A profitability assessment of Target Corporation Inc A Finan

A profitability assessment of Target Corporation Inc. A Financial Ratio Analysis of Target Corporation A Profitability Assessment Assume that you are a prospective lending bank of Target Corporation (TGT), a retailer of \'everyday essentials and fashionable, differentiated merchandise at discounted prices,\" and are interested in the company\'s historical and current financial activities and performance. Use the followi financial data for Target to complete and condudt your financial ratio analysis. Then answer the questions that foilow. Remember, the results of a ratio analysis often identify issues requiring additional investigation. Target Corporation Selected Income Statement, Balance Sheet, and Related Data1 2008 $65,786,000,000 $63,435,000,000 $62,884,000,000 45,725,000,000 44,062,000,000 44, 157,000,000 20,061,000,000 19,373,000,00018,727,000,000 13,469,000,000 13,078,000,00012,954,000,000 1,609,000,000 4,402,000,000 866,000,000 ,872,000,000 3,536,000,000 1,322,000,000 $2,920,000,000 $2,488,000,000 $2,214,000,000 609,000,000 496,000,000 465,000,000 $0.62 2009 Income Statement Sales Less: Cost of goods sold Gross profit Less: Selling, general, and administrative expenses Less: Other expenses Earnings before interest and taxes (EBIT) Less: Interest expense Earnings before taxes (eBT) Less: Taxes Net income Less: Common dividends paid Dividends per share Balance Sheet Data 2010 860,000,000 1,521,000,000 ,252,000,000 4,673,000,000 801,000,000 757,000,000 4,495,000,000 1.575,000,000 1384,000,000 $0.92 $0.67

Solution

The ratios for each year are calculated as below:

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Notes:

1) The values used in the calculations have been taken in millions rather than in exact dollars for simplification purposes.

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1)

The blanks have been filled in the sequential order as follows:

Blank 1 and Blank 2 - more productive and effective in generating net income dollars.

Blank 3 - management is effective in generating a growing return to target\'s shareholders.

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Option A and Option C are correct.

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2)

The blanks have been filled in the sequential order as follows:

Blank 1 and Blank 2 - consideration of its interest and tax expenses. By exlcuding these expenses from the calculation, the ratio is useful for comparing companies that employ differing tax treatments and levels of leverage.

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Option A and Option C are correct.

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In general, it is reasonable to conclude that the trend of the BEP ratio reflects favorably on management\'s performance during the 2008-to-2010 period.

The trend of the BEP ratios indicates that Target\'s management performance has been improving, which is consistent with that of ROA and ROE ratios.

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3)

The blank has been filled as below:

Blank 1 - in the numerator and uses sales as the its denominator.

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The pattern of gross profit margins from year to year suggests that Target\'s cost of goods sold as a percentage of total sales are variable, first decreasing and then increasing slightly.

Option B is correct. (the cost of goods sold percentage is calculated by dividing cost of goods sold by total sales)

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4)

An examination of the income statement data suggests that the growth in the operating and net profit margins is mostly attributable to decreases in other expenses account.

Is it reasonable to attribute changes in the net profit margin to changes to Target\'s tax rate? No, because Target pays a constant rate of 35%.

Target Corporation
Profitability Ratios
Gross Profit Margin (Gross Profit/Sales*100)
2010 (20,061/65,786*100)	30.49%
2009 (19,373/63,435*100)	30.54%
2008 (18,727/62,884*100)	29.78%
Operating Profit Margin (EBIT/Sales*100)
2010 (5,252/65,786*100)	7.98%
2009 (4,673/63,435*100)	7.37%
2008 (4,402/62,884*100)	7.00%
Net Profit Margin (Net Profit/Sales*100)
2010 (2,920/65,786*100)	4.44%
2009 (2,488/63,435*100)	3.92%
2008 (2,214/62,884*100)	3.52%
ROA (Net Income/Total Assets*100)
2010 (2,920/43,705*100)	6.68%
2009 (2,488/44,533*100)	5.59%
2008 (2,214/44,106*100)	5.02%
ROE (Net Income/Total Equity*100)
2010 (2,920/15,487*100)	18.86%
2009 (2,488/15,347*100)	16.21%
2008 (2,214/13,712*100)	16.15%
BEP (EBIT/Total Assets*100)
2010 (5,252/43,705*100)	12.02%
2009 (4,673/44,533*100)	10.49%
2008 (4,402/44,106*100)	9.98%