Project 2 Financial Analyst Report_Alicia Wilkinson

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Jan 9, 2024

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Alicia Wilkinson FIN 320: Principles of Finance Southern New Hampshire University December 12, 2021 FIN 320 Project Two Financial Analyst Report Financial Analysis, Financial Evaluation, and Financial Recommendation(s) 1. Financial Analysis A. Financial Calculations: Working capital: o The current working capital of Target is -$775,000. A positive working capital is always ideal; however, I do not believe that the company’s negative working capital is the end of the line for them. The working capital for Target seems in line with the industry and therefore not something to be concerned with. Current ratio: o The current ration of Target is 0.97. Since a good current ratio is considered anything over 1, I would say that the current ratio is also doing fairly good. Even though the current ratio is not quite 1, it is very close. Debt ratio: 1
o The current debt ratio of Target is 0.74. A good debt ratio is considered between 0.3 and 0.6. Again, Target is just outside of the normal range. Earnings per share: o The current earning per share is $3.09 for Target. These numbers alone are difficult to say if they are ‘good’ or ‘bad’, but I think that these numbers are within the range of competitors. Price/earnings ratio: o The current price earnings ratio for Target is 75.25. Since this number is high, it means that the price to earning is in a good place. Total asset turnover ratio: o The total asset turnover ratio for Target 0.47. Ideally an asset ratio should be much higher than Target’s current ratio. The lower number means that their productivity level for the last quarter was low. Financial leverage: o The current financial leverage of Target is 3.94. This is quite a high financial leverage and would defer investors. Net profit margin: o The current net profit margin is 0.06 for Target. This is a low net profit margin, especially for a retail store. 2
Return on assets: o The current return on assets for Target is 0.03. This return is a bit lower than the industry standard, which means the company is not making maximum use of its assets. Return on equity: o The current return on equity is 0.11 for Target. Again, this is a bit lower than what is considered normal or good. B. Working Capital Management: Working capital can be defined as, “the difference between a company’s current assets…and its current liabilities.” (Fernando, 2021) This is a measure of a company’s short-term liquidity, meaning the liquid assets that remain after all of the short-term liabilities have been paid. By knowing and understanding the company’s working capital, they can make decisions easier knowing what funds they have to pay their bills or make investments. C. Bond Investment: Corporate bonds are debt that is issued to a company in order raise capital. (Chen, 2020) This means that the company can receive an investment that needs to be paid back in regular payments over the terms of the agreement. Corporate bonds are considered a riskier investment. The positive of a corporate bond is the return that you can receive. While a risk associated with a corporate bond would be if the bond issuer went out of business, Target would be at risk to no longer receive the interest payments. 3
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D. Capital Equipment: Capital equipment is a good that has a projected life of longer than a year. This means that the equipment that the company is using is an investment to not only improves productivity but are considered a fixed asset. A benefit or risk to investing in capital equipment is the cost of the equipment and the rate of depreciation. E. Capital Lease: Capital lease is the ability of a business to temporarily rent an asset but record it as a true lease. (Hayes, 2021) This allows the business to record the assets and liabilities accordingly. The biggest risk of a capital lease is the amount of debt that is recorded on the balance sheet and increases the debt ratios. Though this can increase the debt, it also increases the assets since it can be recorded as an asset on the financial reports. 2. Financial Evaluation A. Financing: Most all businesses need some sort of financing in order to expand or operate. Not only is financing necessary, but it is helpful in improving the financial stance of the company. There are two main types of financing: debt financing and equity financing. Debt financing is when a loan is taken and payment is made until it is paid off, where equity financing is when a company makes an investment in exchange for a share in the company. (Parker, 2021) 4
B. Bond Investment: Due to Target’s current working capital being in the negative, I do think that considering a corporate bond could be beneficial. Corporate bonds do come with risk since they are not backed by the government, but they are more liquid. Even though Target’s working capital is not significantly concerning, with the challenges that the past two years have brought it could be helpful to invest to ensure the safety of the company. Since Target’s current ratio is almost 1, their chances of securing an investor should be fairly good. If Target was able to increase their current ratio over the next quarter their chances would be even higher. C. Capital Equipment: Since Target does not manufacture their own items, it is mostly sorting and distributing product, I don’t know that they would have a significant need for capital equipment. They potentially could invest in processing equipment or something that would improve their online services. I don’t think this would be the best option for Target. D. Capital Lease: Target’s goal should be to continue to decrease their debt to improve their financial stability. With a current debt ratio of 0.74, it is a bit high and may prevent them from being eligible for capital lease. Even with a higher debt ratio, I think that being a retailer may improve their chances. The ability for Target to be able to use a capital lease to have a new store could potentially increase their revenue and lower their debt ratio. 5
E. Short-Term Financing: Short-term financing is a good option that could provide a business increase funds to improve their financial health over a small time period. This is more likely an option for companies facing bankruptcy; however, since Target’s financials are only slightly below average, this option doesn’t seem feasible for the time being. The amount that would be added to the debt ratio does not make this option the best for Target. F. Future Financial Considerations: With the current state of the economy, along with the changes in shopping habits, a global pandemic and supply chain issues, it is hard to predict what the future financial situation will be for any business. I believe going into the 4 th quarter of 2021, Target will definitely see a hike in their sales and revenue, thanks to the holiday rush. 3. Financial Recommendation(s) Overall, the financial calculations for Target are a bit lower than industry standard, but I don’t believe that means they are in financial trouble. Of the given financial assumptions given, I believe that the best option for Target would be Financial Option 1: Purchase of a $10 Million Building. Since Target is a retail store, a new building that has a useful life expectancy of 20 years. With an additional building, Target will be able to utilize this as another store front for manufacturing or a shipping warehouse. Though this has a huge cost, I think this is the most logical and beneficial option for the business. 6
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References Chen, J. (2021, December 7). What is a corporate bond? Investopedia. Retrieved December 12, 2021, from https://www.investopedia.com/terms/c/corporatebond.asp. Fernando, J. (2021, November 20). What is working capital? Investopedia. Retrieved November 28, 2021, from https://www.investopedia.com/terms/w/workingcapital.asp. Hayes, A. (2021, December 7). Capital lease definition . Investopedia. Retrieved December 12, 2021, from https://www.investopedia.com/terms/c/capitallease.asp. Mergent. (2021, November 28). Target . Retrieved November 28, 2021, from https://www.mergentonline.com/login/php Parker, T. (2021, September 8). The basics of financing a business . Investopedia. Retrieved December 12, 2021, from https://www.investopedia.com/articles/pf/13/business-financing- primer.asp. 7