Fin 571 - Financial Ratio Analysis Project

Financial Ratio Analysis Project

FIN 571

July 8, 2015

 Dr. Yvan Nezerwe

Financial Ratio Analysis Project

Successful businesses continually measure their performance to determine whether they are growing, becoming stagnant, or at risk for going out of business. Financial records are used to do a thorough analysis. The income statement, balance sheet and statement of cash flows are important documents for performing an analysis of any corporation. The income statement shows a company’s revenue and expenses for a period of time and reports how successful the organization is at generating a profit and can be used to perform comparative analysis and profitability ratios. These ratios indicate to stakeholders how profitable the company has been. The balance sheet is used to evaluate the relationship between a company’s various assets and liabilities, as well as stockholder’s equity.  The ratios derived from the information on the balance sheet are used to analyze the liquidity of the organization, which indicates the organizations ability to quickly pay off its short-term obligations. A thorough financial analysis uses data from several consecutive years or financial cycles. This paper perform a thorough financial ration analysis of Target. “Target Corporation (NYSE TGT) is an upscale discount retailer that provides high-quality, on-trend merchandise at attractive prices in clean, spacious and guest-friendly stores” (Target.com, 2015).

Liquidity Ratios

Liquidity ratios indicate a company’s ability to pay short-term obligations with short-term assets, higher ratios are a favorable indicator (Parrino, Kidwell, & Bates, 2012). Current ratio is calculated by dividing current assets by current liabilities. This ratio can indicate that a firm has ability to make payments, and creditors look for trends that indicate the current ratio has been increasing over time (Parrino, Kidwell, & Bates, 2012). The quick ratio has the inventory subtracted as it is difficult to quickly liquidate inventory without loss of value. Table one below shows the liquidity ratios of Target during the last three years. Target has had a restructuring thru 2014, and had some decreased financial stability, which is clearly seen in the trend over the last three years.

Efficiency Ratios

Efficiency ratios indicate a firm’s ability to use assets to produce sales. The ratios are useful for managers to identify the inefficient use of current and long-term assets and are useful to investors as they indicate how quickly a firm is selling inventory or converting receivables into cash flow ( (Parrino, Kidwell,  & Bates, 2012).  Efficiency ratios include inventory turnover, which is calculated by dividing cost of goods sold by inventory. A higher inventory ratio is usually good as it indicates it means that a firm is doing a good job of minimizing its investment in inventory but too high a ratio could indicate that the firm has low inventory for consumers and is possibly losing sales (Parrino, Kidwell, & Bates, 2012). The day’s sales in inventory indicate how long it takes to turn over its inventory on average, the accounts receivable turnover is calculated by dividing net sales by accounts receivables and indicates how quickly a firm converts its receivable into cash. Total asset turnover measures the dollar amount of sales generated with each dollar of total assets and is calculated by taking the net sales divided by total assets. The fixed asset turnover can be used to determine how particular types of assets are being put to use and can be calculated by dividing net sales by the net fixed assets (Parrino, Kidwell, & Bates, 2012). Table two shows the calculated efficiency ratios for Target.