A Financial Ratio Analysis of Target Corporation An Asset Management Assessment Assume that you are an existing bondholder 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. Note: Round values to two decimal places. 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 Data 1 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 45,725,000,000 44,062,000,000 44,157,000,000 20,061,000,000 19,373,000,000 18,727,000,000 12,954,000,000 1,609,000,000 4,164,000,000 866,000,000 3,298,000,000 1,322,000,000 $3,400,000,000 $2,589,000,000 $1,976,000,000 465,000,000 0.62 2010 2009 13,469,000,000 860,000,000 5,732,000,000 757,000,000 4,975,000,000 1,575,000,000 13,078,000,000 1,521,000,000 4,774,000,000 801,000,000 3,973,000,000 1,384,000,000 609,000,000 496,000,000 0.92 0.67 Balance Sheet Data Assets: Cash and marketable securities Receivables Inventory Other current assets 2010 2009 2008 $1,712,000,000 $2,200,000,000 6,966,000,000 7,179,000,000 2,079,000,000 18,424,000,000 25,493,000,000 25,280,000,000 25,756,000,000 6,153,000,000 7,596,000,000 1,752,000,000 17,213,000,000 $864,000,000 8,084,000,000 6,705,000,000 1,835,000,000 17,488,000,000 Total current assets Net fixed assets Other long-term assets 999,000,000 829,000,000 862,000,000 $43,705,000,000 $44,533,000,000 $44,106,000,000 Total assets Liabilities and Equity: Accounts payable Accruals Other current liabilities $6,625,000,000 $6,511,000,000 6,337,000,000 3,120,000,000 1,696,000,000 11,327,000,000 17,859,000,000 3,326,000,000 119,000,000 10,070,000,000 18,148,000,000 2,913,000,000 1,262,000,000 10,512,000,000 19,882,000,000 Total current liabilities Long-term liabilities Total debt 28,218,000,000 29,186,000,000 30,394,000,000 63,000,000 2,762,000,000 10,887,000,000 13,712,000,000 $43,705,000,000 $44,533,000,000 $44,106,000,000 Common stock Additional paid-in capital Retained earnings 62,000,000 2,919,000,000 12,117,000,000 12,366,000,000 15,487,000,000 15,347,000,000 59,000,000 3,311,000,000 Total Equity Total debt and equity Other Relevant Data Common shares outstanding Total dividends paid Market price per share 704,038,218 609,000,000 $54.35 744,644,454 496,000,000 $51.27 752,712,464 465,000,000 $31.20 Given Target's financial data, answer the following questions: Is Target's management efficiently using the company's assets so that sales opportunities aren't lost and excessive assets aren't held? Specifically, how well is Target managing its receivables and inventory? 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 outstaning (DSO) ratios, in particular, are correct? Target Corporation Asset Management Ratios The observed trend in Target's DSO ratio is consistent with either decreases in the fim's Inventory turnover ratio sales, increases in its Accounts receivable account balance, or both. Over time, Target's inventory turnover ratio has exhibited a declining trend, which suggests 2010 2009 2008 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 In general, asset management ratios are designed to report the number of dollars of sales generated per dollar of investment made in the company's receivables, inventory, plant 2010 2009 2008 and equipment, or total assets. In the absence of extraordinary events, the three-year trend of the inventory turnover ratio Fixed asset turnover ratio should be interpreted as unfavorable management performance. 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 Total asset turnover ratio The firm expanded an existing product line or developed a new product line. One or more suppliers offered favorable prices for making accelerated purchases. One or more suppliers offered favorable prices for making bulk purchases. 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 performance. 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'ta favorable behavior because the company may be eamed interest income. opportunities for greater future sales and 4. Which statement addressing Target's fixed asset turnover ratios or its component accounts is correct? The behavior of Target's fixed asset turnover ratios is consistent with the pattern of its Sales account balances and inconsistent with the trend of its Accounts receivable balances. The reason why the fixed asset turnover ratio increases from 2009 to 2010 is that the Sales account increases by 0.84%, while the Net fixed asset account increases by only 3.71%. 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. H the O A company doesn't replace worn-out plant and equipment and operates the remaining assets over additional work shifts. O A company cuts back on the downtime and maintenance and repair activities necessary to preserve the performance of the property and equipment. 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 eams $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 In general, Target's management should prefer a small total asset turnover ratio to a larger ratio because it reflectsmore favorably on their performance. 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. Target's accumulation of inventory merits additional investigation to ensure that it is not the result of obsolete, missing, or unsalable items. The observed trend in the company's DSO and Accounts Receivable account also helps explain the pattern of its current ratio. The trend of the DSO ratio merits additional investigation to determine why the company's receivables balance is declining over time