Wal-Mart and Target, Statistics Problem Example

Wal-Mart and Target are one of the largest companies in the world with multi-billion dollar profits and a major player in the U.S. retail sector. Both companies have achieved success despite following different competitive strategies. Whereas Wal-Mart focuses on low prices, Target emphasizes a delicate balance between quality of products and their prices. The financial analysis of both companies reveals that they are being managed efficiently which is impressive given their huge sizes. The data for the purpose of financial ratios for both companies comes from their 10-K statements for the fiscal year ending in 2013.

Return on Equity (ROE) ratio denotes the return being generated by a company’s shareholders (Investopedia). The ROE for Wal-Mart’s shareholders was an impressive 20.8 percent while Target’s shareholders were not far behind with an ROE of 18.11 percent. Wal-Mart’s ROE is particularly impressive due to the fact that the company’s equity base is approximately five times that of Target. A closer look at the financial analysis reveals that Target’s net income might have suffered due to debt being greater proportion of total capital base since interest obligations eat into net income.

Current ratio measures the short-term liquidity of a company (Investopedia). As far as Wal-Mart is concerned, its current ratio of 0.83 was below Target’s current ratio of 1.17. Thus, Target’s management has been doing a better job of managing short-term liquidity such as expenses incurred in day-to-day operations. Target’s performance is particularly impressive given the fact that Wal-Mart is more efficient at receivables management and seems to employ consumer credit less often to boost sales. But Wal-Mart was hurt by less efficient accounts payable management which is not surprising given the company’s vast scale of operations.

An even better measure of short-term liquidity is Quick Ratio because it excludes inventory which take time to sell. Target once again bested Wal-Mart when it comes to Quick Ratio since its ratio was 0.60 or almost three times Wal-Mart’s ratio of 0.22. This doesn’t only tell us that Target does a better job of managing short-term liquidity but also that Target is better at inventory management than Wal-Mart. This comes as a little surprise because Wal-Mart has built a reputation for world-class supply chain network that enables it to charge low prices for its products.

Debt to Total Assets ratio helps us measure company’s leverage by understanding the size of debt relative to total assets (Investopedia). Wal-Mart had a Debt to Total Assets ratio of 0.60 which is slightly better than Target’s 0.66. This tells us that both companies primarily rely on debt financial to fund their capital investments and demonstrates that companies in same industry tend to have similar capital structures sometimes. Wal-Mart’s better ratio as compared to Target may also be the reason the company generates higher ROE for its shareholders. This also means that Target’s management may benefit considerably by reducing its financial leverage.

Times Interest Earned ratio helps us understand a company’s ability to meet its interest obligations(Investopedia). As far as Wal-Mart and Target are concerned, both companies demonstrate a strong ability to meet their interest obligations which is not surprising given their strong financial performance. But Wal-Mart performance significantly better than Target in this regard with Times Interest Earned ratio of 13.47 as opposed to Target’s 7.05. This is somewhat expected, too because Target has relatively higher financial leverage than Wal-Mart and, thus. Relatively higher interest obligations. This ratio once again proves that Target’s management may benefit from reducing its debt in many areas. A closer look at Target’s balance sheet reveals that the company’s total debt increased in the fiscal year 2013 as opposed to 2012.

Conclusion

Both Wal-Mart and Target had an impressive financial performance in the year 2013 but Wal-Mart performed slightly better than Target because it was a winner in three of the five ratios. Target might have beaten Wal-Mart in Current Ratio and Quick Ratio but both ratios tell us pretty much the same thing that Target is better at short-term liquidity. But at the same time, Wal-Mart deserves credit because contrary to what most may assume given Wal-Mart’s focus on volume, Wal-Mart consumer credit policy is less generous and the company is better at receivables management than Target. Wal-Mart did suffer from less efficient accounts payable management though.

Wal-Mart’s performance is also impressive given the company’s gigantic size and its sales and net income figures that are many times more than Target. Usually, when a company becomes bigger, its operations suffer due to diseconomies of scale related to huge size. But Wal-Mart continues to post impressive figures year after year and its profit margins are more like new and small businesses enjoying phenomenal growth than a large corporation with decades of existence.

There are several measures that Target’s management could take to become more competitive with Wal-Mart. First of all, the company’s management should reduce debt and even use some of the net income to do so. Reducing debt will not only improve profitability but also further improve short-term liquidity. The company should also manage its accounts receivables more efficiently because some of the receivables may turn into bad debt in the near future.

Works Cited

Investopedia. Current Ratio. 25 January 2014 <http://www.investopedia.com/terms/c/currentratio.asp>.

—. Return On Equity – ROE. 25 January 2014 <http://www.investopedia.com/terms/r/returnonequity.asp>.

—. Times Interest Earned – TIE. 25 January 2014 <http://www.investopedia.com/terms/t/tie.asp>.

—. Total Debt To Total Assets. 25 January 2014 <http://www.investopedia.com/terms/t/totaldebttototalassets.asp>.