Acc-240 Benmark PDF

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Ngan Le

Acc-240

February 25, 2020

Dan Reis

Benchmark: Interpreting financial Statements The two competitors in the US Retailer market, which are Walmart and Target, will be discussed here. The performance of these two companies with its industry average will be evaluated from different aspects like solvency, liquidity and profitability. Then, in the end, a conclusion consisting of a summary of this evaluation will be given. The first aspect in which the evaluation will be done is liquidity which assesses the financial ability of a firm to fulfill its short-term obligation on its own. The comparison of the liquidity of the two companies among themselves and with the industry average will be made by two liquidity ratios and one of which is the current ratio that assesses the proportion of the current assets that the business to fulfill the obligation arising from current liabilities(Bragg & Bragg, 2020). Therefore, the higher the ratio, the better is the performance according to this ratio. From this ratio analysis of current ratio of Walmart which stand at .79, it can be seen that the liquidity of Walmart is much lower than the industry average (0.98) and its competitor, who is Target. On the other hand, Target’s financial ability to fulfill its short-term obligation seems to be

1 higher than Walmart but lesser than the industry average (0.98) as the current ratio of Target stand at .84. The second liquidity ratio, which is the quick ratio assesses the financial ability of the company to fulfill its short-term obligation in a short time (Corporate Finance Institute, 2020). Therefore, the higher the ratio, the better is the performance according to this ratio. The quick ratio analysis shows that both Walmart and Target financial ability to fulfill the short term obligation in a short time is lesser than the industry average but among the two Walmart financial ability is slightly better than Target as the quick ratio of Walmart and Target stands at .22 and .20 respectively compared to industry average of .65. Therefore, in overall, it can be seen that both Walmart and Target liquidity is lower than other businesses in the market in average, but among themselves, Target has better liquidity according to current ratio, and Walmart has better liquidity according to the quick ratio which assesses the financial ability in an emergency. The second aspect which will be evaluated is solvency means the financial health of the company and how well position is the business to fulfil its financial obligation. The first ratio under it is the debt to equity ratio, which calculates the proportion of debt in the capital structure of the business (Investopedia.com, 2020). From This ratio analysis shows that Walmart debt to equity ratio stands at .64 which is lower than Target (.91) and the industry average (1.03). This is a sign of superior financial health of Walmart compared to Target and its other competitors as the lower debt is indicate of the company which means lower financial obligation as interest expenses arising from it. On the other hand, Target debt to equity ratio stands at .91 which is higher than Walmart (.64) and the industry average (.76), and this means Target is incurring higher financial obligation due to its higher debt component compared to its competitors in the

2 market including Walmart. This indicates lower solvency of Target compared to its competitors, including Walmart. The second ratio to assess the solvency of these two companies is leverage ratio which assesses total debt of the company compared to its shareholder equity (Corporatefinanceinstitute.com, 2020). This ratio analysis shows that the Walmart’s leverage ratio stands at 3.17 that are lower than Target (3.79) but higher than the industry average (3.76) which means its debt component is higher than the industry average but lower than its competitor Target which means the debt is lower in Walmart compared to Target but higher than other competitors. On the other hand, the leverage ratio of Target stands at 3.79, which is higher than Walmart (3.17) and industry average (3.76), which means debt in Target is higher than Walmart and other competitors. The higher debt means lower solvency of the business. Therefore, it can be interpreted that Walmart and Target solvency is lower than all competitor in the market on average, but among themselves, the solvency of Walmart is higher than Target. The third aspect which has been assessed is profitability. The Gross margin is the first ratio by which the profitability of the business will be assessed, and under this ratio, the percentage of gross profit that the business earns after deducting the cost of goods sold from the revenue of the business is calculated (Investopedia, 2020). The gross margin of Walmart stands at 24.96, which is lower than Target (29.27) and industry average (31.46), and this means the gross profit percentage earned by Walmart is lower than Target and other competitors. On the other hand, Target’s gross margin stood at 29.27, which is higher than Walmart (24.96) and industry average (31.46), and this means that the gross profit earned by Walmart is higher than Target and other competitors.

3 The second profitability ratio is net profit margin shows that the net income percentage by the business after deducting all expense from its revenue (Bragg & Bragg, 2020). The net profit margin shows that Walmart’s net profit margin stands at 2.90 which is lower than Target (3.84) and industry average (2.58) which means that the profitability of Walmart is lower than Target and other competitors according to this ratio. On the other hand, Target’s net profit margin stands at 3.84, which is higher than both Walmart (2.90) and industry average (2.58). This means that the profitability of Target is higher than Walmart and other competitors in the market. Therefore, from this evaluation of the two-profitability ratio, it can be interpreted that the profitability of Walmart is lower than Target and other businesses in this market. On the other hand, the profitability of Target is higher than Walmart and other businesses in this market. The ratio which has been collected of the two companies and the industry average is given in the appendix. It can be concluded from the above evaluation that liquidity of Walmart and Target is lower than other companies in the market in average, but among the two, Walmart’s liquidity is better in an emergency compared to Target and Target liquidity is better than Walmart in the normal situation. The second conclusion is that the solvency of Walmart and Target is lower than other companies in the market in average, but among the two, Walmart solvency is better than Target. In term of profitability, Target is performing better than Walmart and other competitors in the market and on the other hand, Walmart is earning less profit than Target and other competitors in the market on average.

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Reference Bragg, S., & Bragg, S. (2020). Current ratio — Accounting tools. Retrieved from: https://www.accountingtools.com/articles/2017/5/16/current-ratio Bragg, S., & Bragg, S. (2020). Net profit margin — Accounting tools. Retrieved from: https://www.accountingtools.com/articles/what-is-net-profit-margin.html Corporate Finance Institute. (2020). Quick ratio - A short term liquidity metric, formula, example. Retrieved from: https://corporatefinanceinstitute.com/resources/knowledge/finance/quick-ratio-definition/ Corporatefinanceinstitute.com. (2020). Retrieved from: https://corporatefinanceinstitute.com/resources/knowledge/finance/leverage-ratios/ Investopedia. (2020). Gross margin defined. Retrieved from: https://www.investopedia.com/terms/g/grossmargin.asp/ Investopedia.com. (2020). Retrieved from: Debt-to equity ratio https://www.investopedia.com/terms/d/debtequityratio.asp

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Walmart Inc.-WMT

Target Corporation-TGT

Financial Ratios Debt/Equity Ratio Current Ratio Quick Ratio Leverage Ratio Book Value/Share

Company 0.64 0.79 0.22 3.17 26.32

Industry 1.03 0.98 0.65 3.76 1.69

Financial Ratios Debt/Equity Ratio Current Ratio Quick Ratio Leverage Ratio Book Value/Share

Company 0.91 0.83 0.20 3.79 22.79

Industry 0.76 1.14 0.70 2.96 1.32

Profit Margin % Gross Margin Pre-tax Margin Net Profit Margin Average Gross Margin Average Pre-tax Margin

Company 24.69 3.84 2.90 25.18 3.54

Industry 19.27 2.58 1.74 19.24 2.64

Profit Margin % Gross Margin Pre-tax Margin Net Profit Margin Average Gross Margin Average Pre-tax Margin

Company 29.27 4.88 3.84 29.58 5.44

Industry 31.46 4.83 3.52 30.34 4.93

Key Metrics Return on Equity % Return on Assets % Return on Capital % Income/Employee Inventory Turnover

Company 20.22 6.67 10.61 8.90

Industry 11.35 4.58 6.15 5.93k 10.49

Key Metrics Return on Equity % Return on Assets % Return on Capital % Income/Employee Inventory Turnover

Company 28.61 7.41 12.19 8.21k 5.89

Industry 14.20 6.7 7.83 9.96k 6.11

Growth Rate (%)

Company

Industry

Growth Rate (%)

Company

Industry

2.07 109.24

1.74 -1.88

Sales Revenue Net Income

Sales Revenue Net Income

4.74 12.83

7.45 -2.39...