Analysis of the Target Enterprise for Purchase - Essay Example

The ratio analysis will consist of a combination of ratios from three categories. The three ratio categories are profitability, efficiency, and leverage ratios. Three profitability ratios selected for the analysis are net margin, return on equity (ROE), and return on sales (ROA). The three efficiency ratios used in the ratio analysis are sales to inventory, assets to sales, and sales to net working capital ratio. The two leverage ratios selected were the debt ratio and the current ratio. Appendix A shows the ratio calculations results for Target in 2009 and 2008 and for comparison purposes the ratios of Costco in 2010.

The net margin shows the profitability of the firm by dividing net income by sales. High net margins are a desirable outcome. The return on equity shows how much profits are being created in relation to its equity investment. The return of assets shows how much of a return a company is obtaining from its assets. High ROA and ROE are desirable outcomes. The sales to inventory ratio show how well your inventory is producing sales. The asset to sale ratio shows the ability of the assets to generate revenue.

The sale to working capital ratio is calculated by dividing sales by net working capital. In the fiscal year 2009 which ended on January 30, 2010, Target generated revenues of $63435 million (Annual Report: Tesco, 2009). This figure represents an increase in revenues of 0.88%. In 2009 Target had a net margin of 3.92%. The firm was able to increase its overall profitability by 0.40% in comparison with 2008. In order to compare the ratios of the company with a competitor, we choose Costco. The most recent financial statements of Costco were released in the fiscal year 2010 which ends on August 29, 2010.

The net margin of Costco in the fiscal year 2010 was 1.67% (Annual Report: Costco, 2010). The net margin of Target is better than Costco by 2.25%. The return on assets of Target in 2009 was 5.14%. This metric improved by 0.12% in comparison with the previous fiscal year. The return on assets of Target is inferior to Costco by 0.33%. The return on equity of Target in 2009 was 16.21%. The ROE of Target is superior to Costco by 4.29%. The sale to inventory ratio of Target in 2009 was 8.84. The financial metric was reduced by 0.54. The sale to the inventory of Costco in 2010 was 13.83. Costco had a superior sale to inventory efficiency by 4.99. The asset to sale ratio of Target in 2009 was 0.70. Costco had assets to sales ratio of 0.31. The asset to sales ratio of Target was superior by 0.39. The sale to working capital ratio of Target in 2009 was 8.93. The sale to working capital ratio of Costco was much better at 47.38. The metric of Costco was superior by 38.45. The debt ratio of Target in 2009 was 1.53. Due to the fact that the company has a debt ratio above 1.

0 is in a favourable position to pay off its long term debt. The debt ratio of Costco was better at 1.85. The current ratio of Target in 2009 was 1.63 which is 0.03 better than in 2008. The firm is in a good position to pay off its short term debt because the current ratio is above 1.0. The current ratio of Target is better than Costco by 0.47. The operating expenses of Target in 2009 were $13,078 million which represents an increase in operating expenses of 0.42%. The financial ratio analysis performed on Target led me to believe that Target is a good acquisition for the company.

Target had excellent revenues and profitability numbers. The 3.92% net margin of the firm is better than other competitors such as Costco which had a 1.67% net margin. The other profitability ratios of the company (ROA and ROE) were also solid. The efficiency ratios were better for Costco than Target. Target is in a good position to pay off its long term and short term liabilities. I recommend based on the financial ratio perform to make a takeover bid to acquire Target.