Question

3. Presented below are condensed financial statements adapted from Target and Wal-Mart ($ in millions, except per share amounts).

Balance Sheets ($ in millions, except per share data)
	Target				Wal-Mart
Assets:
Cash and cash equivalents	$	2,643			$	6,756
Accounts receivable (net)		416				5,614
Inventories		8,657				43,783
Other current assets		848				3,511
Current assets		12,564				59,664
Property, plant, and equipment (net)		25,018				107,675
Intangibles and other assets		1,417				37,183
Total assets	$	38,999			$	204,522
Liabilities and Shareholders' Equity:
Accounts payable	$	8,677			$	46,092
Short-term notes		-				5,257
Other current liabilities		4,524				27,172
Current liabilities		13,201				78,521
Long-term debt		11,317				30,045
Other long-term liabilities		2,772				15,134
Total liabilities		27,290				123,700
Capital stock (par and additional paid-in capital)		5,903				2,943
Retained earnings		6,553				85,107
Accumulated other comprehensive income (loss)		(747	)			(10,181)
Noncontrolling interest		-				2,953
Total shareholders' equity		11,709				80,822
Total liabilities and shareholders' equity	$	38,999			$	204,522
Income Statements
Net sales	$	71,879			$	485,873
Cost of sales		51,125				361,256
Gross margin		20,754				124,617
Operating expenses		16,442				101,853
Other (income) expense—net		666				2,267
Income before taxes		3,646				20,497
Tax expense		718				6,204
Net income	$	2,928			$	14,293	*
Basic net income per share	$	5.35			$	4.40

* This is before income from discontinued operations.

Evaluate and compare the two companies by responding to the following questions.

Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate.

A. For both companies, compute the following ten ratios:

• Asset Turnover:
• Average collection period
• Average days in inventory
• Equity multiplier
• Profit margin on sales
• Return on assets
• Return on shareholder’s equity
• Current Ratio
• Debt to Equity
• Acid Test Ratio

B. After completing the ratios, evaluate and compare the two companies.

1. Which of the two firms had greater earnings relative to resources available?

2. Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover?

3. From the perspective of a common shareholder, which of the two firms provided a greater rate of return?

4. Which company has made the most effective use of financial leverage?

5. Of the two companies, which appears riskier in terms of its ability to pay short-term obligations?

6. Which of the two companies manages their current assets more efficiently?

Answer 1

Ans.A.

Asset turnover ratio = Net Sales / total assets.

Asset turnover ratio for Target = $71,879 / $38,999 = 1.84 times

Asset turnover ratio for wals mart = $485,873 /$204,522 = 2.37 times.

Average collection period = 365 / Debtors turnover ratio.

Debtor turnover ratio = Net Credit Sales / Accounts Receivable.

Debtor turnover ratio for target = 71,879 / 416 = 172.7 times.

Debtor turnover ratio for walsmart = $485,873 / 5614 = 86.54 times.

Average collection period for target = 365 / 172.7 = 2.1 times.

Average collection period for walsmart = 365 / 86.54 =  4.21 times.

Equity multiplier = total assets / shareholder's equity.

Equity multiplier for target = $38,999 / $11,709 = 3.33 times

Equity multiplier for walsmart = $204,522 / $80,822 = 2.53 times.

Profit margin on sales: Net profit / Net Sales *100.

Profit margin on sales for target = $2928 / $71,879*100 = 4.07 %

Profit margin on sales for walsmart = $14293 / $485,873*100 = 2.94 %.

Return on assets = Net Income / Total assets*100

Return on assets for target = $2928 / $38,999 *100 = 7.5%

Return on assets for walsmart = $14293 / $485,873*100 = 2.9%.

Return on shareholder's equity = Net income / Shareholder's equity*100.

Return on shareholder's equity for target = $2928 / $11,709 *100 = 25 %

Return on shareholder's equity for walsmart = $14293/ 80,822*100 = 17%.

Current Ratio = Current Assets / Current Liabilities.

Current Ratio for target = $12,564 /$13,201 = 0.95:1

Current Ratio for walsmart = $59,664 /$80,822 = 0.73:1

Debt to equity ratio = Long term Debt / shareholder's equity.

Debt to equity ratio for target = $11,317 /$11,709 = 0.96:1

Debt to equity ratio for walsmart = $30,045 / $80,822 = 0.37:1

Acid test ratio = Quick assets / Current liabilities.

Acid test ratio = $3907 / $13,201 = 0.29:1

Acid test ratio = $15,881 /$80,822 = 0.19:1.

Ans.B

1. Target has greater earning than walmart as per available resources.

2. Yes, both the companies have earned their respective return on assets with similiar combination to profit margin and turnover.

3. Target has maximum return on shareholder's equity.

4.Walmart has better financial leverage than target.

5.Target has more riskier than walmart as per ability to pay short term obligations.

6. Target manages their current assets more efficiently.