Financial Analysis
Target's working capital in 2005 was as follows:
8,220 = $5,702 and in 2006 it was 14,405 -- 9588 = $4,817. For 2004 the working capital was $4,638. These figures indicate that the working capital totals for Target were inconsistent.
The current ratio for Target for 2005 was as follows:
13,922 / 8220 = 1.69 and for 2006 it was 14,405 / 9588 = 1.50. For 2004 it was 1.55.
The asset turnover for 2004 was as follows:
$42,025 / 29,841.5 = 1.41. For 2005 the asset turnover was:
$46,839 / $31,854.5 = 1.47. For 2006 the asset turnover was:
$52,620 / $33,644 = 1.56
Overall, Target is a healthy company. It has strong liquidity and its operations indicate good efficiency that is improving over time. These characteristics make Target a good investment. However, it is important to consider the investment alternatives, in particular companies that are close competitors. A comparable company for Target is Wal-Mart. The working capital for Wal-Mart is much larger since the company is much larger. The absolute value represented by the working capital is largely irrelevant for comparison between two different firms because of the different sizes of the firms. Current ratio is the better measure to compare between two different firms. Wal-Mart's current ratios for 2004-2006 were 1.70, 1.69 and 1.62 respectively. Target's current ratio over these three years was inconsistent, and Wal-Mart's declined. Target's was generally the weaker of the two.
Wal-Mart's asset turnover for 2004, 2005 and 2006 respectively was 2.58, 2.49 and 2.39 based on the following calculations:
2004: 256,329 / 99,152.5 = 2.58
2005: 281,488 / 112,979.5 = 2.49
2006: 308,945 / 129,170.5 = 2.39
Target's figures showed improvement over the three years in this area, but the figures are much lower than those of Wal-Mart. Thus, even though Wal-Mart's numbers are declining, they are stronger than Target's.
I would not invest in Target. The evidence presented here indicates that Target is not as good an investment as its close competitor Wal-Mart. Wal-Mart's working capital indicates that the company has a much larger size than does Target. While Target's figures for current ratio and asset turnover are perfectly healthy numbers, they are inferior to those of Wal-Mart. It could be argued that Target has the better trend with respect to asset turnover, however, improvements should be expected when the firm underperforms. Wal-Mart's track record of superior performance is only slightly diminished by the shrinking spread between its asset turnover and that of Target. Overall, Wal-Mart's financials are almost entirely superior to those of Target. While Target would not make a bad investment, Wal-Mart would be a better one.
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