Good Term Paper On Financial Analysis: Walmart Inc. V/S Target Inc
About the company: Walmart Inc.
Founded in the year 1962, Walmart Stores Inc. is an American multinational company that runs discount retail stores around the world. It is the world’s largest company in terms of revenue generation and also the biggest employer of the world with the employee strength of 2.2 Million. By the end of April, 2014, the company had 11000 stores in 27 countries of the world.
The company is one of the constituent of S&P 500 index and also Dow Jones Industrial Average Index with the total market capitalization of $269101.44 million.
About the company: Target Inc.
Founded in the year 1902 as Dayton Dry Goods in Minnesota, Target Inc. is an American retailing company and also the second largest discount retailer in the United States after Walmart Inc. The company operates solely in the United States with the total store count of 1934. Target Inc. also started operating in Canada in March, 2013 but closed its operation on January, 2015.
The company is one of the constituent of S&P 500 index with the total market capitalization of $48959.28 million and operates with the employee strength of 366000.
In this section, we will compare both the companies using the tool of ratio analysis and also by comparing the relative stock performance to arrive at a comprehensive conclusion as which company is performing better than the other one:
Important financial metrics that indicate the level of profit margins being earned by the company from its business activities. Below compared are the profitability ratios Walmart Inc and Target Inc for the year 2014:
Referring to the table and graph above, we can witness that while gross and operating margin of Target Inc. are higher than Walmart Inc., the latter scores over the net margin and ROE multiple. Thus, we can assert that Walmart is more profitable than Target and even the shareholders of the former company will be ecstatic to see a sustainable ROE multiple of 21.01%.
These ratios indicate the ability of an organization to honor their short-term obligations as and when they become due. Below discussed are two popular liquidity ratios for both the companies:
Referring to the table above, we witnessed that Target Inc. is having higher current ratio multiple of 1.0 as against 0.88 of Walmart. We even tested the liquidity using the stringent measure of acid ratio and found that both the companies have almost similar multiples.
Thus, in comparison, Target Inc. scores over Walmart Inc with better liquidity position.
These traditional ratio multiple indicates the growth in the financial metrics over a time horizon. Below compared is the growth multiples for both the companies:
Noted from the table above, although Walmart Inc. has achieved higher sales growth and EPS multiple of 3.95% and 7.55%, respectively, but the forecasted growth multiple favors Target Inc, where growth in EPS for next year is forecasted to be 14.49% while for Walmart it is only 4.21%.
d) Earnings and Dividends:
Comparing the multiples of the company we found that Walmart Inc. have higher EPS multiple than target Inc., but the latter company have higher dividend payout of $2.03/share as against $1.92/ share of Walmart.
e) Financial Risk:
Popularly known as Leverage Ratios, these ratio multiples indicate the composition of the capital structure of the company. Below discussed is the debt-equity ratio for both the companies:
As noted from the above table, Target Inc. has higher ratio multiple indicating that there is a high proportion of debt in the capital structure of the company as compared to Walmart.
PE ratio: This ratio indicates the expectations of the investors relating to the earning potential of the company. On comparing the ratio multiple for both the companies, we found that Target Inc has higher PE ratio than Walmart indicating that the investors are expecting higher future earnings for Target Inc.
Forward PE: This ratio multiple is highly popular in the financial industry and indicates forward looking expectations for a company’s PE ratio. On comparing the ratio multiple for both the firms we find that although forward PE multiple is expected to decline but Target Inc. still scores over Walmart with higher multiple of 16.95.
Price-Earning Growth Potential: This ratio is used to determine stock value while taking into account company’s earnings growth. A higher PEG ratio is considered to be a good buy and here also, Target Inc. scores over Walmart Inc.
P/B Ratio: A lower Price- Book Value ratio indicates that the company is undervalued. Thus, the results here again favors Target Inc with ratio multiple lower than Walmart Inc.
Price-Sales Ratio: This ratio indicates the value of each dollar placed on each dollar of the company’s revenue. A low P/S ratio shows possible undervaluation of the stock and on comparing the P/S ratio of both the firms we find that Walmart has lower ratio multiple than Target Inc.
Price-cash flow ratio: This ratio evaluates the market price relative to the cash flow it is generating. On comparing the ratio multiple of both the firms we found that Target Inc. has extremely high P/CF multiple indicating it to be overvalued.
Price- Free Cash Flow ratio: Higher the multiple, more expensive is the stock. This financial multiple is similar to valuation measure of price-to cash flow but uses strict measure of free cash flow in the denominator. On comparing the ratio multiple, we found that Target Inc. trades at higher capacity to its free cash flow than Walmart
Dupont equation is one of the method of measuring the financial performance of the company by decomposing the ROE multiple into three components, Net Profit Margin, Asset Turnover and Financial Leverage. Thus, analysts are able to locate the financial metric that is driving the ROE multiple of the company and if the results are unsatisfactory, he can indicate the part of business that is unsatisfactory. Below is the formula used while employing Dupont identity to the ROE multiple of the company and also an in-depth analysis of ROE multiple of both Walmart Inc. and Target Inc. for past three years
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
= 3.36* 2.32*2.67
2012: (2929/69865)* (69865/ 46630)* ( 46630/15821)
= 4.19* 1.49* 2.94
2013: (2999/73301)* (73301/48163)* (48163/16558)
= 4.09* 1.52* 2.90
2014: (1971/72596)* (72596/44553) * (44553/16231)
= 2.71* 1.62* 2.74
Referring to the above calculations, we can witness that as for Walmart Inc., ROE and ROA multiple of the company are majorly driven by sustainable profit margins. Looking at the three year trend of the ratio we can see that over the years, the financial leverage and the asset turnover of the company has been fairly stable at the peripherals level of 2.30 and 2.66, respectively. On the other side, the profit margin of the company which ranged in between the range of 3.36%-3.62% has been the primary driver of the ROE multiple.
On the other side, although Target Inc. indicated sustainable profit margins which were even higher than that of Walmart Inc. during 2012 and 2013, but the asset turnover of the company was significantly lower than that of Walmart Inc. leading to lower ROE multiple of the company. In addition, the company was also marginally overleveraged in comparison to Walmart.
Thus, in comparison, ROE multiple of Walmart Inc. superior as the same is majorly driven by higher profit margins and asset turnover, while despite of higher profit margins during 2012 and 2013, ROE multiple of Target Inc. falls behind that of Walmart because of relatively lower asset turnover.
Dupont Analysis. (n.d.). Retrieved February 23, 2015, from Investopedia: http://www.investopedia.com/terms/d/dupontanalysis.asp
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