Essay: Financial Ratio Analysis of Wal-Mart

Sample Essay

The financial ratios of both companies have been calculated from financial data obtained from annual reports. The ratio analysis has been performed in four major areas of liquidity, asset management, debt management and profitability.  The liquidity analysis consists of the current ratio, quick ratio and working capital ratio. All these ratios indicate higher levels of liquidity for Target Corporation and the company’s ability to meet short term obligations.

The liquidity of Target Corporation is far better than Wal-Mart and all liquidity ratios of Target are almost two fold in value as compared to the ratios of Wal-Mart especially working capital which indicates a positive amount for Target and negative amount for Wal-Mart. The asset management ratios on the other hand paint a completely different picture for the two companies and indicate that Wal-Mart is quite efficient in asset management and inventory turnover, fixed asset turnover and total asset turnover of the company higher than Target. This means that the management of the company is quite effective in managing its current and noncurrent assets and these assets are utilized in business efficiently rather than wasted. The debt management ratios of the two companies indicate a similar pattern with the exception of interest coverage ratio which is quite high for Wal-Mart at a level of 12 as compared to 5.08 in Target. Investors, banks and financial institutions would prefer giving a loan to Wal-Mart rather than Target based on this interest coverage ratio. Profitability ratios are the most significant indicators for investment decisions as investors can easily predict the return on their investment and the level of risk and return on their investment. The profitability ratios relevant to investors and shareholders are profit margin, basic earning power of the company and earnings per share.

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