Financial statement analysis and credit risk analysis. Case Solution

Average collection period:

.According to Target in 2008, it took 1550 days to receive its payment; this means that most of the cash of company stuck in receivables. The management does not have to sell on credit.

Day’s inventory held:

This ratio is used to find out how quickly company is converting their inventory into sales. According to the Target, the days inventory held was 59 days in 2008, it shows that Target takes 59 days to convert inventories into sales. The management has to decrease this ratio as days inventory held increasing; company has to pay the expense of holding inventory like rent.

Day’s payable outstanding: 

This ratio determines how long a company will take time to pay their suppliers. According to the company, day’s payables are outstanding at 59 for 2008, which is lower than receivable collection period. This means that, company is paying their suppliers earlier than they are getting cash from their creditors.

Cash conversion cycle:

Cash conversion cycle is used to find the effectiveness of company’s management and overall health of the company. This measure calculates how fast the company can convert cash on hand into inventory, and account payables through sales and account receivables, and then back into cash. As company’s cash’ conversion cycle was 1551 days in 2008 and 1400 days in 2007. CCC is higher, which means that company is facing liquidity problems.

 Activity Ratios

This measurement indicates the efficiency of management’s ability to employ current assets and current liability to generate cash from company.

Accounts receivable turnover:

It is an activity ratio, which measures how effectively firm uses their assets. It measures the number of days in which company will collect their total receivables. The accounts receivable turnover of Target is 0.235 in 2008. A lower turnover means higher days, so it means that Target required more days to collect their all receivables

Inventory turnover:

Inventory turnover measures the number of days required through, which company covert their inventories into sales. Lower turnover shows the higher number of days. Hence, in case of Target, inventory turnover is higher than the receivables. This means, company required few days to convert inventories into sales.

Payables turnover:

This turnover measures the number of days in which company pays their liability. According to Target, payable turnover is higher than the receivable’s turnover in both years; which means company is paying their liability earlier than when they collect their all receivables.

Fixed asset turnover:

It measures how company is generating their sales from use of fixed assets investments. A higher fixed assets turnover investment indicates that company has efficiently utilized its fixed assets in order to generate sales. According to Target, fixed asset turnover is 3 in both years. As fixed assets turnover is higher, it means company is efficiently utilizes its fixed assets so that company can generate more sales.

Total asset turnover:

 It measures how company is generating their sales from the use of total assets investments. Total assets turnover of Target Company is 1.4 in 2008 and 1.5 in 2007. It indicates that company is effectively utilizing total assets in order to generate sales. Leverage Ratios:

Companies rely on mixture of debt and equity to finance their operations. A leverage ratio is one of the financial measurements, which look at the percent of debt (loan) in capital structure.

 Debt ratio:

This ratio measures a company’s capital structure, financial solvency, and degree of financial leverage. The debt to capital ratio should not be more than 50%. The higher the debt ratio, the more company has debt as compared to equity. According to Target, debt ratio of the company is 65% in 2008; which indicates that company has more debt ratio than equity ratio. Target has financial risk as company has more financial leverage……………….

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