A Financial Ratio Analysis of Target Corporation An Asset Management Assessment Assume that you are a prospective business partner 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. Note: Assume that there are 365 days in a year, and that Target's inventory turnover ratio is computed by dividing its net sales by its ending inventory balance. Target Corporation Selected Income Statement, Balance Sheet, and Related Data1 Income Statement Sales Less: Cost of goods sold Gross profit Less: Selling, general, and administrative expenses Less: Other expenses Earnings before interest and taxes (EBIT) Less: Interest expense Earnings before taxes (EBT) Less: Taxes Net income Less: Common dividends paid Dividends per share 2008 $65,786,000,000 $63,435,000,000 $62,884,000,000 44,157,000,000 18,727,000,000 12,954,000,000 1,609,000,000 4,402,000,000 866,000,000 3,536,000,000 1,322,000,000 2010 2009 45,725,000,000 20,061,000,000 13,469,000,000 860,000,000 5,252,000,000 757,000,000 4,495,000,000 1,575,000,000 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 $2,920,000,000 $2,488,000,000 2,214,000,000 609,000,000 $0.92 496,000,000 $0.67 465,000,000 $0.62 To answer these questions, compute the listed asset management, or efficiency, ratios for 2008 through 2010 and evaluate each ratio and the trend of its component account balances. 1. Which of the following statements addressing the use of asset management ratios, in general and the inventory turnover and days sales outstanding (DSO) ratios, in particular, are correct? Target Corporation Asset Management Ratios with the exception of its inventory turnover ratio, during the 2008 to 2010 period, Target's asset management ratios have exhibited a positive trend Inventory turnover ratio 2010 2009 2008 Over time, Target's inventory turnover ratio has exhibited a declining trend, which suggests that the strength of the company's sales growth has been less than its accumulation of additional inventory. This is consistent with your conclusions regarding Target's liquidity ratios. DSO The observed trend in Target's DSO ratio is consistent with either decreases in the firm's sales, increases in its Accounts receivable account balance, or both When evaluating a firm's asset management ratios, an increase in sales is almost always construed as a positive outcome when evaluating management's performance 2010 2009 2008 Fixed asset turnover ratio 2. Which of the following behaviors could explain the trend in the inventory turnover ratio and therefore merit additional investigation? Check all that apply 2010 2009 2008 One or more suppliers offered favorable prices for making bulk purchases. Total asset turnover ratio One or more suppliers offered favorable prices for making accelerated purchases. The purchasing manager placed orders with suppliers even when sales didn't justify them 2010 2009 2008 3. Consider the trend of Target's DSO ratios, as well as the pattern of its Sales and Accounts receivable balances If Target is making fewer credit sales because management is concerned about future economic conditions and preventing defaults and unrecoverable accounts receivable, then this finding could reflect favorably in your assessment of management's ance On the other hand, if credit sales are declining because sales associates in the company's stores are failing to encourage customers to open new Target credit cards, then this isn't a favorable behavior because the company may be earned interest income. opportunities for greater future sales and 4. Which statement addressing Target's fixed asset turnover ratios or its component accounts is correct? O The reason why the fixed asset turnover ratio increases from 2009 to 2010 is that the sales account increases by 3.71%, while the Net fixed asset account increases by only 0.84%. O Target's fixed asset turnover ratio should be computed using the total historical cost of its fixed assets, which means that the ratio should not reflect the accumulated depreciation, or age, of its fixed assets. In general, a higher, rather than a lower, fixed asset turnover ratio will reflect practice of generating ever-greater sales dollars using the same stock of property, plant, and equipment can be taken to extreme. Which practice would increase a company's fixed asset turnover ratio to the detriment of the company's long-term viability and profitability? on management's performance. However, the O A company cuts back on the downtime and maintenance and repair activities necessary to preserve the performance of the property and equipment. O A company doesn't replace worn-out plant and equipment and operates the remaining assets over additional work shifts. 5. The trend of the total asset turnover ratio indicates that Target is moderately successful in generating sales dollars using its entire holding of assets. In general, it earns $1.42 to $1.51 of for every dollar of assets owned. 6. Given these insights and information, which of the following statements are correct? Check all that apply Each year during the period of 2008 to 2010, Target's inventory turned over more slowly-primarily because its percentage growth in inventory exceeded its percentage growth in sales. Target's accumulation of inventory merits additional investigation to ensure that it is not the result of obsolete, missing, or unsalable items. The fixed asset turnover ratio suggests that Target is generating $2.44 to $2.58 in sales per dollar of investment in net fixed assets. An inventory that turns over 8.66 times per year, such as Target's 2010 inventory, will be sold and replaced, on average, every 42.15 days. In general, Target's management should prefer a small total asset turnover ratio to a larger ratio because it reflectsmore favorably on their performance A Financial Ratio Analysis of Target Corporation An Asset Management Assessment Assume that you are a prospective business partner 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. Note: Assume that there are 365 days in a year, and that Target's inventory turnover ratio is computed by dividing its net sales by its ending inventory balance. Target Corporation Selected Income Statement, Balance Sheet, and Related Data1 Income Statement Sales Less: Cost of goods sold Gross profit Less: Selling, general, and administrative expenses Less: Other expenses Earnings before interest and taxes (EBIT) Less: Interest expense Earnings before taxes (EBT) Less: Taxes Net income Less: Common dividends paid Dividends per share 2008 $65,786,000,000 $63,435,000,000 $62,884,000,000 44,157,000,000 18,727,000,000 12,954,000,000 1,609,000,000 4,402,000,000 866,000,000 3,536,000,000 1,322,000,000 2010 2009 45,725,000,000 20,061,000,000 13,469,000,000 860,000,000 5,252,000,000 757,000,000 4,495,000,000 1,575,000,000 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 $2,920,000,000 $2,488,000,000 2,214,000,000 609,000,000 $0.92 496,000,000 $0.67 465,000,000 $0.62 To answer these questions, compute the listed asset management, or efficiency, ratios for 2008 through 2010 and evaluate each ratio and the trend of its component account balances. 1. Which of the following statements addressing the use of asset management ratios, in general and the inventory turnover and days sales outstanding (DSO) ratios, in particular, are correct? Target Corporation Asset Management Ratios with the exception of its inventory turnover ratio, during the 2008 to 2010 period, Target's asset management ratios have exhibited a positive trend Inventory turnover ratio 2010 2009 2008 Over time, Target's inventory turnover ratio has exhibited a declining trend, which suggests that the strength of the company's sales growth has been less than its accumulation of additional inventory. This is consistent with your conclusions regarding Target's liquidity ratios. DSO The observed trend in Target's DSO ratio is consistent with either decreases in the firm's sales, increases in its Accounts receivable account balance, or both When evaluating a firm's asset management ratios, an increase in sales is almost always construed as a positive outcome when evaluating management's performance 2010 2009 2008 Fixed asset turnover ratio 2. Which of the following behaviors could explain the trend in the inventory turnover ratio and therefore merit additional investigation? Check all that apply 2010 2009 2008 One or more suppliers offered favorable prices for making bulk purchases. Total asset turnover ratio One or more suppliers offered favorable prices for making accelerated purchases. The purchasing manager placed orders with suppliers even when sales didn't justify them 2010 2009 2008 3. Consider the trend of Target's DSO ratios, as well as the pattern of its Sales and Accounts receivable balances If Target is making fewer credit sales because management is concerned about future economic conditions and preventing defaults and unrecoverable accounts receivable, then this finding could reflect favorably in your assessment of management's ance On the other hand, if credit sales are declining because sales associates in the company's stores are failing to encourage customers to open new Target credit cards, then this isn't a favorable behavior because the company may be earned interest income. opportunities for greater future sales and 4. Which statement addressing Target's fixed asset turnover ratios or its component accounts is correct? O The reason why the fixed asset turnover ratio increases from 2009 to 2010 is that the sales account increases by 3.71%, while the Net fixed asset account increases by only 0.84%. O Target's fixed asset turnover ratio should be computed using the total historical cost of its fixed assets, which means that the ratio should not reflect the accumulated depreciation, or age, of its fixed assets. In general, a higher, rather than a lower, fixed asset turnover ratio will reflect practice of generating ever-greater sales dollars using the same stock of property, plant, and equipment can be taken to extreme. Which practice would increase a company's fixed asset turnover ratio to the detriment of the company's long-term viability and profitability? on management's performance. However, the O A company cuts back on the downtime and maintenance and repair activities necessary to preserve the performance of the property and equipment. O A company doesn't replace worn-out plant and equipment and operates the remaining assets over additional work shifts. 5. The trend of the total asset turnover ratio indicates that Target is moderately successful in generating sales dollars using its entire holding of assets. In general, it earns $1.42 to $1.51 of for every dollar of assets owned. 6. Given these insights and information, which of the following statements are correct? Check all that apply Each year during the period of 2008 to 2010, Target's inventory turned over more slowly-primarily because its percentage growth in inventory exceeded its percentage growth in sales. Target's accumulation of inventory merits additional investigation to ensure that it is not the result of obsolete, missing, or unsalable items. The fixed asset turnover ratio suggests that Target is generating $2.44 to $2.58 in sales per dollar of investment in net fixed assets. An inventory that turns over 8.66 times per year, such as Target's 2010 inventory, will be sold and replaced, on average, every 42.15 days. In general, Target's management should prefer a small total asset turnover ratio to a larger ratio because it reflectsmore favorably on their performance