Financial Performance Measures: Target vs. Walmart

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Introduction

This paper focuses on and calculation and discussion of Walmarts financial performance in comparison with Targets performance using financial ratios. In particular, 21 financial ratios are used to compare the companies performance in terms of profitability, liquidity, efficiency, and financial gearing. First, the paper provides calculations of ratios in a table format. After that, the paper focuses on the discussion of the probable causes of the differences in the performance.

Ratio Calculations

Table 1 below provides calculations of the financial ratios for Target and Walmart. The data was taken from the companies consolidated financial statements for the FY ended in January 2022.

Table 1. Ratio calculations (all numbers in millions except for ratios)

	Target		Walmart
Ratio Name	Calculation	Ratio	Calculation	Ratio
NI/NS	6,946/104,611	6.64%	13,673/567,762	2.41%
COGS/NS	74,963/104,611	71.4%	429,000/567,762	75.56%
SG&A Exp/NS	19,752/104,611	18.88%	117,812/567,762	20.75%
Depr Exp/NS	2,344/104,611	2.24%	10,658/567,762	1.88%
Int Exp/NS	421/104,611	0.4%	1,836/567,762	0.32%
ROE: NI/SE	6,946/12,827	0.54	13,673/91,891	0.15
Equity Multiplier: TA/SE	53,811/12,827	4.2	244,860/91,891	2.66
ROA: NI/TA	6,946/53,811	0.13	13,673/244,860	0.06
TAT: NS/TA	104,611/53,811	1.94	567,762/244,860	2.32
CAT: NS/CA	104,611/21,573	4.85	567,762/81,070	7
Inv. Turn: NS/Inv	104,611/13,902	7.52	567,762/56,511	10.05
NS/Cash	104,611/5,911	17.7	567,762/14,760	38.47
ARTurn: NS/AR	104,611/1,353	77.32	567,762/8,280	68.57
NS/prop. plant & equip.	104,611/28,181	3.71	567,762/94,515	6.01
Debt/TA	13,549/53,811	0.25	34,864/244,860	0.14
Current: CA/CL	21,573/21,747	0.99	81,070/87,379	0.93
Acid Test: CA-Inv./CL	(21,573-13,902) / 21,747	0.35	(81,070-56,511) / 87,379	0.28
NS/store	104,611/0.001938	53.98 mil	567,762/0.010585	53.64 mil
NS/employee	104,611/0.450	0.23 mil	567,762/2.3	0.25 mil
NS/sqr. ft.	104,611/251.94	415.22	567,762/1,905.3	297.99

Ratio Analysis

Profitability

Walmart has a lower profitability measure in net profit margin with 2.41% in FY2021-2022 against Targets 6.64% in net profit margin. The central reason for the difference is Targets better ability to manage its costs. Targets costs of goods sold (COGS) were 71.4% in FY2021-2022, while Walmarts COGS were 75.56%, which negatively affected the companys net profit margin. Similarly, Targets selling, general, and administrative (SG&A) expenses were 18.88% in FY2021-2022, which is significantly lower than Walmarts 20.75% in the same fiscal year. It should also be noted that Walmarts decreased profitability is not associated with depreciation or interest costs. The analysis revealed that Targets depreciation costs were 2.24% from net sales in FY2021-2022, which is higher than Walmarts 1.88% of total sales for the same fiscal year. Similarly, Targets interest expense was 0.4% in FY2021-2022, which is higher than Walmarts 0.32% for the same fiscal year.

There may be several reasons for such a difference in net profit margin. One of the possible reasons for low net profit margin is the low prices of the goods. However, comparative analysis of prices between Target and Walmart revealed that the prices were almost the same, with a slight difference in favor of Target, showing that shopping in Target was associated with 0.9% savings in comparison with Walmart (Balestra, 2021). Another reason for the differences in prices may be associated with supply chain costs. Walmart operates in the US, Puerto Rico, Canada, China, Mexico, Brazil, Germany, Britain, Argentina and South Korea (Walmart, 2022). This implies that the company needs to maintain a more complicated supply chain in comparison with Target, which operates only in the US (Target, 2022). Moreover, sales may be lower in the countries with lower quality of life and the cost of sales and associated SG&A may be higher. Additionally, Walmart launched a new membership program, which offered unlimited free shipping (Walmart, 2022). This program may need more time to repay for itself.

Another measure of profitability is return on equity (ROE). Targets ROE was 0.54 in FY2021-2022, while Walmarts ROE was only 0.15 for the same year. However, it should be noted that the difference in ROE may be associated with Targets higher equity multiplier, which is demonstrates a higher level of companys financial leverage.

Liquidity

Liquidity was measured using two financial ratios, including current ratio and acid test ratio. The current ratio demonstrated of two companies was comparable, with 0.99 for Target 0.93 for Walmart in FY2021-2022. The companies performed similarly in terms of acid test ratio, with 0.35 for Target 0.28 for Walmart in FY2021-2022. The results of the analysis demonstrated a high reliance on inventory in terms of current assets, which may be difficult to turn into cash. The analysis demonstrated that Walmart required lower liquidity due to high inventory turnover, which was 10.05 for Walmart in FY2021-2022 in comparison with Targets 7.52. Therefore, Walmart could allow to operate with a lower liquidity.

Leverage

Financial leverage was measured using debt-to-assets ratio and equity multiplier. Targets debt-to-assets ratio was 0.25 for FY2021-2022, while Walmarts debt-to-assets ratio was 0.14 for the same fiscal year. Walmarts relatively low reliance on debt to finance its assets be associated with the fact that Walmart needed to operate with lower risks due to international supply chain maintenance.

Efficiency

The companies efficiency was measured using return on assets (ROA), total assets turnover (TAT) ratio, current assets turnover (CAT) ratio, sales-to-cash ratio, accounts receivable turnover (ART) ratio, sales-to-PPE, sales-to-store, sales-to-employees, and sales-to-square feet. Targets ROA was 0.13 for FY2021-2022, while Walmarts ROA was more than twice as low with 0.06 for the same year. However, Walmart demonstrated a better ability to turn assets into sales, as its TOT ratio was 2.32 in comparison with Targets 1.94. Similar situation was with the CAT ratio, which was 4.85 for Target and 7.0 for Walmart. Similarly, analysis demonstrates that Walmart used its PPE more efficiently to generate sales, as its sales-to-PPE ratio was 6.01, while Targets ratio was 3.71. The ART ratio was high for both companies with 77.32 for Target and 68.57 for Walmart, demonstrating that Walmart requires overall more time to collect money on credit sales.

Walmarts ability to generate sales from property is explained by the company embracing online sales. Walmart took advantage of trends to online sales due to the COVID-19 pandemic, which allowed the company to increase it sales (Walmart, 2022). Target did not demonstrate such a focus on online sales despite systematically increasing its capacities to fulfill online sales (Target, 2022).

Conclusion

In order to explain the differences in efficiency, it is crucial to look at sales-to-store, sales-to-employees, and sales-to-square feet. Both companies sales-to-store ratio were relatively the same with $53.98 million of sales per store for Target and $53.64 million of sales per store for Walmart. Similarly, Targets sales-to-employees ratio was $230 thousand in sales for employee, while Walmarts sales-to-employees ratio was $250 thousand, which demonstrates a relative parity in the matter. However, Walmarts sales-to-square feet ratio was significantly lower ($297.99) in comparison with that of Target ($415.22). This demonstrates that Walmarts stores are larger that Targets store, while they provide similar sales. As a result, Walmart has additional expenses associated with maintaining larger stores, which leads to lower net profit margin and low ROA. Therefore, it is crucial that the company increases its efficiency of store area to improve its performance.

References

Balestra, D. (2021). Target vs. Walmart Price Comparison: Which is Cheaper? Koopy. Web.

Target. (2022). Annual report 2021. Web.

Walmart. (2022). Annual report 2021. Web.

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