Question

Problem 18-05A b (Essay) Suppose selected financial data of Target and Wal-Mart for 2020 are presented here (in millions). Net sales Cost of goods sold Selling and administrative expenses Interest expense Other income (expense) Income tax expense Target Wal-Mart Corporation Stores, Inc. Income Statement Data for Year $65,357 $408,214 45,583 304,657 15,101 79,607 707 2,065 (94) (411) 1,384 7,139 $ 2,488 $ 14,335 Net income Current assets Noncurrent assets Total assets Balance Sheet Data (End of Year) $18,424 $48,331 26,109 122,375 $44,533 $170,706 $11,327 $55,561 17,859 44,089 15,347 71,056 $44,533 $170,706 Current liabilities Long-term debt Total stockholders' equity Total liabilities and stockholders' equity

Answer 1

1. Profitability : Even though Net income of Target Corporation is marginally lower than Wal-Mart, that is just the difference in volume of business of both corporations. What we need to compare are the various financial ratios which indicate which business is more profitable. Refer the below table for comparison of both companies on basis of profitability ratios :

Ratio	Target Corporation	Wal-Mart	Which company is in a better position	Description of the Ratio	Remarks
Profit Margin Ratio	3.80%	3.50%	Target Corporation (Only by 0.3%)	Profit margin is one of the commonly used profitability ratios to estimate the degree to which a company makes money.	Target Corporation's profit margin ratio is only slightly higher than Wal-Mart, hence we cannot really say that Target Corporation is most definitively in a better position.
Return on Assets	5.60%	8.60%	Wal-Mart	It measures how effetive the company is in deploying its assets in order to generate revenue.	Wal-Mart is clearly performing much better than Target in deploying their assets and generating revenue at a good rate.
Return on Equity	17.10%	21%	Wal-Mart	It measures the ability of the company to earn profits on basis of the equity investment.	Wal-Mart is again clearly better at utilizing its resoruces and earning higher profits out of the equity investment.
Conclusion : In terms of profitability, Wal-Mart clearly seems to be in a better position as compared to Target Corporation. This can most likely be attributed to its ability to optimally utilize its assets and investment.

2. Solvency : Solvency can basically be defined as the extent to which the assets cover the entity's commitment for current and future liabilities. Solvency ratio focus more on the ability of the company to pay it's overall debt and not just the current debt. Hence current ratio and other short term ratios have been covered under liquidity. We can compare the solvency of both the companies with the help of following solvency ratios :

Ratio	Target Corporation	Wal-Mart	Which company is in a better position	Description of the Ratio	Remarks
Debt to assets ratio	66.00%	58.00%	Wal-Mart	This ratio indicates how much of the assets of the company are financed by creditors, i.e., it indicates the company's financial leverage. The lower the ratio, the better it is	Since Target Corporation's ratio is higher, it means that more assets of the company is financed by its debt which is not a good sign and hence Wal-Mart is better in this respect.
Times Interest Earned Ratio	6.5 times	11.4 times	Wal-Mart	Times interest earned or interest coverage ratio is a measure of a company's ability to honor its debt payments.	Wal-Mart's times interest earned ratio is almost double that of Target corporation. It means that Wal-Mart is in a much better position to meet it's debt payments than Target Corporation.
Debt to Equity Ratio	1.90	1.40	Wal-Mart	This ratio shows how much of the capital structure is financed by debt. The lower it is the lower the debt obligations and the better it is.	Wal-Mart is again in a better position as compared to Target as less of its capital structure comprises of debt as compared to Target where the debt to equity ratio is almost 2 which is generally not a good sign.
Conclusion : In terms of solvency, Wal-Mart clearly seems to be in a better position as compared to Target Corporation. This can most likely be attributed to higher fixed payment/debt obligations of Target Corporation as compared to Wal-Mart.

3. Liquidity : Liquidity refers to the company's ability to meet it's current debt obligations. It refers to whether the company has enough liquid assets and free cash flow to meet its very current oblig

Ratio	Target Corporation	Wal-Mart	Which company is in a better position	Description of the Ratio	Remarks
Current Ratio	1.63	0.87	Target Corporation	It measures the copany's ability to meet its current liabilities using its current assets. The higher the better.	Target Corporation is clearly better at meeting its current obligations as it has a current ratio of more than 1.5 which is pretty favourable.
Accounts Receivable Turnover Ratio	8.6 times	101.4 times	Wal-Mart	It measures how many times a business can turn its accounts receivable into cash during a period. Companies are more liquid the faster they can covert their receivables into cash, hence higher this ratio, the better.	Wal-Mart's accounts receivable turnover ratio is really on a very high level. Such a high ratio not seen in any industry, however it is very good for the company as this means Wal-Mart collects amount from its customers very fast and will not have any cash flow issues.
Free Cash Flow	3656$	9848$	Wal-Mart	It is the cash left with the company after paying off its operating expenses and capital expenditure. The higher the better.	Since Wal-Mart's free cash flow is better, it faces lower risk of not meeting any unexpected obligation that may arise or grabing any unexpected investment opportunity.
Conclusion : Even though Target Corporation's current ratio is way better than Wal-Mart, the ability of Wal-Mart to generate liquid cash flow is much better than Target Ratio as not only free cash flow for Wal-Mart is higher, its accounts receivable turnover ratio is way higher than Target and hence in terms of liquidity as well, Wal-Mart seems to be in a better position.

ations. Comparison between 2 companies has been made on the basis of financial measures and ratios below :