Question

Using the following table of ratios of Walmart, Amazon, and Target, discuss the variation in return to equity of the three firms. What is driving the variation (financial/operational) and relate you answer to the firms' business(es)?

	Target				Amazon				Walmart
	2015	2016	2017		2015	2016	2017		2015	2016	2017
Revenue (Mil)	73,785	69,495	71,879		107,006	135,987	177,866		482,130	485,873	500,343
% of Sales
Revenue	100	100	100		100	100	100		100	100	100
COGS	70.8	70.72	71.13		20.51	22.14	22.87		74.87	74.35	74.63
Gross Margin	29.2	29.28	28.87		6.54	7.11	7.73		25.13	25.65	25.37
SG&A	19.88	19.22	19.82		11.72	11.83	12.72		20.13	20.96	21.29
Operating Margin	6.65	7.15	6		-0.62	-0.22	-0.17		5	4.69	4.08
EBT Margin	6.67	5.71	5.07		1.47	2.86	2.14		4.49	4.22	3.02
	2015	2016	2017		2015	2016	2017		2015	2016	2017
Net Margin %	4.56	3.94	4.08		0.56	1.74	1.71		3.05	2.81	1.97
Return on Assets %	8.24	7.05	7.68		0.99	3.19	2.83		7.29	6.85	4.89
Return on Equity %	24.95	22.89	25.89		4.94	14.52	12.91		18.15	17.23	12.67
Return on Invested Capital %	12.81	11.08	12.49		3.31	8.42	7.09		12.51	11.97	9.17
	2015	2016	2017		2015	2016	2017		2015	2016	2017
Current Ratio	1.12	0.94	0.95		1.08	1.04	1.04		0.93	0.86	0.76
Quick Ratio	0.38	0.26	0.27		0.77	0.78	0.76		0.22	0.19	0.16
Financial Leverage	3.11	3.42	3.33		4.89	4.32	4.74		2.48	2.56	2.63
Debt/Equity	0.92	1.01	0.97		1.06	0.79	1.37		0.55	0.54	0.47
Days Sales Outstanding	3.83	2.13	2.03		20.53	19.81	22.06		4.69	4.3	4.18
Days Inventory	61.04	63.15	60.56		39.78	37.41	36.59		45.3	44.21	42.44
Payables Period	53.27	54.78	56.86		79.08	78.78	79.72		38.88	40.37	42.78
Cash Conversion Cycle	11.6	10.5	5.74		-18.77	-21.56	-21.06		11.12	8.14	3.84
Receivables Turnover	95.27	171.17	179.47		17.78	18.42	16.54		77.75	84.8	87.4
Inventory Turnover	5.98	5.78	6.03		9.18	9.76	9.97		8.06	8.26	8.6
Fixed Assets Turnover	2.88	2.79	2.89		5.52	5.34	4.56		4.14	4.21	4.37
Asset Turnover	1.8	1.78	1.88		1.78	1.83	1.66		2.39	2.44	2.48

Answer 1

To determine the variations in RoE (return on equity) for the three companies we will use the Du Pont analysis.

As per the Du Pont equation: RoE = net profit margin * asset turnover * equity multiplier

= Net income/revenues * revenues/total assets * total assets/total equity

Let us look at the financial numbers for 2017 for the 3 companies:

	Target	Amazon	Walmart
RoE %	25.89	12.91	12.67
Net margin %	4.08	1.71	1.97
Financial leverage	3.33	4.74	2.63
Asset Turnover	1.88	1.66	2.48

We can see that Target's RoE is the highest at 25.89% and this can be attributed to financial reasons as we can see that Target's net margin % is the highest at 4.08%. It is almost more than twice of the margins of both Amazon and Walmart. Target's operational factors do not contribute to its high RoE as its asset turnover ratio is lower than Walmart and very close to Amazon. Thus in terms of operational efficiency Target has a lower level of operational efficiency than Walmart but only a marginal higher level than Amazon.

The above can be easily related to each company's business. Target enjoys the highest net margin because it focuses on selling exclusive brands. It also has exclusive partnership with designers and as such Target is able to sell its products at a slight premium when compared to Amazon and Walmart. Also the asset turnover is the highest for Walmart and this is no surprise as Walmart's business model is based on supply chain efficiencies and quickly turning its inventories into sales.