8.5.5

A Financial Ratio Analysis of Target Corporation A Profitability Assessment Assume that you are a prospective shareholder of Target Corporation (TGT), a retailer of "everyday essentials and fashionable differentiated merchandise at discounted prices," and are interested in the company's historical and current financial activities and performance. Use the following financial data for Target to complete and conduct your financial ratio analysis. Then answer the questions that follow. Remember, the results of a ratio analysis often identify issues requiring additional investigation. Now consider the effectiveness of Target's revenue-generating and cost-containing activities and its profitability ratios. That is, how profitable is the company, and what return is earned by TGT's investors? (Note: Round all intermediate and final calculations to two decimal places. The values you enter should be in percentage form.) % % 90 Target Corporation Profitability Ratios Gross profit margin 2010 2009 2008 Operating profit margin 2010 2009 2008 Net profit margin 2010 2009 % 90 % % 2008 ROA 2010 2009 % 2008 ROE 2010 2009 % 2008 BEP 2010 % 2009 % 2008 % To answer these questions, focus primarily on income statement accounts and relate them selectively to either the firm's asset holdings (total assets) or its sources of financing (such as its common equity). For example: 1. The return on assets (ROA) ratio relates the volume of after-tax earnings generated to each dollar of company assets. The trend of Target's ROA ratio, over the period of 2008 to 2010, indicates that management is becoming productive or effective in generating dollars. In addition, the return on equity (ROE) ratio provides shareholders with a summary value that indicates the amount of net income generated by each dollar of stockholders' equity. The trend of Target's ROE ratios indicates that management is in generating a growing return to Target's shareholders. Which of the following statements are correct? Check all that apply. An examination of the trend of the Total equity account balances further supports the behavior of the ROE values. The trend of Target's Net income account is contradictory to the observed behavior of its ROA and ROE ratios. The trend of Target's Net income account is consistent with the observed behavior of the ROA and ROE ratios. 2. In contrast, the basic earnings power (BEP) ratio provides insights into the effectiveness of Target's management in generating profits using the firm's total assets-before consideration of its By excluding these expenses from the calculation, the ratio is useful for comparing companies that employ differing tax treatments and Which of the following statements are correct? Check all that apply. The behavior of the Accounts receivable and Other long-term asset accounts contributed to the trend of Target's BEP ratio during 2008 to 2010. The behavior of Target's Accounts payable and Retained earnings accounts contributed to the trend of the BEP ratio during 2008 to 2010. During 2008 to 2010, the quality of management performance suggested by the ROA and ROE ratios is consistent with that suggested by Target's BEP ratio. In general, it is reasonable to conclude that the trend of the BEP ratio reflects 2010 period. on management's performance during the 2008-to- which is with that of the The trend of the BEP ratio indicates that Target's management performance has been ROA and ROE ratios. 3. The profit margin ratios-gross, operating, and net-are useful to users of financial information interested in the company's ability to manage (but not necessarily minimize) its costs. Each ratio places a different income statement subtotal (gross profit, EBIT, and net income) in the numerator and as the its denominator uses The pattern of gross profit margins from year to year suggests that Target's costs of goods sold as a percentage of total sales are ... This trend is verified by which of the following data? O Target's cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 30.49% 30.54%, and 29.78%, respectively. Target's cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 70.22%, 59.46%, and 69.51%, respectively, Target's cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 29.78%, 30.54%, and 30.49% respectively. 4. An examination of the income statement data suggests that the growth in the operating and net profit margins is mostly attributable to Is it reasonable to attribute changes in the net profit margin to changes in Target's tax rate? because Target pays Grade It Now Save & Continue 2008 $62,884,000,000 44,157,000,000 18,727,000,000 12,954,000,000 2009 $63,435,000,000 44,062,000,000 19,373,000,000 13,078,000,000 1,521,000,000 4,673,000,000 801,000,000 3,872,000,000 1,384,000,000 $2,488,000,000 496,000,000 $0.67 1,609,000,000 4,402,000,000 866,000,000 3,536,000,000 1,322,000,000 $2,214,000,000 465,000,000 $0.62 2009 2008 Target Corporation Selected Income Statement, Balance Sheet, and Related Data Income Statement 2010 Sales $65,786,000,000 Less: Cost of goods sold 45,725,000,000 Gross profit 20,061,000,000 Less: Selling, general, and administrative expenses 13,469,000,000 Less: Other expenses 860,000,000 Earnings before interest and taxes (EBIT) 5,252,000,000 Less: Interest expense 757,000,000 Earnings before taxes (EBT) 4,495,000,000 Less: Taxes 1,575,000,000 Net income $2.920,000,000 Less: Common dividends paid 609,000,000 Dividends per share $0.87 Balance Sheet Data Assets: 2010 Cash and marketable securities $1,712,000,000 Receivables 6,153,000,000 Inventory 7,596,000,000 Other current assets 1,752,000,000 Total current assets 17,213,000,000 Net fixed assets 25,493,000,000 Other long-term assets 999,000,000 Total assets $43,705,000,000 Liabilities and Equity: Accounts payable $6,625,000,000 Accruals 3,326,000,000 Other current liabilities 119,000,000 Total current liabilities 10,070,000,000 Long-term liabilities 18,148,000,000 Total debt 28,218,000,000 Common stock 59,000,000 Additional paid-in capital 3,311,000,000 Retained earnings 12,117,000,000 Total equity 15,487,000,000 Total debt and equity $43,705,000,000 Other Relevant Data Common shares outstanding 704,038,218 Total dividends paid 609,000,000 Market price per share $54.35 $2,200,000,000 6,956,000,000 7,179,000,000 2,079,000,000 18,424,000,000 25,280,000,000 829,000,000 $44,533,000,000 5864,000,000 8,084,000,000 6,705,000,000 1,835,000,000 17,488,000,000 25,756,000,000 862,000,000 $44,106,000,000 $6,337,000,000 2,913,000,000 1,262,000,000 10,512,000,000 $6,511,000,000 3,120,000,000 1,696,000,000 11,327,000,000 17,859,000,000 29,186,000,000 62,000,000 2,919,000,000 19,882,000,000 30,394,000,000 63,000,000 2,762,000,000 10,887,000,000 13,712,000,000 12,366,000,000 15,347,000,000 $44,533,000,000 $44,106,000,000 744,644,454 496,000,000 $51.27 752,712,464 465,000,000 $31.20 A Financial Ratio Analysis of Target Corporation A Profitability Assessment Assume that you are a prospective shareholder of Target Corporation (TGT), a retailer of "everyday essentials and fashionable differentiated merchandise at discounted prices," and are interested in the company's historical and current financial activities and performance. Use the following financial data for Target to complete and conduct your financial ratio analysis. Then answer the questions that follow. Remember, the results of a ratio analysis often identify issues requiring additional investigation. Now consider the effectiveness of Target's revenue-generating and cost-containing activities and its profitability ratios. That is, how profitable is the company, and what return is earned by TGT's investors? (Note: Round all intermediate and final calculations to two decimal places. The values you enter should be in percentage form.) % % 90 Target Corporation Profitability Ratios Gross profit margin 2010 2009 2008 Operating profit margin 2010 2009 2008 Net profit margin 2010 2009 % 90 % % 2008 ROA 2010 2009 % 2008 ROE 2010 2009 % 2008 BEP 2010 % 2009 % 2008 % To answer these questions, focus primarily on income statement accounts and relate them selectively to either the firm's asset holdings (total assets) or its sources of financing (such as its common equity). For example: 1. The return on assets (ROA) ratio relates the volume of after-tax earnings generated to each dollar of company assets. The trend of Target's ROA ratio, over the period of 2008 to 2010, indicates that management is becoming productive or effective in generating dollars. In addition, the return on equity (ROE) ratio provides shareholders with a summary value that indicates the amount of net income generated by each dollar of stockholders' equity. The trend of Target's ROE ratios indicates that management is in generating a growing return to Target's shareholders. Which of the following statements are correct? Check all that apply. An examination of the trend of the Total equity account balances further supports the behavior of the ROE values. The trend of Target's Net income account is contradictory to the observed behavior of its ROA and ROE ratios. The trend of Target's Net income account is consistent with the observed behavior of the ROA and ROE ratios. 2. In contrast, the basic earnings power (BEP) ratio provides insights into the effectiveness of Target's management in generating profits using the firm's total assets-before consideration of its By excluding these expenses from the calculation, the ratio is useful for comparing companies that employ differing tax treatments and Which of the following statements are correct? Check all that apply. The behavior of the Accounts receivable and Other long-term asset accounts contributed to the trend of Target's BEP ratio during 2008 to 2010. The behavior of Target's Accounts payable and Retained earnings accounts contributed to the trend of the BEP ratio during 2008 to 2010. During 2008 to 2010, the quality of management performance suggested by the ROA and ROE ratios is consistent with that suggested by Target's BEP ratio. In general, it is reasonable to conclude that the trend of the BEP ratio reflects 2010 period. on management's performance during the 2008-to- which is with that of the The trend of the BEP ratio indicates that Target's management performance has been ROA and ROE ratios. 3. The profit margin ratios-gross, operating, and net-are useful to users of financial information interested in the company's ability to manage (but not necessarily minimize) its costs. Each ratio places a different income statement subtotal (gross profit, EBIT, and net income) in the numerator and as the its denominator uses The pattern of gross profit margins from year to year suggests that Target's costs of goods sold as a percentage of total sales are ... This trend is verified by which of the following data? O Target's cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 30.49% 30.54%, and 29.78%, respectively. Target's cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 70.22%, 59.46%, and 69.51%, respectively, Target's cost of goods sold, expressed as a percentage of total sales, for 2008, 2009, and 2010 are 29.78%, 30.54%, and 30.49% respectively. 4. An examination of the income statement data suggests that the growth in the operating and net profit margins is mostly attributable to Is it reasonable to attribute changes in the net profit margin to changes in Target's tax rate? because Target pays Grade It Now Save & Continue 2008 $62,884,000,000 44,157,000,000 18,727,000,000 12,954,000,000 2009 $63,435,000,000 44,062,000,000 19,373,000,000 13,078,000,000 1,521,000,000 4,673,000,000 801,000,000 3,872,000,000 1,384,000,000 $2,488,000,000 496,000,000 $0.67 1,609,000,000 4,402,000,000 866,000,000 3,536,000,000 1,322,000,000 $2,214,000,000 465,000,000 $0.62 2009 2008 Target Corporation Selected Income Statement, Balance Sheet, and Related Data Income Statement 2010 Sales $65,786,000,000 Less: Cost of goods sold 45,725,000,000 Gross profit 20,061,000,000 Less: Selling, general, and administrative expenses 13,469,000,000 Less: Other expenses 860,000,000 Earnings before interest and taxes (EBIT) 5,252,000,000 Less: Interest expense 757,000,000 Earnings before taxes (EBT) 4,495,000,000 Less: Taxes 1,575,000,000 Net income $2.920,000,000 Less: Common dividends paid 609,000,000 Dividends per share $0.87 Balance Sheet Data Assets: 2010 Cash and marketable securities $1,712,000,000 Receivables 6,153,000,000 Inventory 7,596,000,000 Other current assets 1,752,000,000 Total current assets 17,213,000,000 Net fixed assets 25,493,000,000 Other long-term assets 999,000,000 Total assets $43,705,000,000 Liabilities and Equity: Accounts payable $6,625,000,000 Accruals 3,326,000,000 Other current liabilities 119,000,000 Total current liabilities 10,070,000,000 Long-term liabilities 18,148,000,000 Total debt 28,218,000,000 Common stock 59,000,000 Additional paid-in capital 3,311,000,000 Retained earnings 12,117,000,000 Total equity 15,487,000,000 Total debt and equity $43,705,000,000 Other Relevant Data Common shares outstanding 704,038,218 Total dividends paid 609,000,000 Market price per share $54.35 $2,200,000,000 6,956,000,000 7,179,000,000 2,079,000,000 18,424,000,000 25,280,000,000 829,000,000 $44,533,000,000 5864,000,000 8,084,000,000 6,705,000,000 1,835,000,000 17,488,000,000 25,756,000,000 862,000,000 $44,106,000,000 $6,337,000,000 2,913,000,000 1,262,000,000 10,512,000,000 $6,511,000,000 3,120,000,000 1,696,000,000 11,327,000,000 17,859,000,000 29,186,000,000 62,000,000 2,919,000,000 19,882,000,000 30,394,000,000 63,000,000 2,762,000,000 10,887,000,000 13,712,000,000 12,366,000,000 15,347,000,000 $44,533,000,000 $44,106,000,000 744,644,454 496,000,000 $51.27 752,712,464 465,000,000 $31.20