Finance
A company’s profitability ratios serve to indicate its effectiveness at maximizing the shareholders’ wealth through generating high revenues, which are consequently distributed to shareholders in form of dividends. An analysis of the financial data reveals consistency between the return on equity TGT and the minor improvements for five years. This indicates that the dividends attributed to the shareholders exhibit consistency. The return on assets has fallen by 3% within the five years implying that asset generated revenue of the company has decreased. This decrease can be attributed to the company’s increase in assets from 64.5% to 68.1% since 2006. In addition, the company’s profit margin has fallen by 0.11 due to the reduced profits in the five-year financial period. The performance of the company is relative to that of BIG and FDO as their profit margins are similar, but these companies offer higher dividends than TGT as indicated by their return on equity rations. This finding implies that the TGT bears higher profit retention for investment purposes.
Asset turnover ratios serve to highlight the company’s effectiveness at earning returns through utilizing its assets. A rise in time allocated towards recovering debts by the company indicates that the company takes longer to repay its debts currently than it did five years ago. This current trend maintains that the company will soon find itself in a position where it will be unable to settle its debts as long as the ratios keep on rising. When inventory is retained for a long period, the conclusion is that the sales made by the company are reducing as well as becoming slow compared to the consistency and rate of making sales five years before. The company has therefore been ineffective in utilizing its assets to earn revenue. Compared to DLTR, FDO and BIG, these ratios are low. This indicates that these companies have a higher tendency of utilizing their assets to earn revenues for the shareholders than Target Company. This premise implies that the company has employed ineffective means of managing its assets and the management should act to ensure that the company utilizes its assets to earn income.
Leverage ratios show the combination between the company’s equity and debt as sources of capital for investment and operations. The capital structure leverage compares the seats of the company and total equity attributable to shareholders. An increase in this ratio over the years with the common stock remaining constant is an indication of the increase in assets. This positively affects the performance of the company since it builds the asset base without increasing the external debt. The financial data shows a 0.56 increase in the debt to equity ratio coming from the increase in the company’s debt financing. This increase is beneficial to the company since using debt capital does not liquidity the ownership of the company compared to using equity financing. This is a result of the long-term rise in debts amounting to $5 million. This will eventually plague the company since the cost of debt will increase due to interest rates charged by financial institutions. The other companies in the industry have reduced their debt ratios. They have managed to reduce this cost by transferring the mandate of financing the company to shareholders whose dividend payment is not guaranteed.
Solvency ratios serve to highlight the rate at which the company can meet its current liabilities using the liquid assets such as cash and inventory. The current ratio has increased and has been influenced by the higher increase in current assets compared to the current liabilities by 1.1% as illustrated in the common sized statement. The company has also reduced its period of covering interest charged which indicates a positive by the increase in annual income of the company. This performance is, however, recommendable in comparison with industry performance as other companies such as FDO have a problem repaying its interest charges. A reduction in quick ratio over the years, however, indicates a reduction in the liquid assets of the company, which is detrimental in recovering current liabilities of the company.
Market ratios indicate the value at which the company shares are operating in the market throughout the years. An increase in EPS over the years indicates that the shareholders can earn higher dividends from the increased income. The financial data includes a notable decrease in P/E ratio contributed by the company’s reduction in the market price per share. This suggests that the trading values of shares in the market has reduced and can have a negative effect on investors who argue that this reduction indicates company mismanagement. This decrease is notable in some of the industry’s companies that can be regarded as a factor affecting it.
This analysis has indicated that the management requires raise its performance by improving the company’s asset management in a bid to increase its income. This will increase its competitive advantage in the industry. The reduced returns to shareholders suggest that the management needs to implement better strategies as a means of ensuring maximization of the shareholders’ wealth to reduce any diversion to industry competitors. Lastly, the management needs to reduce the company’s debt capital to ensure that the company can be in a position of managing its debt costs
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