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Short-Term Liquidity

Autor:   •  December 8, 2018  •  Essay  •  991 Words (4 Pages)  •  96 Views

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Short-term liquidity

Targets current ratio is 1.60 an increase of 21% YOY. This indicates that target has sufficient short-term liquidity to meet its short-term, immediate debt obligations. Its quick ratio improved YOY by 41% however, there’s still indication that Target is unable to meet its current liabilities without liquidating its inventory, which is not uncommon in the retail industry since they rely primary on inventory sales that is typically harder to liquidate. Target also showed strong improvement in its liquidity with a 98% increase YOY in working capital, showing a significant amount of $7.1B in 2007. The cash flow liquidity ratio of 0.35 suggests that Target may have some difficulty using cash generated to cover its debt. This again is not unusual in the retail industry as they rely primarily on cash sales from their inventory and margins are usually based on volume sold. Targets has a low cash conversion cycle of 39 days which is in line with most of its competitors in the industry as most sales are cash sales from its end customers and need to replenish inventory as required hence the need to effectively manage this process in limited time. This further suggests that Target is effectively utilizing its short-term assets and liabilities to generate cash for the company.

Operating efficiency

Targets A/R turnover of 8.63 suggests it is efficiently utilizing its assets and collects on credit that it issues to its customers. Its inventory turnover of 6.43 which is higher than the industry average further suggests effective management of operations which has led to strong sales for the retailer and which may likely yield higher returns. The payables turnover decreased by 5% YOY, though a slight decrease, this suggests that Target is able to pay its suppliers quicker and as such can be seen as an indication of improved financial conditions for the retailer. Targets fixed asset turnover declined by about 6% YOY to 2.55 which indicates they have invested more in their fixed assets as was reflected in the increase in their reported investment in PPE and other fixed assets which increased YOY by about 13%. The turnover however by industry standard still reflects a satisfactory use of its fixed assets to generate revenue. Its total asset turnover declined slightly by about 3% YOY and remained low in relation to the industry even though sales revenue increases. This signals that the retailer may be over-invested in assets and may be experiencing slow inventory sales.

Capital structure and long-term solvency

Target’s capital structure indicates that the company is adequately funded however, its debt ratio of 0.66 suggests that company is utilizing more external debt than funds from its owners in its capital financing structure which may pose higher financial risk to the company and to investors. This

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