Target Corporation: Computed The Following Ratios For Two ✓ Solved

Target Corporation 21 Computed The Following Ratios For Two Years

Target Corporation has calculated several financial ratios for two consecutive years to evaluate its performance and financial health. The key ratios include the debt ratio, gross profit margin, free cash flow, and a DuPont analysis of return on equity. The following sections detail the calculation of these ratios, their implications, and insights drawn from the analysis.

Debt Ratio

The debt ratio is an important measure of financial leverage, indicating the proportion of a company's assets that are financed by debt. It is calculated using the following formula:

Debt Ratio = Total Liabilities / Total Assets

For the years in question:

  • Year 1: Total Liabilities = $30,946; Total Assets = $42,779; Debt Ratio = 72.34%
  • Year 2: Total Liabilities = $29,993; Total Assets = $41,290; Debt Ratio = 72.64%

This analysis shows a slight increase in the debt ratio from Year 1 to Year 2, indicating that a larger proportion of assets is being financed through debt, which may pose a risk to the company's financial stability.

Gross Profit Margin

The gross profit margin reflects the efficiency of a company in generating profit from its sales. It is calculated as:

Gross Profit Margin = Gross Profit / Total Sales

The computed figures are:

  • Year 1: Gross Profit = $23,248; Total Sales = $78,112; Gross Profit Margin = 29.76%
  • Year 2: Gross Profit = $22,057; Total Sales = $75,356; Gross Profit Margin = 29.27%

The decline in the gross profit margin from Year 1 to Year 2 indicates decreased efficiency in managing production costs or increased competition leading to lower pricing power.

Free Cash Flow

Free cash flow is a critical measure of a company's ability to generate cash beyond its operational needs and capital expenditures. It is calculated as:

Free Cash Flow = Cash Flow from Operations - Capital Expenditure

Based on the calculations:

  • Year 1: Cash Flow from Operations = $7,117; Capital Expenditure = $2,944; Free Cash Flow = $4,173
  • Year 2: Cash Flow from Operations = $5,973; Capital Expenditure = $3,416; Free Cash Flow = $2,557

The decrease in free cash flow from Year 1 to Year 2 suggests potential concerns regarding the company’s ability to generate sufficient cash to fund operations and growth initiatives.

DuPont Analysis of Return on Equity (ROE)

The DuPont analysis breaks down the return on equity into three components: return on sales, total asset turnover, and financial leverage (equity multiplier). This provides a detailed understanding of the factors driving ROE:

Return on Sales

Return on Sales = Net Income / Revenue

  • Year 1: Net Income = $3,281,937; Revenue = $78,112,356; Return on Sales = 4.20%
  • Year 2: Return on Sales = 3.90%

Total Asset Turnover

Total Asset Turnover = Revenue / Total Assets

For the calculated years:

  • Year 1: Total Assets = $42,779,290; Asset Turnover = 1.83

Financial Leverage (Equity Multiplier)

Financial Leverage = Total Assets / Total Equity

  • Year 1: Total Equity = $11,833,297; Financial Leverage = 3.65

Return on Equity

Finally, the return on equity can be summarized as:

Return on Equity = Return on Sales × Total Asset Turnover × Financial Leverage

Resulting in:

  • Year 1: ROE = 27.73%
  • Year 2: ROE = 26.00%

This small decline in ROE over the two years indicates weakened profitability against equity, which may encourage management to address operational inefficiencies and reconsider capital structure strategies.

Conclusion

In summary, Target Corporation's financial analysis reveals a mixed performance across the evaluated metrics. Specific challenges such as increasing debt ratio, declining gross profit margins, and reduced free cash flow suggest areas for potential improvement. However, despite the slight decrease in ROE, the company maintains a solid financial foundation but must remain vigilant to ensure sustained growth and profitability in the competitive retail environment.

References

  • Target Corporation. (2021). Annual Financial Report.
  • Investopedia. (2023). Financial Ratios. Retrieved from https://www.investopedia.com/financial-ratios-5115795
  • MarketLine. (2023). Target Corporation Company Profile.
  • Yahoo Finance. (2023). Target Corporation Financials. Retrieved from https://finance.yahoo.com/quote/TGT/
  • SEC. (2023). Target Corporation SEC Filings.
  • Morningstar. (2023). Target Corporation. Retrieved from https://www.morningstar.com/stocks/xnas/tgt/quote
  • Forbes. (2023). Target Corporation Profile. Retrieved from https://www.forbes.com/companies/target/
  • Reuters. (2023). Target Corporation Overview. Retrieved from https://www.reuters.com/companies/TGT
  • FDIC. (2023). Understanding Financial Ratios. Retrieved from https://www.fdic.gov/
  • Graham, B., & Dodd, D. (2023). Security Analysis. McGraw-Hill Education.

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