Kristi Askew

Accounting 2410
Financial Analysis Report
Target Corporation
10/22/2016
I have been asked to complete a financial analysis report to determine whether my hiring
company (hereafter referred to as Company A) would be better suited to invest in Targets debt or
equity securities.
I have not been given direction on whether Company A would like a higher return or a steady
income, which is crucial to the analysis. I will compile my analysis for both situations and allow
Company A to decide afterwards whether they would prefer to invest in the debt or equity
securities of Target Corporation.
When looking at a company to invest in, it is important to understand the companys structure
and what that type of company has to offer its investors, including viewing the companys risks
and rewards. Target Corporation is mainly categorized as a Department Store, and within that
category is determined to be a Large-sized Department Store (>$50 Million in Revenue).
Because of Targets categorization and industry, there are inherent advantages and disadvantages
as well as risks and rewards. For example, the advantages and rewards of a department store are
offering a superior shopping experience (lighting and dcor, in-store promotions, etc.),
competitive advantage due to developing customer relationships, repeat customers with loyalty
programs (i.e. Red Card advantages for Target), tailoring marketing to local demand, etc. The
disadvantages and risks inherent with a department store are a dependence on consumer
spending, demands on trends (and how quickly they change), and inventory control (having too
much or too little of a specific inventory).
Keeping much of this in mind as we analyze Target Corporation, lets look at the list of computed
ratios to help analyze this situation.
Lets first look at Targets liquidity ratios. These ratios will give us an idea of Targets ability to
pay its current liabilities.
Liquidity Ratios:
Ratio Name

How to Find the Ratio

Targets Ratio

Working Capital

Current Assets Current

Liabilities

$1508 Million

What it Means to
Company As Desire to
Invest In Target Corp.
Because working capital is
a positive, large number,
Target has the ability to
meet its short-term
obligations with its current
assets.

Current Ratio

Total Current Assets

1.12

Total Current Liabilities

Cash Ratio

(Cash + Cash Equivalents) 0.32

Total Current
Liabilities

Acid-test Ratio

(Cash + Short-term
Investments + Net current
receivables) Total

0.38

Current Liabilities

Although the current ratio

for Target is greater than 1
(meaning it has more
current assets than current
liabilities), when compared
to the industry average of
2.65, Target has less assets
to liabilities than other
comparable department
stores.
Targets cash and cash
equivalents (quick cash) in
comparison to its total
current liabilities is
concerning.
If Targets current
liabilities came due
immediately, they could
only pay off 38% of their
liabilities. Compared to the
industry average of 50%,
the difference of 12% is
also concerning, especially
considering a company of
Targets size.

Next, lets look at Targets Efficiency Ratio, or their ability to sell merchandise inventory. I will
not be including the receivables into this analysis because Target (and other large department
store retailers) have such a quick and high turnover of their receivables that their receivables are
immaterial in nature. Target (and other large retailers) do their credit sales mostly via third-party
credit card companies like Visa, MasterCard, and American Express, which turn around within
just a few days to pay Target completely for the customers purchases.
Efficiency Ratios:
Ratio Name

How to Find the Ratio

Targets Ratio

Inventory
Turnover

Cost of Goods Sold

6.05

Average Merchandise
Inventory

What it Means to
Company As Desire to
Invest In Target Corp.
Target sells its average
level of inventory 6.05
times in each period. When
compared to industry
averages of 2.73 times per
period, Target has an

Days Sales in
Inventory

365 Inventory

Gross Profit
Percentage

Gross Profit Net

60.38

turnover
29.53%

Sales Revenue

overwhelming efficiency in
this area.
Inventory is held on
average for 60.38 days for
Target.
For every item sold,
29.53% of the sales dollar
is profited.

The third area Id like to evaluate is Targets Solvency Ratios. These ratios will help us
understand Targets ability to pay long-term debt.
Solvency Ratios:
Ratio Name

How to Find the Ratio

Targets Ratio

Debt Ratio

Total Liabilities

0.678

Total Assets

Debt to Equity
Ratio

Total Liabilities

2.107

Total Equity

What it Means to
Company As Desire to
Invest In Target Corp.
A little over 2/3 of Targets
assets are financed with
debt. That could be
alarming, but due to the
nature of the department
store structure and its high
inventory turnover, I dont
find that ratio to be
alarming, especially since
Targets inventory turnover
is only 60 days and it turns
over its inventory 6 times
each period.
Targets liabilities are over
twice its equity. This ratio
does seem high and
something to take into
consideration when
looking at debt securities.

The fourth area Id like to evaluate is Targets Profitability Ratios. These ratios will help us better
understand Targets profitability.
Profitability Ratios:
Ratio Name

How to Find the Ratio

Targets Ratio

What it Means to
Company As Desire to
Invest In Target Corp.

Profit Margin
Ratio

Net Income Net

Rate of Return
on Total Assets

(Net Income + Interest

Expense) Average

Asset Turnover
Ratio

4.65

Sales

Total Assets
Net Sales Average

8.13

1.81

Total Assets

Rate of Return
on Stockholders
Equity

(Net Income Preferred

Dividends) Average

Earnings Per
Share

(Net Income Preferred

Dividends)

24.95

Stockholders Equity
5.31

Weighted Average
Number of Common
Shares Outstanding

The profit margin ratio

tells us how much net
income is earned on every
dollar of net sales.
Target uses its assets very
efficiently to earn income.
Use of average total assets
are used positively to
generate sales.
This ratio tells us the
relationship between net
income available to
common shareholders.
Earnings per share tells us
how much of the net
income is allotted to each
share of its outstanding
common stock. This ratio
is much higher than in
years past, which is
promising.

The fifth and last area that Id like to evaluate is the investment potential ratios for Target
Corporation. These ratios help us better understand the valuation of stock as an investment.
Investment Potential Ratios:
Ratio Name

How to Find the Ratio

Targets Ratio

Price per
Earnings Ratio

Market Price Per Share of

Common Stock

13.5

Dividend Yield

Earnings Per Share

Annual Dividend Per
Share Market Price

3.1%

Per Share
Dividend Payout

Annual Dividend Per

Share Earnings Per

0.41

What it Means to
Company As Desire to
Invest In Target Corp.
The value the stock market
places on $1 of a
companys earnings.
3.1% of Targets stock
market value that is
returned annually as
dividends to stockholders.
How much of the earnings
per share is dividends.

Share
Now that we have analyzed and better understand the financial stability of Target Corporation,

and we understand some of the basic risks and rewards to its investors, lets compile this
information into a concise and meaningful analysis.
Investing in Debt Securities:
Looking at the possibility of investing in Target Corporations debt securities, I first like to see
how Targets abilities to pay off long-term debt is concerned. We can see that Targets debt ratio
is .678. To reiterate the chart above, a little over 2/3 of Targets assets are financed with debt.
That could be alarming, but due to the nature of the department store structure and its high
inventory turnover, I dont find that ratio to be alarming, especially since Targets inventory
turnover is only 60 days and it turns over its inventory 6 times each period. When we analyze the
Debt to Equity Ratio, we normally like to see a lower number than a higher number. The higher
the number usually means a higher risk. However, if Target is increasing operations, it could be
potentially generating higher earnings than it would without the debt financing, and would also
benefit shareholders. However, if the cost of the financing outweighs the possible returns Target
may be able to make, then Targets ability to pay its interest, principal, and shareholders would
be in jeopardy.
Evaluating Targets ability to pay off short-term investments is a bit concerning, as I mentioned
above. The Acid-test ratio of .38 tells us that only 38% of Targets liabilities could be paid off if
they came due immediately. With the industry average being 50%, I would steer away from the
short-term investment options in Target. (See chart in Appendix C.)
However, looking into the current strong long-term debt credit ratings and the trend of Target to
repay its long-term debt, I would not hesitate to lend Target money and invest in their debt
securities.
Investing in Equity Securities:
Targets equity securities are less favorable, but still not a bad option. Dividend yields from 2015
financial statements indicate that only 3.1% of the price per share is given back to common
stockholders. On page 25 of the 2015 financial statement of Target Corporation, the company
states that they have paid dividends every quarter since our 1967 initial public offering, and it is
[their] intent to continue to do so in the future. Even after the data breech in 2013, Target was
able to come back from that loss and still pay dividends. That says a lot about the companys
financial health, but the yield is not only less than favorable, but also riskier.
Conclusion:
Due to the riskier nature of the equity securities along with the inherent risks of a department
store (their dependence on consumer spending, trends, etc.), I would suggest investing in Targets
long-term debt securities. Doing so would be a more conservative and safer route with a better
chance of returns being constant, consistent, and reliable.

Reflection:
This assignment was overwhelming and a bit terrifying. I am a conservative and careful financial
planner in my personal finances, and although I came to a similar conclusion for this analysis as I
would have in my own personal finances, it was worthwhile for me to investigate the risks and
ratios to help stretch my mind into spheres of what someone else (besides me) may want to do
with their investments.
I know I will be asked similarly terrifying tasks in the field of accounting, and I need to be
prepared to give a professional opinion, not just my personal opinion.
I hope I can use the information Ive learned in class and have a more in-depth and real-world
application more often so I can practice and gain more confidence in my accounting abilities.