Question

Comprehensive analysis of Wal-Mart and Target, compute the four ratios; current ratio, quick ratio, liabilities to equity, times earned.

Current Ratio                                 2018        2017

Walmart                                        0.75:1     0.86:1

Target                                           0.95:1     0.94:1

Quick Ratio                                  2018        2017

Walmart                                       0.20:1     0.21:1

Target                                          0.29:1     0.28:1

Total liabilities to equity            2018          2017

Walmart    1.62times 1.55times

Target 2.33times 2.41times   

Times interest earned                      2018              2017

Walmart                                     7.490.5times   9.659.5times

Target                                         6.475.5times 4.949.5times

-          Which company is more liquid? More solvent?

-          Compare the liabilities to equity ratio, do they differ from the each other and the industry? why?

-          Do the ratios change over time? Why?

Answer 1

Answer- 1: More Liquid? More Solvent?

Current Ratio: Current ratio explains how many times company carry its current assets (Liquid as well as Illiquid) as compared to current liabilities. It measures a company’s ability to pay its short term and long term obligations. Current ratio is calculated: dividing current assets by current liabilities. Higher the current ratio, better for company.

In both the years, Target Company is having higher current ratio as compared to Walmart Company. Hence Target Company is more solvent as compared to Walmart Company.

Let’s Analyze Quick ratio as well. Quick ratio gives a more comprehensive view of company’s ability to pay its upcoming short term Obligations. Also knows as Acid test ratio, it doesn’t consider the Inventory Stock and Prepaid Expenses as Assets for payment of obligations. In short, Quick ratio considers only those assets which are readily convertible into cash. More the quick ratio, it is better for company.

In both the years, Target Company is having higher quick ratio as compared to Walmart Company. Hence Target Company is more liquid as compared to Walmart Company.

By the analysis of Current ratio and Quick ratio, we can state Target Company is more solvent as compared to Walmart Company because Target Company has better multiple of Current assets over current liabilities.

Note: If the Current ratio is let’s say 4:1 which is too high. It may be the case company is having unutilized funds in current assets. Usually, a current ratio of 2:1 and a quick ratio of 1:1 is considered good.

Answer- 2: liabilities to equity ratio

Liabilities to Equity ratio is also called as debt-equity ratio. A debt-Equity ratio of 1.6 means that for every $1 of equity, $1.6 of debt is raised by the organization. This ratio is used to measure the financial leverage being used by Organization.

A higher ratio interpretation is Organization has taken more debts in relative to its equity in order to run the operations. In question, Target Company has higher ratio as compared to Walmart Company which means that Target Company has taken higher debt in relative to its equity but this is not the indicator.

If the Target Company is generating more income than the cost of capital on the debt taken, Target company is doing pretty well. With a good solvency ratios as compared to Walmart, Target company is doing pretty well on higher debt equity ratio.

Answer- 3: Do the ratios change over time?

Accounting Events lead to transaction recording and all transaction may affect various accounts which in turn will give the different ratios all time

For example, let’s say a company has $200,000 of Current assets and $100,000 of current liabilities, It’s current ratio is 2:1. Company paid a cash of $30,000 to its one of the vendor. Now the new set of numbers will be Current Assets : $170,000 and Current Liabities: $70,000. Now, Current ratio would be 2.42 which is improved from earlier ratio.

Let’s see another example.

A company has total debt of $100 M and total equity of $200M. Currently, debt- equity ratio is 0.5:1. Suppose Company has just raised another debt of $20M to finance its increased operations. Now, total debt will be $120M and equity will remain same as $200M. Now, debt-equity ratio will be 0.6:1.