Cost Behavior

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see attach. doc labled SLP for the paper. see attached word doc. from last week for the two companies to use in current assigement. Thanks see attach. doc labled SLP for the paper. see attached word doc. from last week for the two companies to use in current assigement. Thanks

3

Analyzing and Comparison of Companies

ACC 501

Dr.

May 6, 2013

Introduction

The company of choice is Target Corporation with the official website at target.com. (

https://corporate.target.com/

). Target Corporation runs general merchandise stores in US. Some commodities categories on offer in Target stores include pharmacy, personal care, cleaning, beauty, baby care, books, music, computer software, electronics and apparel. My interest to analyze this company is influence by the intrigues and dynamics in the large retail market segments. Its main competitor (Wal-Mart) has over the years emerged as a force and introduced many concepts that have revolutionized the sector. These changes and their effects in the sector present an interesting area for considerations to the sector players and more so concerning their financial implications. The links available for financial information include http://investors.target.com/phoenix.zhtml?c=65828&p=irol-reportsAnnual and

https://www.google.com/finance?fstype=ii&q=NYSE:TGT

. Analysis of Target and a brief comparison with the competitor will give an indication of how the past changes in the industry have affected the financial position of Target compared to the strongest challenger. Some of its other competitors include Costco Wholesale Corporation, Kmart Corporation,

PART II

1. Return on assets

Return on assets is calculated as = Annual Net Income/Average Total Assets

NB Net income is the after tax income while average total assets is the some totals at the beginning and end of financial year divide by two.

Target Corporation

Therefore for year 2012 = $ 2,930,000,000/ [(48,163,000,000+46630000000)/2]

= 2,930,000,000/47,396,500,000

= 0.062

Wal-Mart Corporation

For year 2012 = 16999000000/[( 193406000000 + 203105000000)/2]

= 16999000000/198225500000 = 0.086

Return on assets is higher for Wal-Mart an indication that the management is more efficient in using assets to generate earnings as compared to Target Corporation.

2. Profit Margin

Target

Net profit margin = Net profit /revenue

Net profit = Revenue – cost

2,930,000,000/73301000000 = 0.04

Wal-Mart

Net profit margin = Net profit /revenue
Net profit = Revenue – cost

= 352488000000/469162000000 = 0.75

Net profit margin for Wal-Mart is higher implying that Wal-Mart is able to source for supplies at a better price or its operations are more efficient for example transportation of purchase may be more competitive or it is able to enjoy higher volume or other discounts from suppliers.

3. Asset utilization rate

Target

Asset utilization rate = Revenue/total average assets for each quarter

73301000000/47396500000 = 1.55

Wal-Mart
Asset utilization rate = Revenue/total average assets for each quarter

469162000000/198255500000 = 2.36

The Asset utilization rate for the two companies shows that Wal-Mart compares better in terms of how the company uses its assets to produce more revenue. It means it is more efficient in the utilization of its assets.

2. Competitive position

Target is heavily dependent on cash from operating activities. Its liquidity position is poor given that the Net change in cash was negative at the end of the period. The cash and cash equivalent are quite low compared to other liquid assets. On the other hand although Wal-Mart is equally heavily dependent on operating activities, its liquid assets are stronger and can therefore respond better in the case of need.

Free cash flow = EBIT+ Depreciation & Amortization – Change in Net Working Capital – Capital Expenditure

Target = 4568000000 + 2142000000- 34000000- 3277000000 = 1471000000

Wal-Mart = 25737000000 + 0 – 1060000000 – 12898000000 = 11779000000

The company has about 1.5 billion free cash which it can use to support its cash needs. Although that is the case, it compares poorly to its main competitor who has about 11 billion free cash. Target spends more cash than what it received. Most of its categories spend cash such as in investing and financing.

References

Target (2013). Annual reports. Retrieved on May 1,

2013

Wal-Mart (2013). Annual reports. Retrieved on May 1, 2013

reports