Target Corporation Analysis

To understand a company’s finance position and value the company, investors always choose to go through its finance statements. In terms of total revenue and net income is the most directly way to start when analyzing a company’s finance statement. After look at the four statements, a process of evaluate, select, and interpret the data to assess the company’s present and future performance. It helps shareholders to determine the company’s stock prices and profitability. I choose two company that from different area. They are Target Corporation and General Electric Company.

First, having basic understand of two companies will helps us to evaluate the finance condition. Target Corporation is the second-largest discount store retailer in the United States. Founded by George Dayton and headquartered in Minneapolis, Minnesota. Target operates 1803 locations throughout the United States.  At the last day of February, Target announced its fourth quarter and full-year 2016 results. “The Company reported GAAP earnings per share (EPS) from continuing operations of $1.46 in fourth quarter and $4.58 for full-year 2016, compared with $2.31 and $5.25 in 2015, respectively.” Citing from the Business Wire EPS data, we can indicate the return of investment and show us the per share profitability of the company. The price-earnings (P/E) ratio is 9.79, it represents share price compare with EPS. The price to book (P/B) ratio is 2.8, it shows the relation between the market’s valuation of company and the company’s intrinsic value. Operating Margin is compares the amount of a company earns before interests and taxes with the amount of the growth in sales, which is 7.15%. The high operating profit margin is direct indicator that Target is managing appropriate cost and the cost general sales than cost rising at a faster rate. The current ratio that measure a company’s ability to pay short-term and long-term obligations. The current ratio of Target is 0.94, showing Target Corporation has ability to paying its obligation, also means the company has a larger value of asset relative to its value of liabilities. The interest coverage ratio measures how many times over a company could pay its current interest payment with it available earnings. The interest coverage ratio in 2016 is 8.08, which is high level. If the company growth, it may have to borrow further to survive future financial hardship. An interest coverage ratio higher than 2.5 is always considered a warning sign that not to go further. It much better to invest in capital assets or held as reserves for emergencies.

Here comes to the General Electric Corporation, an American multinational conglomerate corporation incorporated in New York, headquartered in Boston, Massachusetts. The price-earnings (P/E) ratio is 33.34, which is higher than Target Corporation of its current share price relative to its per-share earnings. Also, it means that investors willing to pay more at per dollar of earnings. The price to book (P/B) ratio is 3.43, as an accounting measure that is based on the historic cost data, reflect the company’s future cash flow. Operating Margin of GE is 11.36%, showing that GE manage expense is more efficient. In other words, large amount of revenue turn to GE and it can cover its expenses except for taxes and interest. The current ratio of GE is 1.85, which is higher than Target, reveals that a sense of efficiency of company’s operating cycle, also it can see as how fast that GE can turn its product to cash. The GE’s interest coverage ratio in 2016 is 2.79, which is common ratio that the current interest payment obligation ability of GE.

When we use DCF model, we want to go through revenue growth for forecast to estimate the free cash flow will produce in the future. DCF as the most broadly used valuation technique, because of the value created by a business directly and precisely. Also, it can be use at almost scenarios and many cases. First, I start with Target Corporation’s free cash flow in 5 years, before the impact from debt and cash. Gross profit is 21788 million, the total revenue minus cost of revenue. The sum of research and development, selling, general administrative expense, income from investments is operating expense. The operating profit is gross profit minus operating profit. The result minus other income and interest expense is income earned before taxes. Finally, get the net income of 3663 million for 2016. After review the total revenue of 2014,2015,2016, we get the top line rate, we can forecast the next 10 years’ total revenue and make direction for future investment. Working capital is calculated as the current assets minus current liabilities, it means the cash in a business that use for daily operation, giving the net working capital is 600 million in 2016. The working capital increases as sales revenue increase, attract more inventory investment will be one of the way to match the Target’s revenue growth. After sum of net income, non-cash change, capital expense, working capital inventory and net borrowing, we get the free cash flow to equity of 4710 million in 2016. There are 2 ways to estimate a terminal value of cash flows, I choose to use to value the company as perpetuity using the Gordon Growth Model. The terminal value is calculated as the final projected year cash flow multiple one plus the long-term cash flow growth rate. Now we can choose whether to buy Target Corporation Shares by estimate the fair value for company’s shares. If the shares are trading at a lower value than this, it shows a buying opportunity for investor.