Ratio Analysis

Discussion forum 1 – Ratio Analysis

Financial statements play a pivotal role in the computation of financial ratios. Companies
use ratios to assess the company’s essential performance metrics, such as profitability, liquidity,
activity, leverage, and coverage. This week’s discussion covers the financial ratios of two
companies, Walmart (WMT) and Target (TGT).
Ratio Target (TGT) Walmart (WMT)

Liquidity ratios

Current ratio 0.99 0.93
Quick ratio 0.33 0.28

Activity ratios

Inventory turnover 5.39 7.59
Receivables turnover 125.28 69.17
Fixed asset turnover 5.74 5.1
Total asset turnover 12.91 5.04

Profitability ratios

Operating profit margin 8.54% 3.26%
Net profit margin 6.55% 2.39%
Gross profit margin 29.28% 25.09%
Return on Total assets 12.90% 5.69%
Return on equity 54.15% 15.17%

Leverage ratios

Debt/assets 0.3 0.19
Debt/ Equity ratio 1.07 0.47

Coverage ratios

Times interest earned 13.33 12.9
Liquidity
Target was the more liquid company, as shown by the current and quick ratios. The
current balance assesses the existing assets and liabilities to determine how the company can
meet its short-term liquidity needs (Mayo, 2015). A ratio less than 1 means that the value of the
company’s current assets is less than the current liabilities. Computation of the quick ratio
includes inventory deduction since it considers cash and near cash items. This ratio shows that
the company may have difficulties meeting short-term liquidity needs.
Activity
Activity ratios assess how efficiently companies turn their assets into cash (Mayo, 2015).
The assets considered in this report are inventory, receivables, fixed assets, and total assets.
Target performed better than Walmart in all these ratios except the inventory ratio, where
Walmart performed better.
Profitability

Profitability ratios also show that Target was more profitable than Walmart in all the
ratios computed. Profitability ratios also determine how efficiently the company earns from
assets and equity (Mayo, 2015). These ratios enable the company to evaluate the impact of
interest and taxes on the profit. This is why it is necessary to compute the operating profit margin
(EBIT) and net profit margin. Target performed better in all these ratios and had a better return
on assets and equity.
Leverage ratios
Leverage ratios show how the company utilizes its debt. The analysis shows that Walmart
was more levered and therefore carried more risk. A company with a high debt/equity and
debt/asset ratio means that it is levered, which presents a risk (leverage risk). A debt ratio of
more than 1 indicates the value of debt is more than the value of assets or equity. Shareholders
and creditors pay attention to leverage ratios.
Times interest earned measures the ability of a company to pay interest (Mayo, 2015). It
compares EBIT against annual interest charges. Target demonstrated a better ability to pay off its
debts than Walmart. In summary, Target showed better performance than Walmart in all ratio
categories.
References
Mayo, H. B. (2015, January 23). Basic Finance: An Introduction to Financial Institutions,
Investments, and Management (11th ed.). Cengage Learning.
Target Corporation. (2022, March 9). Securities and Exchange Commission (SEC). Retrieved
October 6, 2022, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/27419/000002741922000007/tgt-
20220129.htm
Walmart Inc. (2022, March 18). Securities and Exchange Commission (SEC). Retrieved October
6, 2022, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/104169/000010416922000012/wmt-
20220131.htm