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 and Jan ratios.
To illustrate benchmarking, we will calculate Target’s Jan ratios and will compare to Walmart’s Jan 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 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 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)
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 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)
Jan. 2005
Jan. 2004
Target TIE
6.32
6.30
Walmart TIE
17.54

9. Profitability Ratios 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)
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)
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
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%
*Since Assets = Liabilities + Equity, 1 – debt ratio = equity/assets meaning for Walmart:

14. Some DuPont ROE Comparisons
Trailing 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 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 Jan. 2005 Stock Price # 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