Question

Suppose selected financial data of Target and Wal-Mart for 2020 are presented here (in millions).

		Target Corporation		Wal-Mart Stores, Inc.
		Income Statement Data for Year
Net sales		$65,357		$408,214
Cost of goods sold		45,583		304,657
Selling and administrative expenses		15,101		79,607
Interest expense		707		2,065
Other income (expense)		(94)		(411)
Income tax expense		1,384		7,139
Net income		$ 2,488		$ 14,335
		Balance Sheet Data (End of Year)
Current assets		$18,424		$48,331
Noncurrent assets		26,109		122,375
Total assets		$44,533		$170,706
Current liabilities		$11,327		$55,561
Long-term debt		17,859		44,089
Total stockholders’ equity		15,347		71,056
Total liabilities and stockholders’ equity		$44,533		$170,706
		Beginning-of-Year Balances
Total assets		$44,106		$163,429
Total stockholders’ equity		13,712		65,682
Current liabilities		10,512		55,390
Total liabilities		30,394		97,747
		Other Data
Average net accounts receivable		$7,525		$4,025
Average inventory		6,942		33,836
Net cash provided by operating activities		5,881		26,249
Capital expenditures		1,729		12,184
Dividends		496		4,217

		Ratio		Target				Wal-Mart
(1)		Current ratio		1.63		:1		0.87		:1
(2)		Accounts receivable turnover		8.6		times		101.4		times
(3)		Average collection period		42.0		days		3.6		days
(4)		Inventory turnover		6.6		times		9.0		times
(5)		Days in inventory		55.3		days		40.6		days
(6)		Profit margin		3.8		%		3.5		%
(7)		Asset turnover		1.5		times		2.4		times
(8)		Return on assets		5.6		%		8.6		%
(9)		Return on common stockholders’ equity		17.1		%		21.0		%
(10)		Debt to assets ratio		66		%		58		%
(11)		Times interest earned		6.5		times		11.4		times
(12)		Free cash flow		$3,656				$9,848

(b)

Compare the liquidity, solvency, and profitability of the two companies. Interpret the current ratio

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Answer 1

Liquidity ratios:

Current ratio indicates the current assets available to meet the current liability (short term) obligations. The higher the ratio higher is the liquidity. Target Corporation is having better liquidity compared to Wal-Mart. The accounts receivable turnover of Wal-Mart is better which reduces its average collection period. The lower the average collection period it reduces the operating cycle. The inventory turnover of Wal-Mart is better which reduces its average days in inventory and it reduces the operating cycle. Target Corporation has to improve its Accounts receivable turnover and Inventory turnover.

Solvency ratios:

The Debt to assets ratio indicates the solvency of the firm. Solvency refers to the ability of the firm to meet its debt commitments. The debt equity ratio of target is higher which means it has higher solvency risk. Times interest earned is the interest coverage ratio for interest expense based on the operating profit of the firm. The higher the interest earned times ratio it is better for firm. Wal-Mart is having better coverage for the interest expense. Free cash flow indicates the cash available for paying debt and dividend after capital expenditure commitments are met from the cash flow from operating activities. Wal-Mart is having better free cash flows

Profitablity ratios:

Profit margin of Target Corporation is better than Wal-Mart. Assets turnover ratio indicates the efficiency of usage of assets in generation of the revenue for the firm. Higher the ratio it is better for the firm. Return on assets and return on common stockholders’ equity are better for Wal-Mart. Higher the returns it indicates better profitablity for the firm.