Research Project 1

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Research Project 1 Jeffrey Dozier Franklin University FINA-301-Q2WW: Principles of Finance Instructor: Keith Zolkowski October 4, 2023

2 Research Project 1 For this class, I will evaluate and compare Walmart and Target corporations. Using two companies in the same market gives a better understanding of their status than two companies in different sectors. This paper will include current, long-term debt to equity, total asset turnover, return on assets (ROA), and return on equity (ROE) ratios. For this paper, Walmart will be the blue line, and Target will be red. Current Ratio Target Walmart All data was gathered from Mergent Online (2019a, 2019b). The current ratio measures a company's short-term liquidity, the assets that can be converted to cash within 12 months. Different markets will tend to have a different average, but the concepts are the same. A relatively high ratio can indicate inefficient use of short-term assets. If the number is less than one, it means that if all debts are to be paid simultaneously, the company would not have enough assets to cover the cost (Fernando, 2023a). This is extremely rare but worth noting. 1. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? There is a slight difference between Target and Walmart, but not enough to mean anything significant is going on. Target is always higher, so it could pay off debts more easily if problems arise in the short term. 0.8 0.79 0.97 0.93 0.82 0.83 0.89 1.03 0.99 0.92 0.0 0.2 0.4 0.6 0.8 1.0 1.2 02/02/2019 02/01/2020 01/30/2021 01/29/2022 01/28/2023 Current Ratio

3 2. Are there economic or end-market influences that explain why the ratios differ? What might they be? The current economic status of the entire market influences the ratios. For example, the COVID- 19 pandemic put a strain on multiple businesses, limiting the financial leverage of each company. It was harder to acquire short-term loans, especially if the current ratio was less than one. 3. Over time, is each company’s overall financial performance improving, declining, or is something strange going on? Target and Walmart are relatively steady, with an average ratio of 0.9. Nothing is alarming about this trend. 4. Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis? It is a great idea to reference the current ratio, particularly with lenders and investors. It is widely used but should not be the only consideration when making decisions. There are two limitations of the current ratio. The first is that it includes inventory, which can inflate the number drastically. Secondly, it can be influenced by long-term financing loans because it would increase the short-term asset of cash while not affecting liabilities. This would also increase the current ratio number (Fernando, 2023a). Long-term (LT) Debt to Equity Target Walmart All data was gathered from Mergent Online (2019a, 2019b). 0.69 0.64 0.56 0.47 0.51 0.9 0.96 0.8 1.06 1.43 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 02/02/2019 02/01/2020 01/30/2021 01/29/2022 01/28/2023 LT Debt to Equity

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4 This ratio measures the company’s ability to meet long-term obligations or financial leverage. A high number means more risk, but a low number could indicate that the company is not taking advantage of debt financing to expand. Relatively speaking, a number below one is safe, above two is risky, and a steady incline could make it harder to get financing in the future because of the reliance on debt (Fernando, 2023b). 1. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? There is a growing difference between the two over the last three years. Target’s ratio is clearly higher than Walmart's, but that does not mean one is better than the other. Target could be investing in expansion, research development, or online pick-up programs. Walmart might not be fully exploiting its borrowing power or waiting until interest rates decline. Regardless, both are growing apart, considering long-term debt-to-equity ratios (Repko, 2022). 2. Are there economic or end-market influences that explain why the ratios differ? What might they be? As mentioned above, the differences could be future changes, waiting for rates to decrease, or a potential growth problem if the number is low considering other companies in the same market. 3. Over time, is each company’s overall financial performance improving, declining, or is something strange going on? Walmart looks to be declining, but not enough to raise a red flag. Target, on the other hand, has changed significantly over the last three years. This can limit future financing because of the risk involved and could raise a red flag if it continues to climb.

5 4. Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis? This is important when considering future investments and the risk involved. However, there are some different things to consider, starting with the industry. Consumer staples like water, electricity, and internet tend to borrow a lot relatively cheaply, making the ratio generally high. This is due to the guaranteed income over time; everyone needs it. It is also highly affected by the analyst preparing the statements. Preferred stock can either be debt or equity, depending on how it is prepared, which can affect this number greatly. When it is debt, the ratio will increase, and equity, the ratio will decrease. Target’s ratio could have been affected by using a different company or internal process to prepare statements, although it is not likely (Fernando, 2023b). Total Asset Turnover Walmart Target All data was gathered from Mergent Online (2019a, 2019b). 1. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? Walmart has always been higher regarding asset turnover during the last five years. The ratio values mean that every dollar in company assets makes the resulting amount. For example, in 2023, Walmart had a ratio of 2.5, meaning every $1 of assets generated $2.50 in sales. It may seem like a slight difference between the two retailers, but considering the billions of dollars 2.43 2.3 2.28 2.3 2.5 1.88 1.86 2 2.02 2.04 0.00 0.50 1.00 1.50 2.00 2.50 3.00 02/02/2019 02/01/2020 01/30/2021 01/29/2022 01/28/2023 Total Asset Turnover

6 each company has in assets, this number can vary greatly. Clearly, Walmart is much more efficient at using its assets to generate profits (Beers, 2019). 2. Are there economic or end-market influences that explain why the ratios differ? What might they be? There are some vital numbers and values to consider when evaluating asset turnover. It can be affected by liquidating or purchasing large assets, like selling or building a store. Given the steady history, this is not the case for either company. Other reasons that can lower the ratio are sluggish sales, obsolete inventory, more relaxed accounts receivable method, and property or equipment not utilized to full capacity. All else equal, Target can improve by increasing its profit margins (Beers, 2019). 3. Over time, is each company’s overall financial performance improving, declining, or is something strange going on? Over time, Walmart had a slight dip and rebound, probably linked to COVID-19, while Target has been slowly improving. This improvement is linked to more online sales, curbside pick-up, and utilizing “just-in-time” inventory. 4. Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis? Retailers have small asset bases and a high sales volume, leading to higher asset turnover ratios. Given the meaning of this ratio, it is essential to consider when in a manager role because it could directly impact your bonus or job security. Externally, however, it does not explain why a company’s turnover ratio is valued at that number. It can be inflated by selling off assets (declining growth) or deflated when making large purchases for future growth (Beers, 2019).

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7 Return on Assets (ROA) Target Walmart All data was gathered from Mergent Online (2019a, 2019b). 1. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? There is a significant difference in ROA between Target and Walmart. The closest they came to each other was in 2020. You may wonder why Walmart has a lower ROA when its asset turnover is higher. To answer this, we must understand how each is computed. The difference is the numerator for each equation; asset turnover uses sales, while ROA uses net income. Walmart has better sales, but Target could have a better profit margin, so they do not need as much volume to turn a profit (McClure, 2023). 2. Are there economic or end-market influences that explain why the ratios differ? What might they be? There are several economic and end-market influences that impact each value. Focusing on Target in 2022, you can notice a significant change from the year before and the year after. After doing some research, Target’s CEO Brian Cornell openly stated that too much inventory of unwanted merchandise was becoming a problem (Repko, 2022). Their solution was to implement significant mark-downs and lower or halt in-store stock on certain items. Not all merchandise was reduced; food and beverage saw double-digit increases, and beauty, with the addition of Ulta 3.15 6.53 5.51 5.5 4.79 7.34 7.83 9.32 13.26 5.2 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 02/02/2019 02/01/2020 01/30/2021 01/29/2022 01/28/2023 ROA % (net)

8 now in stores, also saw significant increases. All of these changes are reflected in the graph, which is why it seems erratic compared to Walmart. 3. Over time, is each company’s overall financial performance improving, declining, or is something strange going on? After discussing Target in the last question, let us focus on Walmart. 2020 was a booming year for retail due to COVID-19, government shutdowns, and remote work. Many home products were purchased, along with increases in loungewear and groceries. As things started returning to normal, ROA fell, and a relatively steady decline was the effect. 4. Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis? This financial information is used by both internal and external stakeholders and shows how the company is doing. ROA is how much bang for the buck a company offers. The major limitation is that it includes assets funded by debt and equity, which can paint a better picture than how the company is actually doing (McClure, 2023).

9 Return on Equity (ROE) Target Walmart All data was gathered from Mergent Online (2019a, 2019b). 1. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? Although the numerical values differ, ROE for both companies follow the same pattern as ROA. The values are higher because the equation removes debt. ROE is directly affected by profit margin, total asset turnover, and the equity multiplier. The values display how stockholders fared during that time and reflects the company’s bottom line (McClure, 2023). 2. Are there economic or end-market influences that explain why the ratios differ? What might they be? The same economic influences as ROA can be applied to ROE and can be seen in the graphical comparison. 3. Over time, is each company’s overall financial performance improving, declining, or is something strange going on? This also is repeated from the ROA, which explains Target’s erratic behavior and Walmart's steady decline since 2020. 8.87 20.22 17.32 16.66 14.6 25.6 28.45 33.34 51.09 23.17 0.00 10.00 20.00 30.00 40.00 50.00 60.00 02/02/2019 02/01/2020 01/30/2021 01/29/2022 01/28/2023 ROE % (net)

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10 4. Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis? In conjunction with ROA, comparing companies in the same market sectors is very important. The textbook goes into even more detail about the DuPont breakdown and gives an example using General Motors. Without going into great detail, I highly recommend reviewing it for another example and explanation of why things happen (Ross et al., 2019). Conclusion Financial information can seem overwhelming with so many numbers and titles, but understanding what each value means can help make a clear picture. The more information you understand, the better you can give yourself and others a forecast of where the company is heading.

11 References Beers, B. (2019). How is asset turnover calculated? Investopedia. https://www.investopedia.com/ask/answers/032415/how-asset-turnover-calculated.asp Fernando, J. (2023a, March 25). Current ratio explained with formula and examples . Investopedia. https://www.investopedia.com/terms/c/currentratio.asp Fernando, J. (2023b, May 24). Debt-to-Equity (D/E) ratio formula and how to interpret it . Investopedia. https://www.investopedia.com/terms/d/debtequityratio.asp McClure, B. (2023, April 17). How ROA and ROE give a clear picture of corporate health . Investopedia. https://www.investopedia.com/investing/roa-and-roe-give-clear-picture- corporate-health/ Mergent Online. (2019a). Target . Franklin.edu. https://www-mergentonline- com.links.franklin.edu/companydetail.php?compnumber=2355&pagetype=synopsis Mergent Online. (2019b). Walmart . Franklin.edu. https://www-mergentonline- com.links.franklin.edu/companydetail.php?compnumber=8865&pagetype=synopsis# Repko, M. (2022, August 17). Target’s earnings take a huge hit as retailer sells off unwanted inventory . CNBC. https://www.cnbc.com/2022/08/17/target-tgt-q2-2022-earnings.html Ross, S. A., Westerfield, R., & Jordan, B. D. (2019). Fundamentals of corporate finance (13th ed.). McGraw-Hill Education.

Research Project 1

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