Question

Create a page length written analysis based on the numbers in the spreadsheet. What do the numbers mean? What should be done with the information?

Ratio	Wal-Mart	Target
Liquidity Ratios
Current Ratio	0.86x	0.94x
Efficiency Ratios
Inventory Turnover	112.87x	8.36x
Leverage Ratios
Total Debt Ratio	58.45%	54.81%
ProfitabiltyRatios
Net Profit Margin	2.81%	3.94%
Return on Equity	16.94%	24.99%

Answer 1

Liquidity Ratios :

Current ratio is the ratio of current assets to current liabilities. It is a widely used indicator of a company's ability to pay its obligation in the short term, and shows the amount of current assets a company has per dollar of current liabilities. Current assets and current liabilities are those that are receivable or payable in the normal operating cycle, or within 12 months after the reporting period. The components of current assets are liquid assets like cash, accounts receivable, inventories and short term investments, short term notes receivable etc.

Current ratio = Current Assets / Current Liabilities

Wal-mart has a lower current ratio as compared to Target, which means that its ability to pay obligations in the short term is lower, and it has only 0.86 dollar of current assets per dollar of its current liabilities.

Efficiency Ratios :

Inventory turnover (ITO ) is the number of times a company's inventories are turned into sales. Investment in inventory represents idle cash. The lesser the inventory level, the greater the cash available for meeting day to day operating needs and investment in productive assets. Besides, lean and fast moving inventory runs a lower risk of obsolescence and reduces interest, insurance and storage charges. High ITO is an indicator of efficient inventory management.

Inventory turnover = Cost of Goods Sold / Average Inventories

As far as ITO goes, Wal-mart scores much higher than Target, which means that its inventory is converted into sales at a much brisker pace, a sign of excellent inventory management.

Leverage Ratios:

Total Debt Ratio = Total Liabilities / Total Assets

The total debt ratio indicates what percentage of the total assets is financed by debt ( outsiders ), and what percentage is financed by equity. If the debt ratio is too high, financial leverage is said to be too high, which can lead to greater financial risk. Financial risk is the inability of the company to absorb the fixed financial charges in its income stream.

58.45 % of the assets of Wal-mart is financed through debt, whereas, 54.81 % of the assets of Target is financed by debt. Financial leverage for Wal-mart is higher than that of Target.

Profitability ratios :

Net Profit Margin measures the amount of net income earned from each dollar of revenue.

Net Profit Margin = Net Income / Net Sales

Net Income = Net Sales - Expenses.

Wal-mart earns only 2.8 cents of net income for every dollar of revenue. In other words, 97.2 cents are eaten up by cost of goods sold and other expenses. On the other hand, Target has a higher margin at 3.94 %, which indicates that expense management is better at Target.

Return on Equity ( ROE ) is a measure of profitability from the stockholders' standpoint. It measures the efficiency in the use of stockholders funds.

Return on Equity = ( Net Income - Preferred Dividends ) / Common Stockholders Equity

As per the spreadsheet, Wal-mart has a lower ROE than Target. Wal-mart should try to improve its Return on Assets in order to improve its ROE.