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Performance of a Public Company

I need help with the following problems

1) Assess the organizational performance of a public company using financial statement and ratio analysis. Use at least three ratios & explain why you chose them & what they mean in your assessment.

2) Discuss valuation techniques as applied to external & internal investment strategies

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I need help with the following problems

1) Assess the organizational performance of a public company using financial statement and ratio analysis. Use at least three ratios & explain why you chose them & what they mean in your assessment.

I have taken Target Corporation for the assessment. Target Corporation was founded in Minnesota in 1902. It is the sixth largest retailer in the United States and is ranked 27th on the 2005 Fortune 500. Target is performing very well in the market place though its stock's performance is subdued. The company operates over 1,450 stores in 47 states in USA.
(Wikipedia)

Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. The three ratios which have been considered are:

Profitability
Profitability ratios try to measure how profitable the firm is. Note that their success in this endeavor depends on how accurately the financial statements reflect reality. We have considered the Net Profit Margin ratio:
Net Profit Margin = Net Income available to Common Shareholders / Sales
This indicates a company's financial health and how effectively the firm is being managed to earn a satisfactory profit and return on investment. Target's net profitability has increased to 4.68% in 2007 from 4.3% in 2004 but its less than 2005 levels. (For details refer excel file). Thus it has grown marginally and needs further improvement.

Liquidity Analysis

Liquidity is a company's ability to meet its maturing short-term obligations. Liquidity is important for conducting business activity especially in times of adversity such as when operating losses occur due to economic conditions or drastic price increases of raw materials or parts. Liquidity must be sufficient to cushion such losses. If not, serious financial difficulties may result. The Target has an average current ratio of 1.32 in 2007 so its liquidity position seems to be average and it has declined.
(See Excel file-Target 2007)
Debt Management

Debt Management ratios measure the utilization of financial leverage and capital structure of the firm and, indirectly, the level of risk the firm faces.

The debt management ratios, measures the company's ability to meet its obligations as they become due. Target has lower leverage ratio than the industry, which indicates high safety. As a lender you will s prefer to see a low debt ratio because there is a greater cushion for creditor losses if the firm goes bankrupt. Its debt equity ratio is low. This is positive for the company. Lower debt ratios (Debt equity is 0.55 in 2007 which has reduced from .91 in 2004), which indicate high safety.

2) Discuss valuation techniques as applied to external & internal investment strategies

Let us discuss certain valuation techniques:

Free cash flow or WACC approach gives the firm's value of assets or stock.
The use of the DCF techniques can be extended to value a business firm. In the valuation of a firm a financial analyst usually assumes a constant debt ratio. The firm can be valued using Free Cash Flows and WACC. (Weighted average cost of capital)
Free cash flows are the funds that can be distributed to investors after the operating costs have been deducted. Operating costs are the costs incurred while running the business and making a product or ...

Solution Summary

2195 words on valuation techniques and using ratio analysis in performance evaluation.

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