Todd Mehrkens

Accounting 230, Sect. 2

Financial Analysis Paper
Wal-Mart and Target are rivals competing in the retailing industry. Both companies are extremely similar in that
they both go for the strategy of providing low prices. The comparison of these two companies in the areas of liquidity,
solvency, and profitability based on each of their annual financial reports ending in January 2011 show the following:
Liquidity is the ability of a company to pay obligations that are expected to become due within the next year or
operating cycle. Current ratio measures liquidity and the ability to pay short term debt. The current ratio for Wal-Mart is .
89:1 and Target has 1.71:1, which means that Wal-Mart has less current liabilities to current assets, unlike Target who is
operating with larger ratio that has higher current liabilities to current assets. Receivables turnover ratio is a measure of
liquidity of receivables; Wal-Mart collects receivables on average 90.66 times in a period which is ten times larger than
Targets collection of receivables 9.01 times in a period. This means that Wal-Mart about ten times more liquid with their
receivables compared to their rival, Target. Current cash debt coverage ratio indicates the ability to pay short term debt.
Wal-Marts ratio for this is 0.415 while Targets is 0.335; this indicates that Wal-Mart is more able to pay off their
(average) current liabilities compared to target. By Wal-Mart having a larger ratio in both current ratio and current cash
debt coverage ratio there is greater amount of evidence that Wal-Mart has a greater ability to pay of short term debt
compared to Target. Average collection period (in days) is the average amount of time that a receivable is outstanding. It
indicates the liquidity of receivables and collection success. Wal-Mart on average takes 4.03 days to collect receivables
which is about ten time faster than the Target which takes on average takes 40.51 days, in other words Wal-Mart has the
edge when it comes to their collection of receivables success and they are more liquid with their receivables. Inventory
turnover ratio measures the number of times average inventory was sold during a period of time. Its purpose is to measure
the liquidity of inventory. Wal-Marts ratio for this is 11.54 has while Target with 6.3. This means Wal-Mart has a faster
inventory turnover ratio, which that less cash is tied up in inventory and the less of a chance of the inventory going
obsolete. On the other hand sometimes having a high inventory turnover ratio also indicates that a company can lose
money in sales, due to the company being more likely to run out of inventory. Days in inventory indicates the liquidity of
inventory and inventory management. For Wal-Mart inventory it is estimated to be in inventory for 32.02 days and Target
is estimated for inventory to be there for 57.88 days. This ratio indicates that Wal-Mart had better inventory management
and better inventory liquidity compared to Target. In conclusion all six ratios suggest that Wal-Mart has better liquidity
than Target.

Solvency is the ability of a company to pay interest as it comes due and to repay the balance of debt at maturity. The
solvency ratios measure the ability of the company to survive over a long period of time. Debt to total assets ratio
measures the percentage of total financing by creditors. When comparing both the companies they are almost the same.
Wal-Mart had 65.56% of their total assets provided by creditors, while Target has 64.56% of their total assets provided by
credits. Times interest earned ratio is a measure of a companys solvency. The times interest earned ratio for Wal-Mart is
11.04 and Targets is 1.01. This means that Wal-Mart has a greater ability to meet interest payments as they come due.
Cash debt coverage ratio indicates long term debt paying ability (cash basis). Wal-Marts cash debt coverage ratio is .223
and Targets is .184. This ratio indicates that Wal-Mart has the ability to pay of 22.3% of their total debt with the net cash
from operations in the January 2010 to January 2011 period, while Target only has the ability to pay 18.4% of their total
liabilities with the net cash from the recent year. Free cash flow is the cash remaining from operating activities after
adjusting for capital expenditures and dividends paid. The free cash flow for Wal-Mart was $6,507 million and Target had
$2,533; this means that Wal-Mart has more than twice as much money as Target to pay dividends or expanding operations
for the recent year. In conclusion Wal-Mart has greater solvency, such the ability to pay off liabilities and interest, than
Target.
Profitability indicates how well a firm is performing in terms of its ability to generate profit. Return on assets ratio is
a profitability measure that indicates the amount of net income generated by each dollar of assets. It indicates the overall
profitability of assets. Wal-Mart has a return on assets ratio that is somewhat significantly larger than Target by having
9.34% compared to Targets 6.62%. This suggests that Wal-Mart is more profitable with their assets. Profit margin ratio
indicates the net income generated by each dollar of sales. For this ratio, Wal-Mart has a lower profit margin ratio of
3.91% compared to Targets 4.33%. This means Target generates a larger amount of net income by each dollar of sales. A
possible reason for this is, is that Target is known for having better quality of merchandise than Wal-Mart, so they have
the same or slightly higher prices in merchandise which could create a high profit margin ratio. The asset turnover ratio
indicates how efficiently a company uses its assets to generate sales. Wal-Marts turnover ratio is 2.384 which is slightly
higher than Targets 1.527. This indicates that Wal-Mart is slightly more efficient than Target in generating sales by using
their assets. The return on common stockholders equity ratio indicates the profitability of common stockholders
investment. Comparing the two companies ratios suggest that Wal-Mart is more profitable for investment by common
stockholders with 25.53% compared to Targets 18.94%. In conclusion for profitability Wal-Mart is more profitable for
their investors and using their resources compared to their rival Target. In general based on the financial ratios used in this
financial analysis, Wal-Mart has better liquidity, solvency, and profitability compared to Target.

References
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