contrast to its prior period because of expenditures incurred by Target Inc. on promotional activities. Operating margin of both the companies remained almost same at an average of 5.7%. Operating margin of the target was also lower than the past year that faced decline as a result of increment in operating expenses. The management was of the view that expenses of the company increased due to its development efforts. Wal-Mart’s gross margin, on the other hand, showed an increase of 3% from previous year, due to the investments made by the company in merchandise and price mix. Moreover, net earnings of Wal-Mart were also lower by 3.1%, despite the fact that the net revenues showed an improvement of 1.6%. It indicated that the company failed to control its operating expenditures in the current year. Also, the Investments were made by the company in e-business which leads to the rise in the cost related to examinations of FCPA and other organizational developments. These factors were cumulatively responsible for a deteriorating operating income of the company.
Wal-Mart made capital expenditures of $13.1 billion in the current year which were higher as compared to $12.9 billion in 2013. This rise in investments caused the asset turnover ratio of the company to decline. Investments were also made by Wal-Mart in local stores and other US Wal-Mart stores segment. Asset turnover of Target was 1.60, which was slightly lower than its rival. Although the company very few capital investments due to lower store remodeling expenditures and fewer new outlets, still the asset turnover had a negative effect due to discontinuity of Canadian businesses in which the company made investments of $228 million before the operations were discontinued.
The receivable collection period of a target was seven days which was higher than Wal-Mart’s five days. The ratio indicates the lack of efficiency of the company’s management in devising its debt collection policy. Furthermore, Target Inc. is also required to review its policy on credit card customers which constituted a large portion of uncollectible debtors. The poor receivable ratio of the company also had a significant impact on the company’s working capital.
The debt to asset ratio determines the proportion of the company’s assets that are financed through external debts, rather than owners’ equity. The ratio of both the companies is nearly equal at approximately 0.62. It indicates that both the companies use debt financing to finance their business, which is a riskier approach. The high ratio also indicates that both the companies are at a risk of nonpayment in the case of sudden increase in interest rates. Moreover, management is of the view that cash flows of the company are not restricted for alternative use by its creditors. Hence, unrestricted cash flows allow them to invest cash and cash equivalents into more profitable activities from where they can generate income to pay their debts.
Inventory turnover ratio shows the rate at which, inventory is used by the company over a period of one year. It determines the efficiency of the company’s management in managing the inventory and generating revenues from it. Inventory turnover of Target was 5.8 times as compared to 7.98 times of Wal-Mart. The low turnover rate of Target indicates that the company has a flawed purchasing system due to which excessive stocks were purchased by the company. It also indicates that the company management did not forecast the sales properly, and over-estimates were made. Hence, target Inc. suffers the risk of inventory aging that may have a significant negative impact on company’s profits.
The current ratio determines the ability of the company to pay its shot term obligation. The suppliers and investors assess this ratio to decide whether or not they should invest in a company or provide credit to it. Then current ratio of target is 0.90, slightly higher that Wal-Mart’s 0.88. it indicates that the Target Inc. is in a better position to pay off its short term obligation which may also benefit it with the early payment discounts from suppliers. On the other hand, Wal-Mart is required to enhance its liquidity position in order to maintain its goodwill among suppliers and investors.
The comparative study made above highlighted the primary operational and financial information of Wal-Mart and Target, both of which are giants in the retail industry of US. The analysis and study of financial ratios of the companies indicated that both the companies are operating efficiently and are expected to show a positive growth in foreseeable future. However, the financial operations and strong policies of Wal-Mart indicate that it is more efficient, and therefore, is expected to show a more rapid growth as compared to its rivals in the market. It is therefore suggested that investment should be made in the stocks of Wal-Mart since their prices are expected to rise shortly.
Annual report: Target Corp. (2014). Minnesota: Target Corp.
Annual report: Wal-Mart. (2014). Arkansas: Wal-mart.