Two of the largest companies in the retail industry are Walmart and Target. Both companies are US based firms that operate internationally. To compare the financial performance of these two companies the financial statements of the organizations are going to be compared to evaluate differences and similarities. Both Walmart and Target prepare their financial statements based on the generally accepted accounting principles (GAAP). In fiscal year 2016 Walmart had total revenues of $482,130 million, while Target had sales of $69,495 million. The sales of Walmart were 6.94 times higher. In terms of net income Walmart outperformed Target by obtaining net income of $14,694 million compared to Target’s result of $2,737 million. The table below compares six important accounts in the balance sheet of both companies.
The net margin is a financial metric that measures the profitability of a company (“What is net margin”, 2017). A high net margin is the desirable outcome. In fiscal year 2016 Walmart had a net margin of 3.05%, while Target’s net margin was 3.94%. The profitability of Target is 0.89% higher than Walmart. Return on assets (ROA) demonstrates the ability of a firm to generate income from its assets. Walmart in fiscal year 2016 had return on assets of 7.36%. The return on assets of Target in fiscal year 2016 was 7.31%. The difference in ROA between both companies was only 0.05%. Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity (“Return on equity”. 2017). During fiscal year 2016 Walmart had a return on equity of 17.57%. Target had a much higher return on equity of 24.99% which is a favorable sign.
The current ratio shows the ability of a company to pay off its short-term debt (“Current ratio”, 2013). In fiscal year 2016 the current ratio of Walmart and Target were 0.93 and 0.94 respectively. Both companies had similar current ratios since the difference between both results is only 0.01. The debt ratio indicates the overall leverage position of an organization. Walmart had a debt ratio in fiscal year 2016 of 0.58, while Target had a debt ratio of 0.71. The leverage position of Walmart is better because it is lower. Inventory turnover is a ratio that measures how many times the inventory of a company has been sold during a period of one year. Walmart had an inventory turnover ratio in fiscal year 2016 of 8.11. Target had an inventory turnover during the same fiscal year of 5.88 which is 2.23 lower than Walmart. This result demonstrates that Walmart is more efficient than Target. Earnings per share (EPS) is a financial indicator that illustrates how much net income a company generates for each common stock outstanding. The EPS of Walmart and Target in fiscal year 2016 were $4.58 and $4.62. Target’s EPS was better by a small margin of $0.04. The price earnings (P/E) ratio shows whether a company is cheap or expensive relative to the market. Walmart had a P/E in 2016 of 15.77 which is higher than Target’s result of 13.8.
The financial statement comparison of Walmart and Target shows various results. Walmart has a bigger operation evidenced by the fact that is total sales and net income is much higher than Target. Target has better profitability than Walmart in terms of net margin and return on equity. Both companies are in a similar position to pay off its short-term debt, but Walmart has done a better job of achieving growth without incurring in long term debt. The operating efficiency of Walmart is superior. Based on the analysis performed if I were to recommend the common stocks of these two companies as an investment option I would choose Walmart over Target.
- “Current ratio” (2013). Accountingexplained. Retrieved from http://accountingexplained.com/financial/ratios/current-ratio
- “Return on Equity – ROE” (2017). Investopedia. Retrieved from http://www.investopedia.com/terms/r/returnonequity.asp
- “What is Net Margin?” (2017). Fool. Retrieved from https://www.fool.com/knowledge-center/net-margin.aspx