1

Ratio Analysis Examines firm’s management of various

facets of the company’s business through its financial statements.

Scales balance sheet and income statement information for easy comparison across time or to other companies.

2

Two common approaches Trend Analysis - looks at changes in one

company’s ratios over time. Benchmarking: Comparison or Industry Analysis -

compares company’s ratios against a similar company or against industry-wide ratios.

To illustrate trend analysis, we will compare Target’s Jan. 2005 and Jan. 2004 ratios.

To illustrate benchmarking, we will calculate Target’s Jan. 2005 ratios and will compare to Walmart’s Jan. 2005 ratios.

3

Areas Examined by Ratio Analysis

Liquidity - measures the ability to meet short-term obligations

Activity - measures the ability to contain the growth of assets, and the ability to effectively utilize assets

Debt Management - measures the use of financial leverage (debt) and its impact

Profitability - measures the profitability of various segments of a company

4

Liquidity Ratios

seitilibailcurrent

assetscurrent = ratioCurrent

seitilibailcurrent

inventoryassets-current = ratioQuick

Jan. 2005 Jan. 2004

Target Current 1.69 1.55

Target Quick 1.04 0.91

Walmart Current

0.90

Walmart Quick 0.21

5

Activity Ratios

inventory

sold goods ofcost = turnoverInventory

assets fixednet

sales = overasset turn Fixed

Jan. 2005 Jan. 2004

Target InvT 5.84 5.95

Target FAT 2.78 2.84

Walmart InvT 7.46

Walmart FAT 4.20

6

Activity Ratios (Continued)

daypersalesAverage

receivableAccounts = periodcollectionAverage

365

salesAnnual = daypersalesAverage

assets total

sales = overasset turn Total

Jan. 2005 Jan. 2004

Target ACP 39.50 43.77

Target TAT 1.45 1.53

Walmart ACP 2.17

Walmart TAT 2.4

7

Debt Ratios

equityrs'Stockholde

debttermLong = ratioequity Debt-

assets total

seitilibail total = ratioDebt

Jan. 2005 Jan. 2004

Target DR 0.60 0.65

Target D/E 0.85 1.09

Walmart DR 0.59

Walmart D/E 0.57

8

Debt Ratios (Continued)

interest

taxesandinterest before earnings = earnedinterest Times

Jan. 2005 Jan. 2004

Target TIE 6.32 6.30

Walmart TIE 17.54

9

Profitability Ratios

sales

taxes&interestbeforeEarnings = marginprofit Operating

sales

profitsGross = marginprofit Gross

Jan. 2005 Jan. 2004

Target GPM 32.9% 34.0%

Target OPM 7.7% 7.3%

Walmart GPM 22.7%

Walmart OPM 5.9%

10

Profitability Ratios (Continued)

sales

incomeNet = marginprofit Net

goutstandinstock common of shares ofnumber

incomeNet = shareper Earnings

Jan. 2005 Jan. 2004

Target NPM 6.8% & 4.0% 3.8%

Target EPS $3.59 & $2.12 $2.02

Walmart NPM 3.6%

Walmart EPS $2.42

11

Profitability Ratios (Continued)

assets Total

incomeNet = assets on totalReturn

equity rs'Stockholde

incomeNet = equitycommon on Return

Jan. 2005 Jan. 2004

Target ROA 9.9% & 5.8% 5.9%

Target ROE 24.5% & 14.5% 16.6%

Walmart ROA 8.5%

Walmart ROE 20.8%

12

Breaking Down ROE: DuPont Equation ROE(NI/Eq) = Return on Assets (NI/TA) x

Assets/Equity (TA/Eq) ROE = Net Profit Margin (NI/S) x Total Asset

Turnover (S/TA) x TA/Eq Profit margin is a measure of the firm’s operating

efficiency – how well does it control costs Total asset turnover is a measure of the firm’s asset use

efficiency – how well does it manage its assets Assets to Equity (sometimes called Equity multiplier) is a

measure of the firm’s financial leverage

13

DuPont Equation: Target(exc disc ops) vs. Walmart

43.259.01

1

ratiodebt total1

1

equity

assets

*Since Assets = Liabilities + Equity, 1 – debt ratio = equity/assets meaning for Walmart:

Jan. 2005 Net Profit Margin

Asset Turnover

Assets to Equity*

ROE

Target 4.0% 1.45 2.48 14.5%

Walmart 3.6% 2.40 2.43 20.8%

14

Some DuPont ROE ComparisonsTrailing 12 Months

NPM TAT A/E ROE

S&P 500 13.85% 0.98 1.46 19.8%

Oil&Gas industry

8.59% 1.79 2.00 30.7%

Disc. Retail Dept Ind.

3.79% 2.03 2.35 18.1%

Microsoft 31.57% 0.63 1.44 28.7%

Nike 9.44% 1.62 1.55 23.7%

Yum! Brands

8.63% 1.56 3.80 51.2%

15

Market Ratios

shareper earnings

stockcommon of shareper pricemarket = ratio (P/E) ingsPrice/earn

Stock Price

EPS Jan. 31, ’05 P/E Ratio

Recent P/E

Target $50.77 $2.12 23.9 21.4

Walmart $52.40 $2.42 21.7 17.7

16

Market Ratios

goutstandinstock common of shares ofnumber

equitystock common = shareper Book value

stockcommonofsharepervalueBook

stockcommonofsharepervalueMarketratio (M/B)k Market/boo

Jan. 2005 StockPrice

# of shares (000)

BV/sh M/B ratio

Target $50.77 890,600 $14.63 3.47

Walmart $52.40 4,234,000 $28.39 1.85