Target And Costco Financial Statement Analysis

 Analysis of financial statements commonly includes operating income as discussed in Module 5 and operating assets as discussed in Module 6. For each point of analysis, compare across the two companies and over the recent three-year period. Additional information can be found in the disclosure notes of annual reports, MD&A, or on company websites.

1.     Accounts Receivable.    The following provides some guidance from analyzing a companys accounts receivable.

  Are sales primarily on credit or is a typical sale transacted in cash? Consider the industry and the companies business model.

  What is the relative size (percentage) of accounts receivable to total assets? How has this changed over the recent three-year period?

  Determine the accounts receivable balance relative to gross accounts receivable.

  What did the company record for bad debt expense?

  Compute accounts receivable turnover and days sales outstanding for the recent three years on income statements. One will need to obtain additional balance sheet information to be able to compute average balances for the denominator. Consider the current economic environment and the companys competitive landscape. Would one expect collection to have slowed down or sped up over the three years?

  Does the company have any large customers that increase its credit risk?

 

2.     Operating Expenses.    Review and analyze the income statement items.

  Prepare a common-size income statement by dividing each item on the income statement by net revenues.

Target And Costco Financial Statement Analysis

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  Compare the common-sized values for the three years presented in income statement. What changes are there, if any? Are there any material changes explained in the MD&A? Do the explanations seem reasonable given the current economic environment?

  Does the company have discontinued operations? If so, how will this impact future operation? 

 

3.     Inventory.    The following provides some guidance for analysis of a companys inventory.

  What is inventory for the company? Does the company manufacture inventory? What proportion of total inventory is raw materials? Work-in-process? Finished goods?

  What inventory costing methods are used in the two companies?

  What is the relative size (percentage) of inventory to total assets? How has this changed over the recent three-year period?

  Compute gross profit margin in percentage terms. Consider the current economic environment and the companies competitive landscape. Can we explain any changes in gross profit levels? Read the MD&A to determine senior managements take.

  Does the company face any inventory-related risk? What has been done to mitigate the risk? Read the MD&A.

 

4.     Tangible Assets.    The following provides some guidance for analysis of a companys long-term (tangible) assets.

  Are tangible assets significant for the companies? What proportion of total assets is held as tangible assets (PPE)?

  Compare the two companies depreciation policies. Do they differ markedly?

  What is the relative size (percentage) of tangible assets to total assets? How has this changed over the three-year period?

  Did the company increase tangible assets during the year? Did the company acquire assets via purchases or a merger or acquisition?

  Compute PPE turnover for all three years reported on income statement.

  Compute the average useful life of PPE and percentage used up.

  Are any assets impaired? Is the impairment charge significant? Is the impairment specific to the company or is the industry experiencing a downturn?


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