Target Corporation's Balance Sheet and Corporate Financial Health

The Balance Sheet and Corporate Financial Health
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Balance Sheet and Corporate Financial Health
Target Corporation its 2019 annual report
https://investors.target.com/static-files/84b61f80-290f-48a2-b98b-99652641f14f
Background
Target Corporation (TGT) operates in the general merchandise retail market, and among the leading competitors are Walmart, Costco, and Dollar General Corporation. There is an analysis of Target’s balance sheet and corporate financial health.
Vertical
Vertical analysis is a financial analysis technique that allows the determination of the proportion of each one of the elements (percentage weight of each item) in a company’s financial statements in a given period of time. When considering the proportional weight (in percentage) of the cash and cash equivalents to the total assets, it was 4% in 2019 and increased to 6% in 2020 (Appendix). The proportion of current assets to total assets remained at 30%. The proportion of inventory to total assets fell by 1.98% the largest ratio of the share. The proportion of total non-current liabilities total liabilities and shareholders’ investment increased from 36.3% in 2019 to 38.5%. The share of non-current assets (property and equipment) was 69.7% in 2019 and 69.8% in 2020 (Appendix).
Horizontal
Horizontal analysis compares two or more consecutive periods to determine the variations for changes and percentage (relative) of the accounts from one period to another. The accumulated change of each account from 2019 to 2020 is determined for comparison. The analysis highlights the trend in financial statement accounts in 2019 and 2020.
Based on the horizontal analysis, the biggest increase was cash and cash equivalents by 66%, but the largest decrease was the current portion of long-term debt and other borrowings that fell by 85%. The biggest absolute change was the total assets or total liabilities and shareholders’ investment from $ 41,290 million in 2019 to $42,779 million in 2020, where the change is $1,489 million. The current portion of long-term debt and other borrowings declined from $ 1,059 million to $161, representing an $891 million decrease or 85% decline (Appendix).
3.Ratio Analysis
Current Ratio= Current assets/ Current liabilities
Current ratio
2020=12,902 / 14,487= 0.89
2019=12,519 / 15,014 =0.83
Quick Ratio= Quick assets/ Current liabilities
Where quick assets are current assets- inventory
Liquidity measures the ability to meet the short-term obligations as they come due, and liquidity relates to a firm’s solvent. The current ratio for the general merchandise stores and consumer discretionary sectors was higher than Targets. The liquidity improved in 2020, and while below one there are no concerns about the cash flow problem.
Target has higher debt ratios than the average for the industry, meaning the company is highly leveraged than the competitors. The debt-to-equity ratio is determined as the total liabilities divided by total assets less total liabilities. The debt-to-equity ratio contains the same information as the debt ratio. The debt-to-equity ratio shows that Target has $ 0.97 of debt for every dollar of equity in 2020 compared to $ 1.00 in 2019. The industry average for the debt-to-equity ratio was 0.67 in 2019 and 0.65 in 2020 (Ready Ratios, 2021). The debt and equity increased from $11,297 million to $11,833 million in 2020.
Ehrhardt& Brigham (2016) pointed out that creditors prefer low debt ratios because the lower the ratio, as there is a low risk of loss and challenges paying the debt in case of liquidation. On the other hand, the stockholders tend to prefer financial leverage as this reflects higher returns.
The interest coverage ratio (times-interest-earned (TIE) is determined as the EBIT divided by the interest expense. The ratio indicates the likelihood that the operating income will decrease and the firm will face challenges paying the annual interests. The interest coverage had lower than the industry average, and this Target’s interest i was covered 8.97 times in 2019 compared to 14.88 for the industry average. On the other hand, the industry average was 7.61 Target’s interest coverage ratio was 9.78 times in 2020. Target had a lower margin of safety in 2019, and the retailer would face challenges borrowing additional funds than in 2020.
Asset management ratios (turnover ratios) reflect a firm’s effectiveness in managing its assets and companies that invest excessively in assets have high operating capital, but this may also reduce the cash flows. The inventory turnover ratio is determined as the sales or cost of goods sold divided by inventories (Ehrhardt& Brigham, 2016). In 2019, the cost of goods sold was $ 53,299 million and $54,864 million in 2020. On the other hand, the inventory was 9,497 million in 2019 and declined to $ 8,992 million in 2020. Target’s turnover of 5.61 in 2019 was lower than 6.1 in 2020, and when the inventory turnover is low, the retailer is likely holding too much inventory.
4. Target’s current financial health and findings
The balance sheet’s vertical analysis helps determine whether there is an equitable distribution of its assets and according to financial and operational needs. When considering the weight each class of assets has on total assets and the weight that each class of liabilities on total liabilities, there is no big difference in 2019 and 2020. The inventory has the largest share of the total assets at 23% in 2019 and 21% in 2020. However, the share of the current assets increased from 4% to 6%. Buildings and improvements accounted for 71% and 72% share of the total assets in 2019 and 2020, respectively (Target Corporation 2020). Ideally, the current liabilities should be less than current assets. Otherwise, the company’s working capital is compromised. However, the current liabilities were more than the current liabilities by $ 2,495 million in 2019 and 1,585 million in 2020 (Target Corporation 2020).
Using 2019 as the base year, the 2019 and 2020 balance sheet financial results are comparable for the same period. For the liabilities and shareholders’ investment, the biggest fall in percentage was the total current liabilities. The proportion of current liabilities to liabilities and shareholders’ investment was 36.4% in 2019 and declined to 33.9% in 2020 (Target Corporation 2020). 
In most of the financial ratios, Target was performing below the industry average, and there is a need to improve the profit and cash flow. Increasing the profitability makes it easier to finance operations and even pay for the purchase of assets. Target Corporation's current and quick ratios improved from 2019 to 2020, but the ratios were still below the industry average.
When considering the debt or solvency ratios, Target Corporation is overleveraged than the industry average. Using debt financing will necessitate the retailer to pay interests, which is a liability. Nonetheless, the debt-to-equity ratio improved from 2019 to 2020, but Target needs to be less reliant on debt financing. The financial leverage ratio declined from 2019 to 2020. However, there are no concerns about the company’s ability to meet its long-term obligations, regardless of the maturity period, and its total assets increased by $ 1,489 million in 2020.
The inventory turnover, one of the short-term activity ratios, improved the inventory by $ 9,497 million in 2019 and declined to $ 8,992 million in 2020. The inventory turnover was 6.10 in 2020 compared to 5.61 in 2019, and a higher ratio indicates strong sales or low inventory levels. 
5. Improving Target’s s financial health
Target needs to focus on diversification to broaden the revenue base and targeting a larger customer base. The company has struggled to expand into the e-commerce market that is gradually increasing in the retail market. Walmart has successfully leveraged e-commerce, and Amazon is the market leader in e-commerce. Increasing online sales will improve the company’s competitiveness and allow Target to grow in diverse markets and serve different customers. Improving online sales should be combined with store remodels, and Target is increasingly focusing on remodeling to create more welcoming environments. Improving the company’s online presence will also enhance the purchasing experience.
 Target needs to focus on a better re-stocking system. A revamped inventory system would improve the point-of-sale stocking system while also improving efficiency. There was a 5.3% decline in the inventory from 2019 to 2020. Effective management of the inventory would also help to improve supply chain efficiency and logistics. Moving inventory quickly and increasing inventory turnover should also be prioritized 
Debt and other liabilities create risk, and Target’s liabilities are more than cash and near-term receivables. While Target is still able to pay for the short-term and long-term obligations as they fall due, reducing the debt levels would be beneficial. Increasing the earnings is one way to offset the challenges associated with the company’s high leverage compared to its rivals. It is easier to manage the debt when the company grows its revenue, but companies pay their debts with cash and not the profits. Thus, improving the profits and free cash flow levels will help to strengthen the company’s competitiveness. 
 
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