Ellingwood and Awesome, LLC audited the financial statement of Target Corporation for the year ended 2016-01-30. The audit scope comprised of investigation of the balance sheet, income statements, statements of cash flows and statements in changes of equity. This report provides analysis of the financial position of the company, how it as changed in the period and recommendations.
Target Corporation made a net income after tax of 1.9 billion us dollars, a loss of 1.6 billion dollars and a profit of $3.3 billion. Thus, the company’s net income after tax increased by almost $4 billion in 2016. This increase can be attributed to a $620 million decrease in unusual expenses in the year ending January 2016. Total revenue as also increased consistently in the three years to7.3 billion 1n 2016 as compared to $7.2 billion in 2015 and $7.1 billion in 2014. The gross profit increased in the three years by $100 million in 2015 and $444 million in 2016. On theother hand operating expenses increased substantially in 2015 but increased with a much lesser margin in 2016. Dividends per share increased from $1.65 in 2014 to $1.99 in 2015 and $2.2 in 2016. The company also bought back some of its shares as it increased to in 2013 from 2015 (Boritz & No, n.d.).
The profitability ratios of 2016 were higher than those of the previous 2 years. Gross profit ratio for the three years were determined by dividing the gross profit with net sales. Gross margin ratios were 30%, 29% and 30% in 2016, 2015 and 2014 respectively. This ratio is healthy and stable indicating that the company has high profitability that is sustainable. The increase in gross profit margin may be attributed to a reduction in discount offered to customers, better product mix and increase in website sales. In 2014 the company online sales were adversely affected by a bleach of its customers database a problem that the company had fully recovered from by 2015. The improvement of the financial profitability of the business may also be due to a reduction in the company’s selling, general and administration expenses (SGA) by approximately 0.3% in 2016. Therefore, the company’s SGA margin increased improved further in 2016. This is because of a decline in marketing expenses and adoption of cost saving practices. However this improvement was undermined by increased labor costs and a high rollout of Red card users. Target Corporation had an earning before interest, tax, depreciation and amortization (EBITDA) margin of 9.4%. This was a result of a reduction in costs in the year ended January 2016. Net profit margin was also calculated by dividing the net profit after tax with the net sales. The net profit margin for 2014, 2015 and 2016 were determined as 3%, 2% and 5% respectively this indicates that the company has improved its efficiency and thus its profitability. After tax return on equity (ROE) ratio was constant at 12% in 2014 and 2015 but more than doubled in 2016 to 26%. This indicates an increase of share of the net profit after tax that is available to the owners of the company. This ratio also indicates an increase in the overall profitability of the business and soundness of the financial position of the company (2016).
The current ratio was determined by dividing current assets with current liabilities for the three years. It was determined as 0.91:1, 1.16:1 and 1.12:1 for 2014, 2015 and respectively. This falls short of the recommended 2:1 ratio and indicate that the company may have difficulties in meeting its short term liabilities. However, this ratio has been improving and indicates that the company’s financial position is improving. The liquidity test was conducted by dividing cash and other liquid assets by the current liabilities. This was determined to be 30% and indicates that the company has not met the prescribed threshold. Alternatively it indicates the company has over utilized its liquid asset maybe through buying of stock or prepaid expenses.
The results of the analysis reveal that the company is growing in terms of sales, profits and assets. The increase in the net profit ratio shows a growth in the company’s profit. The acquired ratios determined stable growth of the company in the three consecutive years. This portrays that the company may continue grow in the subsequent years provided they maintain their current profitability levels. However, the company should exercise caution in reducing the discounts allowed to customers so as to maintain and increase the profit margins as this could reduce customer satisfaction and lead to reduction in sales.
The liquidity ratio is below the recommended standard of 2:1.This ratio indicates that the business might experience some difficulties in settling some of its short term liabilities. However, this ratio has been increasing reflecting an improvement in the financial position of the business regarding settling its short term obligations. The reduction of the in the marketing expenses and savings on the cost of sales improved the Company’s SGA and therefore in a good position to satisfy the upcoming needs of the customers.
The increased profits in the three years as indicated by the increasing net profitability rations showed an increase in the net sales which increases in turn increased the returns. The net sales over the three years shows a rising trend and this signposts increased commodity consumption by customers. The return on equity ratios showed no growth in both the year 2014 and 2015 at 12% and doubled in 2016 indicating an increase in the dividends paid per share. This indicates that the value of shares for the company is likely to rise. This is significance to the company as its shares are attractive to investors and are highly demanded. This eases the process of searching for more capital through issuance of more shares into the market.
It is recommended that the management should pinpoint the source of increase in sales that lead to increase in profits. It should major its resources and efforts to expand and make them more efficient. For instance, online sales through its website have largely contributed to increase in sales and reduction in marketing expenses. This will allow the company to take the advantage of the trend of more consumers shopping online instead of visiting the stores. It will also help them to make more repeat sales as customers can subscribe to daily supplies which would boost the company’s sales further. The management should also invest in adequate security of this system so as to avoid it being corrupted or suffer from frequent delays which would adversely affect the level of sales. They can also offer better after sale services and delivery to more areas to increase their online customer base. Finally, the Target Cooperation should improve its product mix so as to offer more products in their online shelves to increase the possibility of higher sales.
The company should also improve its liquidity position and try to achieve a current asset ratio of 2:1. This would ensure that the company is in a position to settle its short term liabilities quickly and with ease when they become due. It may achieve this by either increasing the current assets or reducing their current liabilities. An improved current asset ratio allows the company to take the advantage of upcoming opportunities that require funding.
The management should make adjustments in order to comply with the newly introduced laws concerning food safety and refrigeration regulations. It should do so by minimizing wastages and ensuring that they deliver fresh food products in a hygienic environment. The company should also make the red card membership more enticing by offering discounts and awards. This will ensure that the customers will make repeat sales. The company should also enrichen its product mix by offering more variety of products which might attract more sales and thus increase the productivity.
In conclusion, the audited books of accounts of Target Corporation show that they represent the true and fair value on the financial position of the business. They reveal that Target is a stable and profitable company with a solid asset base. The management should initiate action to take advantage of emerging trends in the industry.
Boritz, J. & No, W. The Quality of Interactive Data: XBRL VersusCompustat, Yahoo Finance, and Google Finance. SSRN Electronic Journal.