Fsa Part 1 - Winter 2017 - Ready

Financial Ratio Analysis Part 1: Assessing
Profitability
Financial Statement Analysis

ACC 411
Winter 2017
Professor Charles E. Wasley

Simon School
University of Rochester
Prof. Charles E. Wasley 1

Learning Objectives
1) To become proficient at using financial ratios to analyze a firms
profitability.
2) To appreciate the economic insights into a firms profitability and

changes in profitability that can be achieved by decomposing return
on equity (ROE) into its underlying drivers.
The lecture notes discuss two separate decompositions of ROE.
An additive and a multiplicative decomposition (the traditional decomposition).
3) To appreciate the economic meaning of each of the underlying

drivers of ROE in both the additive and multiplicative
decompositions.
4) There is a spreadsheet along with the course lecture notes the

calculates the ratios discussed in these and the next set of lecture
notes. You may keep the spreadsheet for future use.
Types of Financial Analysis
Trend analysis (i.e., time-series analysis):

Discussed previously.
Common-size statements (i.e., cross-sectional analysis):

Discussed previously.
Financial ratio analysis:

The focus of these and the next set of lecture notes.
While the above techniques may seem rudimentary, they

form the basic building blocks for many of the different
types of economic/ business decisions, and problem
solving activities that external users of financial
information need to perform.
What is Financial Ratio Analysis?
The process of expressing financial statement numbers as

ratios to:
1) More clearly assess the past and current economic
performance and financial position of a firm.
2) Facilitate making various economic/business decisions.
Categories of ratios:
Profitability: These lecture notes.
Short-Term Liquidity, Capital Structure, and Analysis of Financial
Distress, all in the next set of lecture notes.

Profitability Ratios
Are designed to answer the question

How successful has a firm been at generating a return
on investment?
Investment can be defined as common stockholders equity
(ROE = return on common equity) or assets (ROA = return
on assets).

Return on Equity (ROE)
ROE measures the rate of return on common

stockholders investment after accounting for the cost of
debt financing and preferred stock dividends.
ROE = Net Income - Preferred Stock Dividends

Average Common Stockholders Equity

Additive Decomposition of ROE The Big Picture
A firms sustainable growth rate is
the rate at which it can grow while
leaving profitability and financial
policies unchanged.
A firms sustainable growth rate is

related to its ROE and dividend
payout ratio (cash dividends / net
income).
Sustainable growth rate = ROE * (1

Dividend Payout).

Additive Decomposition of ROE
ROE = Operating ROA + Financial Leverage Effect.
Decomposing ROE into these two components provides insight into how a firms
operating activities/policies and its leverage/capital structure policies are each
contributing to (i.e., driving) the firms ROE.
Operating ROA measures a firms ability to generate operating profits with

operating assets.
Some of a firms assets, like cash and marketable securities are financial assets (think
Microsoft).
The Financial Leverage Effect measures the impact on ROE from introducing
leverage into the firms capital structure.
Note: Average values for all balance sheet items appearing on the following slides
are implicitly used, however to save space and improve clarity, I suppress the
notation average.

Operating ROA = NOPAT / Net Operating Assets.

NOPAT (Net Operating Profit After Tax) = Net Income + Net
interest expense after tax.
Net Interest Expense After Tax = (Int. Expense Int. Income) x (1-Tax Rate).
Net Operating Assets = Operating Working Capital + Net Long-

Term Operating Assets.
Operating Working Capital = (Current Assets - Cash and Marketable
Securities) - (Current Liabilities Short-term Debt and the Current Portion
Long-term Debt).
Why the subtraction of cash and marketable securities from current assets and short-
term debt and current portion of long-term debt from current liabilities?
Net Long-Term Operating Assets = Total Long-Term Assets Non-Interest-
Bearing Long-Term Liabilities.

Key Insight There are two drivers of

Operating ROA are:
Operating ROA = NOPAT Margin x Net

Operating Asset Turnover.
#1) NOPAT Margin = NOPAT / Sales.
#2) Net Operating Asset Turnover = Sales / Net

Operating Assets.
Financial Leverage Effect = Net Financial Leverage x Spread.
Net Financial Leverage = Net Debt / Common Equity

Net Debt = Total Interest-Bearing Liabilities - Cash and Marketable Securities.
Why the subtraction of cash and marketable securities?
Spread = Operating ROA - Net Interest Rate After Tax.

Net Interest Expense After Tax (NIEAT) = (Interest Expense - Interest Income) x
(1 - Tax Rate).
Net Interest Rate After Tax (NIRAT) = Net Interest Expense After Tax / Net
Debt.

Insight into changes in Operating ROA (hence ROE) over time and versus
competitors is achieved by decomposing Operating ROA into:
1) NOPAT (profit) margin:
NOPAT margin measures a firms ability to generate after-tax operating income from a
particular level of Sales.
2) Net Operating Asset turnover:
Net Operating Asset turnover measures a firms ability to generate Sales from a particular
investment in net operating assets.
To uncover the reasons for changes in the NOPAT margin from year-to-year,
carefully study the relation between sales and various expenses each year
That is, perform common-size analysis of the income statement.
To uncover the reasons for any changes in the Net Operating Asset turnover ratio
from year-to-year, carefully study the turnover ratios of individual assets each year.
Namely, A/R, Inventory, Operating Working Capital, PP&E and A/P turnover ratios which
we will discuss in a few slides.

Insight into changes in the Financial Leverage Effect

(hence ROE) over time and versus competitors can be
achieved by decomposing it into:
1) Spread.
Evaluate the reasons for changes in the Spread by looking at changes in
Operating ROA and the Net Interest Rate After Tax.
2) Net Financial Leverage.
Evaluate the reasons for changes in net financial leverage by looking at
changes in net debt and common equity.

Underlying Drivers of the Operating Asset
Turnover Ratio
A/R, Inventory, Operating Working Capital, PP&E

and A/P turnover ratios are discussed on the
following slides.

Underlying Drivers of the Operating Asset Turnover Ratio: A/R
Turnover
A/R Turnover = Credit Sales / Average A/R.
Tells us how soon Sales are becoming cash.

Important because a firms A/R balance is an implicit investment of its cash.
Cash is king!
An alternative measure of the rate A/R collection is:

Days Receivable Outstanding (DRO) = 360 (or 365) / AR Turnover.
This ratio is also known as A/R days, days sales outstanding (DSO) and/or days
sales in receivables.
Economic interpretations of DRO:

Increases may indicate a deteriorating customer base and/or that some customers are
having financial difficulty. It could also mean the credit department is doing a poor
job.
Decreases might indicate a firms credit department is being too aggressive.
Underlying Drivers of the Operating Asset Turnover Ratio:
Inventory Turnover
Inventory Turnover = Cost of Goods Sold / Average Inventory.
Tells us how quickly inventory is selling.

Important because a firms Inventory balance is an implicit investment of its
cash. Cash is king!
Perhaps a more intuitive measure of the rate inventory is selling is:

Days Inventory Held = 360 (or 365) / Inventory Turnover.
Also known as inventory days or days cost of goods sold in inventory.
Economic interpretations of days inventory held:

A decrease could mean more efficient use of the firms investment in
inventory, but decreases might trigger loss of sales. Why?
An increase could mean the inventory is becoming obsolete (never good).
Operating Working Capital Turnover
Operating Working Capital Turnover = Sales / Average Operating

Working Capital.
Tells us how efficiently a firm is using its operating working capital

to generate Sales.
Operating Working Capital = Current Operating Assets Current

Operating Liabilities.
= (Current Assets Cash & Marketable Securities) (Current Liabilities
Short-term Debt & Current Portion of Long-Term Debt).
Why the subtraction of cash & marketable securities from current assets and
short-term debt & current portion of long-term debt from current liabilities?

Underlying Drivers of the Operating Asset Turnover Ratio: PP&E
Turnover
PP&E Turnover = Sales / Average Net PP&E.

What is Net PP&E?
Tells us how efficiently a firm is using its Net PP&E to generate

Sales.
Economic interpretations:
Changes can signal:
1) A firm making investments in anticipation of higher future sales.
So a low or decreasing rate of turnover might be an indication of an expanding firm
preparing for future growth.
2) On the other hand, a firm may cut back capital expenditures if its near-term
outlook is poor.
Such an action could lead to an increase in the PP&E turnover ratio.

Underlying Drivers of the Operating Asset Turnover Ratio: A/P
Turnover
A/P Turnover = Purchases / Average A/P.
Purchases = Cost of Good Sold + Inventory.
Some users use CGS rather than Purchases in the numerator.
Purchases is probably better (Why?), just be consistent.
Tells us how quickly a firm is paying its suppliers.

Important because a firms A/P balance is an implicit source of cash. Cash is king!
Perhaps a more intuitive measure of the rate A/P are being paid is:
Days Payable Outstanding (DPO) = 360 (or 365) / A/P Turnover.
This ratio is also known as A/P days, days payable, days cost of goods sold in A/P or days purchases in A/P.
Economic interpretations:
1) When a firm begins to experience financial difficulty, DPO typically begins to rise.
That is, one of the first actions taken by a firm in financial difficulty is to begin paying suppliers
slower to exploit the interest-free financing suppliers are providing.
2) Too short a DPO might mean a firm is not exploiting the (implicit) interest-free
financing suppliers are providing.
Or it might be that suppliers cash discounts for prompt payment are too good to pass up.

Alternative Ways to Specify the A/R, Inventory and A/P
Turnovers
Some users use the ending balance rather than the

average balance to compute A/R, Inventory and A/P
turnover ratios.
The average is probably better (Why?).
As noted above there are alternative names for, and

equivalent ways of calculating days receivable
outstanding, days inventory held and days payable
outstanding. Appendix B describes these alternative
calculations.

The Cash Cycle
The Cash Cycle measures the number of days a firm ties

up its own Cash in current operating assets, net of supplier
financing provided by A/P.
Operating Cycle = Inventory days + A/R days.
Cash Cycle = Inventory days + A/R days - A/P days.

While a firm ties up cash in inventory and A/R, part of the cash (i.e., the
A/P balance) is not its own, hence the subtraction of A/P days.

Cash Cycles Differ By Industry
Service firms carry little or no inventory, retailers carry

low A/R, etc.
Cash cycles for several industries appear on the following

page.
What are the underlying economic aspects of the

industries that drive the observed differences?

CASH CYCLES FOR VARIOUS INDUSTRIES
INVENT ORY A/R A/P CASH

DAYS DAYS DAYS CYCLE
Manufacturing:
Bottled and canned soft drinks 24 28 25 27
Dairy products 20 26 23 23
Drugs and medicine 107 52 46 113
Jewelry and precious metals 135 56 34 157
Laboratory analytical instruments 146 61 42 165
Wines, distilled liquor, and liqueurs 365 37 47 355
Retailing:
Autos-new and used 63 5 2 66
Boat dealers 159 4 6 157
Drinking places (alcoholic) 19 0 23 -4
Groceries and meats 23 2 14 11
Jewelry 261 11 66 206
Vending machine operators 32 3 29 6
Service:
Accounting, auditing, and bookkeeping - 62 - 62
Amusement parks--Outdoor - 1 - 1
Auto repair-general - 11 - 11
Consulting services-management - 59 - 59
Chiropractors - 4 - 4
Refuse systems - 41 - 41

Cash Cycles for Dell and Gateway (A Timeless
Example of the Benefits of Effectively Managing
the Cash Cycle)
In addition to differing across industries, Cash Cycles

differ within industries.
Firm-specific differences are driven by differences in the
efficiency in managing Inventory, A/R and A/P.
The exhibit on the next page compares the Cash Cycles of

Dell and Gateway.
What observations can you make?

Cash Cycles for Two Computer Makers
GATEWAY XXX4 XXX5 XXX6 XXX7 XXX8 XXX9 XX10 XX11 XX12
Inventory
days 22.9 20.3 22.2 18.2 12.7 9.6 12.1 15.0 10.4
A/R days 28.2 32.2 30.6 27.5 25.8 25.1 22.3 22.6 18.0
Operating
cycle 51.1 52.5 52.8 45.7 38.5 34.7 34.4 37.6 28.4
A/P days 24.4 23.8 28.2 31.2 37.2 43.0 39.5 40.2 31.2
Cash cycle 26.7 28.7 24.6 14.5 1.3 -8.3 -5.1 -2.6 -2.8
Dell
Computer: XXX4 XXX5 XXX6 XXX7 XXX8 XXX9 XX10 XX11 XX12
Inventory
days 33.8 30.7 20.1 9.1 6.4 6.0 5.6 4.8 3.6
A/R days 49.1 43.0 37.8 34.9 35.3 33.5 31.1 29.8 24.7
Operating
cycle 82.9 73.7 57.9 44.0 41.7 39.5 36.7 34.6 28.3
A/P days 46.8 37.7 45.8 50.4 51.3 53.0 55.3 66.0 68.5
Cash cycle 36.1 36.0 12.1 -6.4 -9.6 -13.5 -18.6 -31.4 -40.2
A Multiplicative Decomposition of ROE (the
traditional decomposition)
ROE = (Net Income - Preferred Stock Dividends) / Average Common
Stockholders Equity
Cost of
Common Capital leverage
ROE = ROA * Earnings * Structure
Leverage Leverage
(CEL) (LEV) Amount
of leverage
ROE = NOPAT / Average Total Assets *
(Net Income - Preferred Dividends) / NOPAT *
Average Total Assets / Average Common Stockholders Equity
That is, a Multiplicative decomposition of ROE = ROA * CEL * LEV.

As before, NOPAT = Net Operating Profit After Tax = Net Income + (1 - Tax Rate) * (Interest
Expense - Interest Income).
The 1st term right of the equal sign is return on assets (ROA, more on ROA shortly).
The next term is common earnings leverage (CEL).

The only difference between the numerator and denominator of CEL is the cost of debt
financing (i.e., net interest expense) and the cost of preferred stock financing (i.e.,
preferred dividends).
The higher (lower) is the cost of debt and preferred stock, the lower (higher) will be this
multiplier (i.e., the less (more) common shareholders benefit from levering up the firm
and from issuing preferred stock).
The last term (LEV) measures the proportion of leverage (and preferred stock) in a
firms capital structure.
That is, the degree to which the firm uses the investment of common shareholders
versus creditors (and preferred shareholders) to finance itself.
The higher LEV, the less capital obtained from common shareholders (i.e., the lower
their investment).

CEL and LEV combine to form a multiplier effect on ROA
emanating from the use of debt (and preferred stock).
Where:
1) CEL captures the cost of debt (and preferred stock) financing.
2) LEV captures the proportion of debt (and preferred stock) financing vis--
vis common equity financing.
UPSHOT:
When a firm can generate earnings using debt and preferred stock that
exceeds the cost of such capital, the excess return belongs to common
shareholders.

ROA= NI + [(1-tax rate)*(Interest Expense- Interest Income)]

Average Total Assets
The numerator is (NOPAT) net operating income after income taxes,

but excluding any debt financing costs (e.g., net interest expense).
ROA measures a firms success at using total assets to generate

earnings.
ROA is a rate of return independent of how a firm finances its assets while
ROE is a rate of return that depends on how a firm finances its assets.

ROA = NOPAT Margin x Total Asset Turnover
=NI+[(1-tax rate)*(Interest Expense-Interest Income)] x Sales

Sales Avg.
Total
Assets
Insight into changes in ROA (hence ROE) over time and versus
competitors can be achieved by decomposing ROA into:
1) NOPAT (profit) margin.
NOPAT margin measures a firms ability to generate after-tax operating income
from a particular level of sales.
2) Total asset turnover.
Total asset turnover measures the ability to generate sales from a particular
investment in total assets.
As noted earlier, to uncover reasons for changes in NOPAT margin

from year-to-year, perform common-size analysis of the income
statement.
To uncover reasons for changes in the total asset turnover rate

from year-to-year, examine turnover ratios for individual assets
each year. Namely, A/R, Inventory, Operating Working Capital,
PP&E and A/P turnover ratios.

Summary of ROE Analysis
Objective:
To understand and appreciate the reasons a firms ROE has changed over time and also
how it compares with the behavior of competitors ROEs.
The following steps achieve this objective.
Calculate ROE:
Additive decomposition:
Decompose ROE into Operating ROA + Financial Leverage Effect.
Decompose NOPAT margin into the underlying expense ratios. Evaluate components.
Decompose operating asset turnover into individual turnover ratios. Evaluate components.
Evaluate the cash cycle. Evaluate components.
Decompose the financial leverage effect into spread and net debt. Evaluate components.
Multiplicative decomposition:
Decompose ROE into ROA, CEL and LEV.
Decompose ROA into NOPAT margin and asset turnover.
Decompose NOPAT margin into the underlying expense ratios. Evaluate components.
Decompose total asset turnover into individual turnover rates. Evaluate components.
Evaluate the cash cycle. Evaluate components.
Evaluate CEL and LEV.
Summary of ROE Analysis
Analysis of a firms ratios for a period of years and versus competitors allows a
user of financial statement information to identify and track historical trends and
variability.
An important part of a users job is to use ratios to identify aspects of a firm

warranting deeper investigation.
A firms ratios should not only be compared with its own past performance, but
also the current and past performance of other firms in the industry.
Caveats:
Before placing complete reliance on a set of ratios one should ask:
Has the firm made a change in its product, geographic, or customer mix that would affect
the comparability of the ratios over time?
Has the firm made a major acquisition or divestiture?
Has the firm changed accounting methods over time?

Wal-Mart and Target
The following pages contain profitability ratios for Wal-

Mart and Target.
The firms actual financial statements appear in Appendix C.
Identify a few aspects of the profitability analysis and

why they are important.

Wal-Mart Stores, Inc.
FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 31-Jan-2014 31-Jan-2013 31-Jan-2012 31-Jan-2011 31-Jan-2010 31-Jan-2009 31-Jan-2008 31-Jan-2007 31-Jan-2006
ALTERNATIVE DECOMPOSITION OF ROE:

ROE (FROM ABOVE) 21.0% 23.0% 22.5% 23.6% 21.2% 20.6% 20.2% 19.7% 21.9%
OPERATING ROA:
NOPAT $17,509.5 $18,422.2 $17,154.9 $17,747.7 $15,644.5 $14,631.5 $13,911.9 $12,300.8 $12,019.2
SALES $476,294.0 $468,651.0 $446,509.0 $421,849.0 $408,085.0 $404,254.0 $377,023.0 $348,368.0 $312,101.0
NOPAT MARGIN 3.7% 3.9% 3.8% 4.2% 3.8% 3.6% 3.7% 3.5% 3.9%
NOPAT MARGIN (TO CHECK) 3.7% 3.9% 3.8% 4.2% 3.8% 3.6% 3.7% 3.5% 3.9%
OPERATING WORKING CAPITAL -$5,149.5 -$7,233.5 -$7,745.5 -$9,231.5 -$8,273.0 -$5,364.0 -$4,665.5 -$3,605.0 -$2,291.0
NET LONG-TERM ASSETS $129,306.0 $127,678.5 $122,347.0 $116,677.5 $110,327.5 $107,371.5 $102,971.0 $92,870.5 $82,624.5
NET ASSETS $124,156.5 $120,445.0 $114,601.5 $107,446.0 $102,054.5 $102,007.5 $98,305.5 $89,265.5 $80,333.5
OPERATING ROA (NOPAT/NET ASSETS) 14.1% 15.3% 15.0% 16.5% 15.3% 14.3% 14.2% 13.8% 15.0%
OPERATING ASSET TURNOVER (OAT) 3.8 3.9 3.9 3.9 4.0 4.0 3.8 3.9 3.9
OPERATING ROA (NOPAT MARGIN * OAT) 14.1% 15.3% 15.0% 16.5% 15.3% 14.3% 14.2% 13.8% 15.0%
FINANCIAL LEVERAGE EFFECT:

NET DEBT $47,857.5 $46,616.0 $44,673.0 $37,941.0 $34,178.0 $37,061.0 $35,215.0 $31,893.5 $29,050.0
STOCKHOLDERS' EQUITY $76,299.0 $73,829.0 $69,928.5 $69,505.0 $67,876.5 $64,946.5 $63,090.5 $57,372.0 $51,283.5
NET FINANCIAL LEVERAGE 62.7% 63.1% 63.9% 54.6% 50.4% 57.1% 55.8% 55.6% 56.6%
(INTEREST EXPENSE - INTEREST INCOME) $2,216.0 $2,063.0 $2,159.0 $2,004.0 $1,884.0 $1,900.0 $1,794.0 $1,529.0 $1,178.0
TAX RATE 32.9% 31.0% 32.6% 32.2% 32.4% 34.2% 34.2% 33.5% 33.1%
NET INTEREST EXPENSE AFTER TAX (NIEAT) $1,487.5 $1,423.2 $1,455.9 $1,358.7 $1,274.5 $1,250.5 $1,180.9 $1,016.8 $788.2
NET INTEREST RATE AFTER TAX (NIRAT) 3.1% 3.1% 3.3% 3.6% 3.7% 3.4% 3.4% 3.2% 2.7%
SPREAD (OPERATING ROA - NIRAT) 11.0% 12.2% 11.7% 12.9% 11.6% 11.0% 10.8% 10.6% 12.2%
FIN'L LEVERAGE EFFECT (NFL*SPREAD) 6.9% 7.7% 7.5% 7.1% 5.8% 6.3% 6.0% 5.9% 6.9%
ALTERNATIVE ROE CALCULATION:

OPERATING ROA 14.1% 15.3% 15.0% 16.5% 15.3% 14.3% 14.2% 13.8% 15.0%
FIN'L LEVERAGE EFFECT 6.9% 7.7% 7.5% 7.1% 5.8% 6.3% 6.0% 5.9% 6.9%
OPERATING ROA + FINL LEVERAGE EFFECT 21.0% 23.0% 22.5% 23.6% 21.2% 20.6% 20.2% 19.7% 21.9%
ROE (FROM ABOVE) 21.0% 23.0% 22.5% 23.6% 21.2% 20.6% 20.2% 19.7% 21.9%
DIFFERENCE (SHOULD BE ZERO) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
RATIOS
RETURN ON EQUITY
ROE 21.0% 23.0% 22.5% 23.6% 21.2% 20.6% 20.2% 19.7% 21.9%
ROA MARGIN (NOPAT MARGIN) 3.7% 3.9% 3.8% 4.2% 3.8% 3.6% 3.7% 3.5% 3.9%
ASSET TURNOVER 2.34 2.36 2.39 2.40 2.44 2.47 2.39 2.40 2.42
ROA 8.6% 9.3% 9.2% 10.1% 9.4% 9.0% 8.8% 8.5% 9.3%
COMMON EARNINGS LEVERAGE 0.92 0.92 0.92 0.92 0.92 0.91 0.92 0.92 0.93
FINANCIAL LEVERAGE 2.67 2.69 2.68 2.53 2.46 2.52 2.50 2.53 2.52
ROE = NOPAT MARGIN * A/T * CEL * LEV 21.0% 23.0% 22.5% 23.6% 21.2% 20.6% 20.2% 19.7% 21.9%
ROE = ROA * CEL * LEV 21.0% 23.0% 22.5% 23.6% 21.2% 20.6% 20.2% 19.7% 21.9%
KEY DRIVERS OF RETURN ON EQUITY
COST OF GOODS/SALES 75.2% 75.2% 75.0% 74.7% 74.5% 75.2% 75.4% 75.8% 76.1%
GROSS PROFIT MARGIN 24.8% 24.8% 25.0% 25.3% 25.5% 24.8% 24.6% 24.2% 23.9%
SELLING, GENERAL & ADMINISTRATIVE EXPENSES/SALES 19.2% 18.9% 19.0% 19.3% 19.5% 19.2% 18.8% 18.3% 17.9%
INTEREST INCOME/SALES 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.1%
INTEREST EXPENSE/SALES 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.6% 0.5% 0.5%
MINORITY INTEREST/SALES 0.1% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
TOTAL OPERATING EXPENSES/SALES 19.2% 18.9% 19.0% 19.3% 19.6% 19.2% 18.8% 18.3% 17.9%
EBT/SALES 5.2% 5.5% 5.4% 5.6% 5.4% 5.2% 5.3% 5.4% 5.6%
EBIT/SALES 5.6% 5.9% 5.9% 6.1% 5.9% 5.6% 5.8% 5.9% 6.0%
EBITDA/SALES 5.6% 5.9% 5.9% 6.1% 5.9% 5.6% 5.8% 5.9% 6.0%
INCOME TAX/ SALES 1.7% 1.7% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.9%
NET INCOME/SALES 3.4% 3.6% 3.5% 3.9% 3.5% 3.3% 3.4% 3.2% 3.6%

ASSET MANAGEMENT RATIOS 31-Jan-2014 31-Jan-2013 31-Jan-2012 31-Jan-2011 31-Jan-2010 31-Jan-2009 31-Jan-2008 31-Jan-2007 31-Jan-2006
A/R TURNOVER 70.85 73.77 80.99 91.38 101.40 107.13 116.33 128.67 145.50
INVENTORY TURNOVER 8.08 8.34 8.68 9.11 9.05 8.73 8.25 8.05 7.71
ACCOUNTS PAYABLE TURNOVER (PURCHASES) 9.51 9.52 9.65 9.94 10.20 10.25 9.71 9.92 10.19
ACCOUNTS PAYABLE TURNOVER (CGS) 9.49 9.43 9.53 9.82 10.26 10.27 9.66 9.85 10.09
DAYS' RECEIVABLES 5.08 4.88 4.44 3.94 3.55 3.36 3.09 2.80 2.47
DAYS' INVENTORY 44.57 43.18 41.46 39.52 39.79 41.26 43.61 44.73 46.71
DAYS' PAYABLE (PURCHASES) 37.84 37.83 37.29 36.22 35.31 35.13 37.08 36.29 35.35
DAYS' PAYABLE (CGS) 37.95 38.16 37.77 36.65 35.10 35.06 37.27 36.54 35.67
PP&E TURNOVER 4.06 4.09 4.06 4.01 4.12 4.20 4.07 4.19 4.28
NET LONG-TERM ASSET TURNOVER 3.68 3.67 3.65 3.62 3.70 3.77 3.66 3.75 3.78
OPERATING WORKING CAPITAL TO SALES -1.1% -1.5% -1.7% -2.2% -2.0% -1.3% -1.2% -1.0% -0.7%
OPERATING WORKING CAPITAL TURNOVER -92.49 -64.79 -57.65 -45.70 -49.33 -75.36 -80.81 -96.63 -136.23
CASH CYCLE (IN DAYS) 11.81 10.23 8.61 7.24 8.03 9.49 9.63 11.23 13.84

Target Corporation
FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 01-Feb-2014 02-Feb-2013 28-Jan-2012 29-Jan-2011 30-Jan-2010 31-Jan-2009 02-Feb-2008 03-Feb-2007 28-Jan-2006
ALTERNATIVE DECOMPOSITION OF ROE:
ROE (FROM ABOVE) 12.3% 18.7% 18.7% 18.9% 17.1% 15.3% 18.4% 18.7% 17.7%
OPERATING ROA:
NOPAT $2,403.6 $3,494.8 $3,498.2 $3,411.8 $3,002.7 $2,756.2 $3,247.6 $3,141.5 $2,723.0
SALES $72,596.0 $73,301.0 $69,865.0 $67,390.0 $65,357.0 $64,948.0 $63,367.0 $59,490.0 $52,620.0
NOPAT MARGIN 3.3% 4.8% 5.0% 5.1% 4.6% 4.2% 5.1% 5.3% 5.2%
NOPAT MARGIN (TO CHECK) 3.3% 4.8% 5.0% 5.1% 4.6% 4.2% 5.1% 5.3% 5.2%
OPERATING WORKING CAPITAL $1,914.0 $4,860.5 $5,352.0 $6,071.5 $6,983.5 $7,006.0 $5,388.0 $4,030.0 $3,941.5
NET LONG-TERM ASSETS $29,118.5 $27,974.5 $25,625.5 $23,659.5 $23,797.0 $23,767.5 $22,014.0 $19,613.0 $17,434.0
NET ASSETS $31,032.5 $32,835.0 $30,977.5 $29,731.0 $30,780.5 $30,773.5 $27,402.0 $23,643.0 $21,375.5
OPERATING ROA (NOPAT/NET ASSETS) 7.7% 10.6% 11.3% 11.5% 9.8% 9.0% 11.9% 13.3% 12.7%
OPERATING ASSET TURNOVER (OAT) 2.3 2.2 2.3 2.3 2.1 2.1 2.3 2.5 2.5
OPERATING ROA (NOPAT MARGIN * OAT) 7.7% 10.6% 11.3% 11.5% 9.8% 9.0% 11.9% 13.3% 12.7%
FINANCIAL LEVERAGE EFFECT:

NET DEBT $14,975.5 $16,776.5 $15,351.5 $14,314.0 $16,251.0 $16,264.0 $11,932.0 $8,724.0 $7,758.5
STOCKHOLDERS' EQUITY $16,057.0 $16,058.5 $15,626.0 $15,417.0 $14,529.5 $14,509.5 $15,470.0 $14,919.0 $13,617.0
NET FINANCIAL LEVERAGE 93.3% 104.5% 98.2% 92.8% 111.8% 112.1% 77.1% 58.5% 57.0%
(INTEREST EXPENSE - INTEREST INCOME) $681.0 $762.0 $866.0 $757.0 $801.0 $866.0 $647.0 $572.0 $505.0
TAX RATE 36.5% 34.9% 34.3% 35.0% 35.7% 37.4% 38.4% 38.0% 37.6%
NET INTEREST EXPENSE AFTER TAX (NIEAT) $432.6 $495.8 $569.2 $491.8 $514.7 $542.2 $398.6 $354.5 $315.0
NET INTEREST RATE AFTER TAX (NIRAT) 2.9% 3.0% 3.7% 3.4% 3.2% 3.3% 3.3% 4.1% 4.1%
SPREAD (OPERATING ROA - NIRAT) 4.9% 7.7% 7.6% 8.0% 6.6% 5.6% 8.5% 9.2% 8.7%
FIN'L LEVERAGE EFFECT (NFL*SPREAD) 4.5% 8.0% 7.5% 7.5% 7.4% 6.3% 6.6% 5.4% 4.9%
ALTERNATIVE ROE CALCULATION:

OPERATING ROA 7.7% 10.6% 11.3% 11.5% 9.8% 9.0% 11.9% 13.3% 12.7%
FIN'L LEVERAGE EFFECT 4.5% 8.0% 7.5% 7.5% 7.4% 6.3% 6.6% 5.4% 4.9%
OPERATING ROA + FINL LEVERAGE EFFECT 12.3% 18.7% 18.7% 18.9% 17.1% 15.3% 18.4% 18.7% 17.7%
ROE (FROM ABOVE) 12.3% 18.7% 18.7% 18.9% 17.1% 15.3% 18.4% 18.7% 17.7%
DIFFERENCE (SHOULD BE ZERO) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Target Corporation
RATIOS
RETURN ON EQUITY
ROE 12.3% 18.7% 18.7% 18.9% 17.1% 15.3% 18.4% 18.7% 17.7%
ROA MARGIN (NOPAT MARGIN) 3.3% 4.8% 5.0% 5.1% 4.6% 4.2% 5.1% 5.3% 5.2%
ASSET TURNOVER 1.58 1.55 1.55 1.53 1.47 1.47 1.55 1.64 1.56
ROA 5.2% 7.4% 7.7% 7.7% 6.8% 6.2% 7.9% 8.7% 8.1%
COMMON EARNINGS LEVERAGE 0.82 0.86 0.84 0.86 0.83 0.80 0.88 0.89 0.88
FINANCIAL LEVERAGE 2.87 2.94 2.89 2.86 3.05 3.06 2.65 2.42 2.47
ROE = NOPAT MARGIN * A/T * CEL * LEV 12.3% 18.7% 18.7% 18.9% 17.1% 15.3% 18.4% 18.7% 17.7%
ROE = ROA * CEL * LEV 12.3% 18.7% 18.7% 18.9% 17.1% 15.3% 18.4% 18.7% 17.7%
KEY DRIVERS OF RETURN ON EQUITY
COST OF GOODS/SALES 70.5% 69.0% 68.5% 67.9% 67.4% 68.0% 67.7% 67.9% 66.4%
GROSS PROFIT MARGIN 29.5% 31.0% 31.5% 32.1% 32.6% 32.0% 32.3% 32.1% 33.6%
SELLING, GENERAL & ADMINISTRATIVE EXPENSES/SALE 21.2% 20.3% 20.2% 20.0% 20.0% 19.9% 20.0% 19.9% 21.3%
DEPRECIATION & AMORTIZATION EXPENSE/SALES 3.1% 2.9% 3.1% 3.1% 3.1% 2.8% 2.6% 2.5% 2.7%
INTEREST EXPENSE/SALES 0.9% 1.0% 1.2% 1.1% 1.2% 1.4% 1.1% 1.0% 1.0%
Credit card expenses/SALES 0.0% 0.6% 0.6% 1.3% 2.3% 2.5% 1.3% 1.2% 1.5%
Gain on receivables transaction/SALES -0.5% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
G/L on early Exting. of lease relat debt/SALES 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
TOTAL OPERATING EXPENSES/SALES 24.3% 23.7% 23.9% 24.4% 25.4% 25.2% 23.9% 23.6% 25.3%
EBT/SALES 4.3% 6.3% 6.4% 6.7% 5.9% 5.4% 7.3% 7.6% 7.3%
EBIT/SALES 5.2% 7.3% 7.6% 7.8% 7.1% 6.8% 8.3% 8.5% 8.3%
EBITDA/SALES 8.3% 10.2% 10.7% 10.9% 10.2% 9.6% 10.9% 11.0% 11.0%
INCOME TAX/ SALES 1.6% 2.2% 2.2% 2.3% 2.1% 2.0% 2.8% 2.9% 2.8%
NET INCOME/SALES 2.7% 4.1% 4.2% 4.3% 3.8% 3.4% 4.5% 4.7% 4.6%
Target Corporation
ASSET MANAGEMENT RATIOS
A/R TURNOVER #DIV/0! 24.73 11.57 10.27 8.69 8.05 8.89 10.03 9.80
INVENTORY TURNOVER 6.14 6.39 6.17 6.19 6.35 6.55 6.59 6.68 6.22
ACCOUNTS PAYABLE TURNOVER (PURCHASES) 7.35 7.93 7.80 7.34 6.93 6.75 6.54 6.35 5.87
ACCOUNTS PAYABLE TURNOVER (CGS) 7.23 7.93 7.75 7.27 6.86 6.76 6.46 6.29 5.80
DAYS' RECEIVABLES #DIV/0! 14.55 31.12 35.04 41.45 44.73 40.47 35.89 36.72
DAYS' INVENTORY 58.65 56.32 58.35 58.16 56.72 54.97 54.65 53.92 57.83
DAYS' PAYABLE (PURCHASES) 48.96 45.40 46.13 49.07 51.93 53.32 55.07 56.69 61.29
DAYS' PAYABLE (CGS) 49.79 45.38 46.44 49.51 52.49 53.23 55.75 57.27 62.09
PP&E TURNOVER 2.34 2.45 2.56 2.65 2.56 2.61 2.78 2.94 2.93
NET LONG-TERM ASSET TURNOVER 2.49 2.62 2.73 2.85 2.75 2.73 2.88 3.03 3.02
OPERATING WORKING CAPITAL TO SALES 2.6% 6.6% 7.7% 9.0% 10.7% 10.8% 8.5% 6.8% 7.5%
OPERATING WORKING CAPITAL TURNOVER 37.93 15.08 13.05 11.10 9.36 9.27 11.76 14.76 13.35
CASH CYCLE (IN DAYS) #DIV/0! 25.47 43.34 44.14 46.24 46.38 40.05 33.12 33.27

Summary Statistics for Select Financial Ratios
When performing ratio analysis it is helpful to have summary values

for other firms and over time.
Appendix A contains summary statistics (e.g., mean, median,

standard deviation and lower and upper quartile) for various
financial ratios.
To reduce the effect of outliers, the distributions of the ratios have

been truncated by dropping the top and bottom 5% of the sample
based on extreme values for ROE, ROA, Annual Sales Growth,
Annual Net Income Growth and Annual EPS Growth.

Appendix A: Summary Statistics for Various
Financial Ratios
The following three slides contain the summary

ratio statistics (e.g., mean, median, standard
deviation and lower and upper quartile) referred
to at the beginning of these lecture notes.

Appendix B: Alternative Ways to Specify the A/R,
Inventory and A/P Turnover Rates
A/R days = A/R / (Sales/360).

Days receivable outstanding = 360 / A/R Turnover.
NOTE: They are the same thing (i.e., same value).
A/R Days = A/R / Sales Per Day = A/R / (Sales / 360).
Days receivable outstanding = 360 / A/R Turnover = 360 / (Sales / A/R).
Easy to show: A/R / (Sales / 360) = 360 / (Sales / A/R).
Inventory days = Inventory / (Cost of Goods Sold CGS / 360).

Days Inventory Held = 360 / Inventory Turnover.
NOTE: They are the same thing (i.e., same value).
Inventory Days = Inventory / CGS Per Day = Inventory / (CGS / 360).
Days Inventory Held = 360 / Inventory Turnover = 360 / (CGS / Inventory).
Easy to show: Inventory / (CGS / 360) = 360 / (CGS / Inventory).
A/P days = A/P / (CGS/360).

Note I used CGS rather than Purchases here.
Days payable outstanding = 360 / AP Turnover
NOTE: They are the same thing (i.e., same value,0:
A/P Days = A/P / CGS Per Day = A/P / (CGS / 360).
Days A/P outstanding =360 / AP Turnover = 360 / (CGS / A/P).
Easy to show: A/P / (CGS / 360) = 360 / (CGS / A/P).
Appendix C: Wal-Marts and Targets Actual
Financial Statements
The firms actual income statements and balance

sheets appear on the following slides.

FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 31-Jan-2014 31-Jan-2013 31-Jan-2012 31-Jan-2011 31-Jan-2010 31-Jan-2009 31-Jan-2008 31-Jan-2007 31-Jan-2006 31-Jan-2005
Net Sales $473,076 $465,604 $443,416 $418,952 $405,132 $401,087 $373,821 $344,759 $308,945 $281,488
Membership and other income $3,218 $3,047 $3,093 $2,897 $2,953 $3,167 $3,202 $3,609 $3,156 $2,822
TOTAL OPERATING REVENUES $476,294.0 $468,651.0 $446,509.0 $421,849.0 $408,085.0 $404,254.0 $377,023.0 $348,368.0 $312,101.0 $284,310.0
COST OF GOODS $358,069 $352,297 $334,993 $314,946 $304,106 $303,941 $284,137 $263,979 $237,649 $216,832
GROSS PROFIT $118,225.0 $116,354.0 $111,516.0 $106,903.0 $103,979.0 $100,313.0 $92,886.0 $84,389.0 $74,452.0 $67,478.0
SELLING, GENERAL & ADMINISTRATIVE EXPENSES $91,353 $88,629 $85,025 $81,361 $79,717 $77,546 $70,934 $63,892 $55,739 $50,178
RESTRUCTURING CHARGES $0.0 $0.0 $0.0 $0.0 $260.0 $0.0 $0.0 $0.0 $0.0 $0.0
TOTAL OPERATING EXPENSES $91,353.0 $88,629.0 $85,025.0 $81,361.0 $79,977.0 $77,546.0 $70,934.0 $63,892.0 $55,739.0 $50,178.0
INCOME BEFORE INTEREST AND TAXES $26,872.0 $27,725.0 $26,491.0 $25,542.0 $24,002.0 $22,767.0 $21,952.0 $20,497.0 $18,713.0 $17,300.0
INTEREST EXPENSE $2,335 $2,249 $2,320 $2,205 $2,065 $2,184 $2,103 $1,809 $1,420 $1,184
INTEREST INCOME $119 $186 $161 $201 $181 $284 $309 $280 $242 $204
INCOME BEFORE TAXES $24,656.0 $25,662.0 $24,332.0 $23,538.0 $22,118.0 $20,867.0 $20,158.0 $18,968.0 $17,535.0 $16,320.0
PROVISION FOR INCOME TAXES $8,105 $7,958 $7,924 $7,579 $7,156 $7,133 $6,889 $6,354 $5,803 $5,589
MINORITY INTEREST $673 $757 $688 $604 $513 $499 $406 $425 $324 $249
INCOME FROM CONTINUING OPERATIONS $15,878.0 $16,947.0 $15,720.0 $15,355.0 $14,449.0 $13,235.0 $12,863.0 $12,189.0 $11,408.0 $10,482.0
DISCONTINUED OPERATION (NET OF TAX) $144 $52 -$21 $1,034 -$79 $146 -$132 -$905 -$177 -$215
NET INCOME $16,022.0 $16,999.0 $15,699.0 $16,389.0 $14,370.0 $13,381.0 $12,731.0 $11,284.0 $11,231.0 $10,267.0
CASH $7,281 $7,781 $6,550 $7,395 $7,907 $7,275 $5,492 $7,767 $6,193 $5,488
ACCOUNTS RECEIVABLE $6,677 $6,768 $5,937 $5,089.0 $4,144 $3,905 $3,642 $2,840 $2,575 $1,715
INVENTORIES $44,858 $43,803 $40,714 $36,437 $32,713 $34,511 $35,159 $33,685 $31,910 $29,762
Prepaid expenses and other $1,909 $1,588 $1,774 $2,960 $3,128 $3,063 $2,760 $2,690 $2,468 $1,889
Current assets of discontinued operation $460 $0 $0 $131 $140 $195 $967 $0 $679 $0
TOTAL CURRENT ASSETS $61,185.0 $59,940.0 $54,975.0 $52,012.0 $48,032.0 $48,949.0 $48,020.0 $46,982.0 $43,825.0 $38,854.0
PROP, PLANT & EQUIP (GROSS) $178,678 $171,724 $160,938 $154,489 $143,517 $131,161 $127,992 $115,190 $100,929 $88,593
ACCUMULATED DEP -$60,771 -$55,043 -$48,614 -$46,611 -$41,210 -$35,508 -$31,125 -$26,750 -$23,064 -$20,475
PROP, PLANT & EQUIP (NET) $117,907.0 $116,681.0 $112,324.0 $107,878.0 $102,307.0 $95,653.0 $96,867.0 $88,440.0 $77,865.0 $68,118.0
GOODWILL $19,510 $20,497 $20,651 $16,763 $16,126 $15,260 $15,879 $13,759 $12,097 $10,803
Other assets and deferred charges $6,149 $5,987 $5,456 $4,129 $3,942 $3,567 $2,748 $2,406 $4,400 $2,379
TOTAL LONG-TERM ASSETS $143,566.0 $143,165.0 $138,431.0 $128,770.0 $122,375.0 $114,480.0 $115,494.0 $104,605.0 $94,362.0 $81,300.0
TOTAL ASSETS $204,751.0 $203,105.0 $193,406.0 $180,782.0 $170,407.0 $163,429.0 $163,514.0 $151,587.0 $138,187.0 $120,154.0
ACCOUNTS PAYABLE $37,415 $38,080 $36,608 $33,676 $30,451 $28,849 $30,344 $28,484 $25,101 $21,987
ACCRUED EXPENSES $18,793 $18,808 $18,180 $18,701 $18,734 $18,112 $15,725 $14,675 $13,274 $12,120
ACCRUED TAXES PAYABLE $966 $2,211 $1,164 $157 $1,347 $677 $1,000 $706 $1,340 $1,281
Current liabilities of discontinued oper $89 $0.0 $0.0 $47 $92 $83 $140 $0.0 $477 $0.0
SHORT-TERM DEBT $7,670 $6,805 $4,047 $1,031 $523 $1,506 $5,040 $2,570 $3,754 $3,812
CURRENT PORTION OF LTD $4,103 $5,587 $1,975 $4,655 $4,050 $5,848 $5,913 $5,428 $4,595 $3,759
CURRENT PORTION OF CAPITAL LEASES $309 $327 $326 $336 $346 $315 $316 $285 $284 $223
TOTAL CURRENT LIAB $69,345.0 $71,818.0 $62,300.0 $58,603.0 $55,543.0 $55,390.0 $58,478.0 $52,148.0 $48,825.0 $43,182.0
LONG TERM DEBT $41,771 $38,394 $44,070 $40,692 $33,231 $31,349 $29,799 $27,222 $26,429 $20,087
CAPITAL LEASE OBLIGATIONS $2,788 $3,023 $3,009 $3,150 $3,170 $3,200 $3,603 $3,513 $3,667 $3,171
Deferred income taxes and other $8,017 $7,613 $7,862 $6,682 $5,508 $6,014 $5,087 $4,971 $4,630 $2,978
Redeemable noncontrolling interest $1,491 $519 $404 $408 $307 $397 $0.0 $0.0 $0.0 $0.0
Nonredeemable noncontrolling interest $5,084 $5,395 $4,446 $2,705 $2,180 $1,794 $1,939 $2,160 $1,465 $1,340
TOTAL INTEREST BEARING LTL $44,559.0 $41,417.0 $47,079.0 $43,842.0 $36,401.0 $34,549.0 $33,402.0 $30,735.0 $30,096.0 $23,258.0
TOTAL NON-INTEREST BEARING LTL $14,592.0 $13,527.0 $12,712.0 $9,795.0 $7,995.0 $8,205.0 $7,026.0 $7,131.0 $6,095.0 $4,318.0
TOTAL LONG-TERM LIABILITIES $59,151.0 $54,944.0 $59,791.0 $53,637.0 $44,396.0 $42,754.0 $40,428.0 $37,866.0 $36,191.0 $27,576.0
TOTAL LIABILITIES $128,496.0 $126,762.0 $122,091.0 $112,240.0 $99,939.0 $98,144.0 $98,906.0 $90,014.0 $85,016.0 $70,758.0
COMMON STOCK $323 $332 $342 $352 $378 $393 $397 $413 $417 $423
PAID IN CAPITAL $2,362 $3,620 $3,692 $3,577 $3,803 $3,920 $3,028 $2,834 $2,596 $2,425
RETAINED EARNINGS $76,566 $72,978 $68,691 $63,967 $66,357 $63,660 $57,319 $55,818 $49,105 $43,854
ACCUMULATED COMPREHENSIVE INCOME (LOSS) -$2,996 -$587 -$1,410 $646 -$70 -$2,688 $3,864 $2,508 $1,053 $2,694
TOTAL SHAREHOLDER EQUITY $76,255.0 $76,343.0 $71,315.0 $68,542.0 $70,468.0 $65,285.0 $64,608.0 $61,573.0 $53,171.0 $49,396.0
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $204,751.0 $203,105.0 $193,406.0 $180,782.0 $170,407.0 $163,429.0 $163,514.0 $151,587.0 $138,187.0 $120,154.0

Target Corporation
FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 01-Feb-2014 02-Feb-2013 28-Jan-2012 29-Jan-2011 30-Jan-2010 31-Jan-2009 02-Feb-2008 03-Feb-2007 28-Jan-2006 29-Jan-2005
Sales $72,596 $71,960 $68,466 $65,786 $63,435 $62,884 $61,471 $57,878 $51,271 $45,682
Credit card revenues $0 $1,341 $1,399 $1,604 $1,922 $2,064 $1,896 $1,612 $1,349 $1,157
TOTAL OPERATING REVENUES $72,596.0 $73,301.0 $69,865.0 $67,390.0 $65,357.0 $64,948.0 $63,367.0 $59,490.0 $52,620.0 $46,839.0
COST OF GOODS $51,160 $50,568 $47,860 $45,725 $44,062 $44,157 $42,929 $40,366 $34,927 $31,445
GROSS PROFIT $21,436.0 $22,733.0 $22,005.0 $21,665.0 $21,295.0 $20,791.0 $20,438.0 $19,124.0 $17,693.0 $15,394.0
SELLING, GENERAL & ADMINISTRATIVE EXPENSES $15,375 $14,914 $14,106 $13,469 $13,078 $12,954 $12,670 $11,852 $11,185 $9,797
DEPRECIATION & AMORTIZATION EXPENSE $2,223 $2,142 $2,131 $2,084 $2,023 $1,826 $1,659 $1,496 $1,409 $1,259
Credit card expenses $0 $467 $446 $860 $1,521 $1,609 $837 $707 $776 $737
Gain on receivables transaction -$391 -$161 $0 $0 $0 $0 $0 $0 $0 $0
G/L on early Exting. of lease relat debt $445 $0 $0 $0 $0 $0 $0 $0 $0 $0
TOTAL OPERATING EXPENSES $17,652.0 $17,362.0 $16,683.0 $16,413.0 $16,622.0 $16,389.0 $15,166.0 $14,055.0 $13,328.0 $11,793.0
INCOME BEFORE INTEREST AND TAXES $3,784.0 $5,371.0 $5,322.0 $5,252.0 $4,673.0 $4,402.0 $5,272.0 $5,069.0 $4,365.0 $3,601.0
INTEREST EXPENSE $681 $762 $869.0 $760.0 $804.0 $894.0 $668.0 $597.0 $532.0 $589.0
INTEREST INCOME $0 $0 $3 $3 $3 $28 $21 $25 $27 $19
INCOME BEFORE TAXES $3,103.0 $4,609.0 $4,456.0 $4,495.0 $3,872.0 $3,536.0 $4,625.0 $4,497.0 $3,860.0 $3,031.0
PROVISION FOR INCOME TAXES $1,132 $1,610 $1,527 $1,575 $1,384 $1,322 $1,776 $1,710 $1,452 $1,146
INCOME FROM CONTINUING OPERATIONS $1,971.0 $2,999.0 $2,929.0 $2,920.0 $2,488.0 $2,214.0 $2,849.0 $2,787.0 $2,408.0 $1,885.0
DISCONTINUED OPERATION (NET OF TAX) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1,313.0
NET INCOME $1,971.0 $2,999.0 $2,929.0 $2,920.0 $2,488.0 $2,214.0 $2,849.0 $2,787.0 $2,408.0 $3,198.0
Target Corporation
CASH $692 $654 $600 $583 $583 $562 $599 $813 $1,648 $2,245
SHORT-TERM INVESTMENTS $3 $130 $194 $1,129 $1,617 $302 $1,851 $0 $0 $0
ACCOUNTS RECEIVABLE $0 $0 $5,927 $6,153 $6,966 $8,084 $8,054 $6,194 $5,666 $5,069
INVENTORIES $8,766 $7,903 $7,918 $7,596 $7,179 $6,705 $6,780 $6,254 $5,838 $5,384
PREPAID ASSETS $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
DEFERRED INCOME TAXES $177 $193 $275 $379 $724 $693 $556 $427 $344 $344
Credit card receivables, held for sale $0 $5,841 $0 $0 $0 $0 $0 $0 $0 $0
Vendor income receivable $555 $621 $592 $517 $390 $236 $244 $285 $560 $428
Other Receivables $0 $395 $411 $405 $526 $433 $353 $278 $0 $0
OTHER CURRENT ASSETS $1,380 $651 $532 $451 $439 $473 $469 $455 $349 $452
TOTAL CURRENT ASSETS $11,573.0 $16,388.0 $16,449.0 $17,213.0 $18,424.0 $17,488.0 $18,906.0 $14,706.0 $14,405.0 $13,922.0
PROP, PLANT & EQUIP (GROSS) $45,780 $43,964 $41,531 $37,048 $35,765 $34,816 $31,982 $28,381 $25,214 $22,272
ACCUMULATED DEP $14,402 $13,311 $12,382 $11,555 $10,485 $9,060 $7,887 $6,950 $6,176 $5,412
PROP, PLANT & EQUIP (NET) $31,378.0 $30,653.0 $29,149.0 $25,493.0 $25,280.0 $25,756.0 $24,095.0 $21,431.0 $19,038.0 $16,860.0
Company-owned life insurance investments $305 $269 $371 $358 $319 $305 $578 $559 $524 $446
GOODWILL $151 $59 $59 $59 $59 $60 $60 $60.0 $60.0 $206.0
INTANGIBLE ASSETS $206 $165 $183 $164 $180 $171 $148 $152 $123 $0.0
Interest Rate Swaps $62 $85 $114 $139 $131 $163 $215 $23 $0 $0
Prepaid Pension Expense $0 $0 $0 $0 $0 $1 $394 $325 $752 $733
OTHER LONG-TERM ASSETS $409 $338 $249 $279 $140 $162 $164 $93 $93 $126
TOTAL LONG-TERM ASSETS $32,511.0 $31,569.0 $30,125.0 $26,492.0 $26,109.0 $26,618.0 $25,654.0 $22,643.0 $20,590.0 $18,371.0
TOTAL ASSETS $44,084.0 $47,957.0 $46,574.0 $43,705.0 $44,533.0 $44,106.0 $44,560.0 $37,349.0 $34,995.0 $32,293.0
ACCOUNTS PAYABLE $7,683 $6,468 $6,282 $6,067 $6,511 $6,337 $6,721 $6,575 $6,268 $5,779
ACCRUED EXPENSES $2,835 $3,471 $3,184 $3,039 $2,477 $2,282 $2,337 $2,195 $2,193 $1,633
ACCRUED TAXES PAYABLE $221 $272 $257 $144 $24 $0 $111 $422 $374 $304
Gift Card Liability $521 $503 $467 $422 $387 $381 $372 $338 $0 $0
Interest Payable $85 $91 $109 $103 $105 $130 $162 $122 $0 $0
Dividends Payable $272 $232 $202 $176 $127 $120 $115 $103 $0 $0
CURRENT PORTION OF LTD $1,160 $2,994 $3,786 $119 $1,696 $1,262 $1,964 $1,362 $753 $504
TOTAL CURRENT LIAB $12,777.0 $14,031.0 $14,287.0 $10,070.0 $11,327.0 $10,512.0 $11,782.0 $11,117.0 $9,588.0 $8,220.0
LONG TERM DEBT $12,622 $14,654 $13,697 $15,607 $15,118 $17,490 $15,126 $8,675 $9,119 $9,034
DEFERRED TAXES $1,433 $1,311 $1,191 $934 $835 $455 $470 $577 $851 $973
Other noncurrent liabilities $1,375 $1,439 $1,409 $1,479 $1,728 $1,619 $1,733 $1,347 $1,232 $1,037
Pension and postretirement health care $115 $170 $225 $128 $178 $318 $142 $0 $0 $0
TOTAL INTEREST BEARING LTL $12,622.0 $14,654.0 $13,697.0 $15,607.0 $15,118.0 $17,490.0 $15,126.0 $8,675.0 $9,119.0 $9,034.0
TOTAL NON-INTEREST BEARING LTL $2,923.0 $2,920.0 $2,825.0 $2,541.0 $2,741.0 $2,392.0 $2,345.0 $1,924.0 $2,083.0 $2,010.0
TOTAL LONG-TERM LIABILITIES $15,545.0 $17,574.0 $16,522.0 $18,148.0 $17,859.0 $19,882.0 $17,471.0 $10,599.0 $11,202.0 $11,044.0
TOTAL LIABILITIES $28,322.0 $31,605.0 $30,809.0 $28,218.0 $29,186.0 $30,394.0 $29,253.0 $21,716.0 $20,790.0 $19,264.0
COMMON STOCK $53 $54 $56 $59 $62 $63 $68 $72 $73 $74
PAID IN CAPITAL $4,470 $3,925 $3,487 $3,311 $2,919 $2,762 $2,656 $2,387 $2,121 $1,810
RETAINED EARNINGS $12,599 $13,155 $12,959 $12,698 $12,947 $11,443 $12,761 $13,417 $12,013 $11,148
ACCUMULATED COMPREHENSIVE INCOME (LOSS) -$1,360.0 -$782.0 -$737.0 -$581.0 -$581.0 -$556.0 -$178.0 -$243.0 -$2.0 -$3.0
TOTAL SHAREHOLDER EQUITY $15,762.0 $16,352.0 $15,765.0 $15,487.0 $15,347.0 $13,712.0 $15,307.0 $15,633.0 $14,205.0 $13,029.0
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $44,084.0 $47,957.0 $46,574.0 $43,705.0 $44,533.0 $44,106.0 $44,560.0 $37,349.0 $34,995.0 $32,293.0

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Financial Ratio Analysis Part 1: Assessing

Financial Statement Analysis

Professor Charles E. Wasley

Prof. Charles E. Wasley 1

2) To appreciate the economic insights into a firms profitability and

3) To appreciate the economic meaning of each of the underlying

4) There is a spreadsheet along with the course lecture notes the

Trend analysis (i.e., time-series analysis):

Common-size statements (i.e., cross-sectional analysis):

Financial ratio analysis:

While the above techniques may seem rudimentary, they

The process of expressing financial statement numbers as

Prof. Charles E. Wasley 4

Are designed to answer the question

Prof. Charles E. Wasley 5

ROE measures the rate of return on common

ROE = Net Income - Preferred Stock Dividends

Prof. Charles E. Wasley 6

A firms sustainable growth rate is

Sustainable growth rate = ROE * (1

Prof. Charles E. Wasley 7

Operating ROA measures a firms ability to generate operating profits with

Prof. Charles E. Wasley 8

Operating ROA = NOPAT / Net Operating Assets.

Net Operating Assets = Operating Working Capital + Net Long-

Prof. Charles E. Wasley 9

Key Insight There are two drivers of

Operating ROA = NOPAT Margin x Net

#1) NOPAT Margin = NOPAT / Sales.

#2) Net Operating Asset Turnover = Sales / Net

Financial Leverage Effect = Net Financial Leverage x Spread.

Net Financial Leverage = Net Debt / Common Equity

Spread = Operating ROA - Net Interest Rate After Tax.

Prof. Charles E. Wasley 11

Prof. Charles E. Wasley 12

Insight into changes in the Financial Leverage Effect

Prof. Charles E. Wasley 13

A/R, Inventory, Operating Working Capital, PP&E

Prof. Charles E. Wasley 14

A/R Turnover = Credit Sales / Average A/R.

Tells us how soon Sales are becoming cash.

An alternative measure of the rate A/R collection is:

Economic interpretations of DRO:

Inventory Turnover = Cost of Goods Sold / Average Inventory.

Tells us how quickly inventory is selling.

Perhaps a more intuitive measure of the rate inventory is selling is:

Economic interpretations of days inventory held:

Operating Working Capital Turnover = Sales / Average Operating

Tells us how efficiently a firm is using its operating working capital

Operating Working Capital = Current Operating Assets Current

Prof. Charles E. Wasley 17

PP&E Turnover = Sales / Average Net PP&E.

Tells us how efficiently a firm is using its Net PP&E to generate

Prof. Charles E. Wasley 18

Tells us how quickly a firm is paying its suppliers.

Prof. Charles E. Wasley 19

Some users use the ending balance rather than the

As noted above there are alternative names for, and

Prof. Charles E. Wasley 20

The Cash Cycle measures the number of days a firm ties

Operating Cycle = Inventory days + A/R days.

Cash Cycle = Inventory days + A/R days - A/P days.

Prof. Charles E. Wasley 21