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COMPARATIVE FINANCIAL ANALYSIS

No. Formula Walmart Target
1  X100= 25%

 

21788/73785= 29.53%
2 EBIT= revenues – operating expenses 24105 5530
  EBIT margin = EBIT/total revenues  X100= 5% 5530/73785 = 7.49%
3 EBITDA = EBIT + depreciation and amortization 36716 6664
  EBITDA margin =  EBITDA/ total revenues 36716/482130= 7.62% 7123/73785 = 9.65%
4 Free Cash Flow = cash flow from operations + cash flow for Capital Expenditure 27389 +-11477= 15,912 5844+-1438 = 4406
5 Effective tax rate =Total Tax Expense / Earnings Before Taxes = 30% 1602/4923= 32.54%
6 Current Ratio = Current Assets / Current Liabilities 60239/64619= 0.932 14130/12622= 1.12
7 Quick ratio = (current assets – inventories) / current liabilities (60239-44469)/64619

=0.2440

(14130-8601)/12622 =0.44
8 Debt to equity=Total Liabilities / Shareholders’ Equity 115970/83611= 1.3870 27305/12957= 2.11
9 360984/[(44469+45141)/2]

=8.0568

51997/[(8601+8282)/2]

=6.16

10 365/8.0568= 45.3 days 365/6.16= 59.3 days
11 478614/(60239-64619)

=-109.27

73785/(14130-12622)

=48.93

12 Asset Turnover = Sales or Revenues / Total Assets 482130/199581= 2.416 73785/40262 = 1.833
13 24105/2467= 9.771 5530/607 =9.11

 

  1. ROE: disaggregate ROE into the components discussed in class. (Net profit margin, asset TO, leverage ratio, tax burden, interest burden and EBIT margin). Comment on the difference between the two companies.

ROE = (net profit margin) * (asset turnover) * (equity multiplier)

ROE = [(EBIT / sales) * (sales / assets) – (interest expense / assets)] * (assets / equity) * (1 – tax rate)

WMT: [(24105 / 482130) * (482130 / 199581) – (2467 / 199581)] * (199581 / 83611) * (1 – 0.3) =18.12%

TGT: [(5530 / 73785) * (73785 / 40262) – (607 / 40262)] * (40262 / 12957) * (1 – 0.3254) = 25.63%

Comment

It is evident that Target has higher ROE than Wal-Mart.  This implies that it is more efficient in using the money from the shareholders in generating profit and growing the company than Wal-Mart. Therefore, Target is more profitable than Wal-Mart.

  1. Comment on the health of each company’s balance sheet.

Wal-Mart

Balance sheet shows the financial position of a company. The health of Wal-Mart’s balance sheet is relatively low since most of its money is in the form of non-current assets. For instance, of the total assets of $199,581 million in 2016, only $60,239 million were in current assets and the rest were either in property and equipment or intangible assets. This implies that the company is not able to meet its short term financial obligations as the fall due. On the other hand, the company is not liquid as most of its current assets are in the form of inventories. In addition, Wal-Mart has more liabilities than equity implying that it uses more debts. For instance, it has a total equity of $83,611 million of the total $199,581 million. This implies that it has more business risks.

Target Corporation

The balance sheet of Target Corporation is somehow healthy and balanced. This is because it has relatively more current assets than current liabilities and hence able to meet their short term obligations. For instance, in January 30, 2016, it had a total current asset of $14130 million while the total current liabilities were $12622 million. On the other hand, it had more liabilities than equity implying that it also uses relatively more debts than equity in financing its operations.

 

  1. Based on a market cap of $210.3B for WMT and $47.7B for TGT, calculate each company’s enterprise value, and EV / EBITDA multiple. How do these multiples compare to the industry (see company multiples by sector on D2L).

Enterprise Value = market cap + preferred stock + long-term debt

WMT: $210300M + 0 + 38214M= $248.514B

TGT: $47700M + 0 + 11945M = $59.645B

EV / EBITDA multiple

WMT: $248,514M/36716M = 6.77

TGT: $59,645M/6664M = 8.95

According to https://www.stock-analysis-on.net/NYSE/Company/Target-Corp/Valuation/EV-to-EBITDA, the EV / EBITDA multiple for Consumer Services industry that both the companies belong is 10.78. This implies that the Wal-Mart’s and Target’s EV / EBITDA multiple is less than that of the industry. This implies that both the companies are relatively undervalued.

 

  1. Based on a stock price of $67 for WMT and $80 for TGT, calculate each company’s trailing PE ratio.

PE ratio = market value per share/ Earnings per share

WMT: $67/4.58= 14.63

TGT: $80/5.29 = 15.12

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