BUS3110 Accounting Financial Analysis Report for Significant Trends

Identifying vertical analysis of balance sheet while significant trends and comparing with industry standard:

The vertical analysis could help in detecting significant tend of the company and compare with industry standard. the asset section of the balance sheet mainly comprises of current and non-current assets, which could be used in detecting the financial trend of the company. The evaluation helps in detecting that current asset of the company has relatively improved in 2015, as compared to 2014, while relevant decline in the composition of non-current assets is detected. Increment in value of cash and cash equivalents and inventory can be detected from vertical analysis, while decline in value of other current assets and assets from discontinued operations is also detected. The current assets have increased from 33.09% to 35.210%, while indicating an incremental asset of the organisation. Moreover, from the valuation trend analysis of property and equipment has mainly declined from 63.03% to 62.63% in 2015. This relevantly indicates that the valuation of noncurrent assets has declined over the period of fiscal year. The valuation of industry standard cash and cash equivalent is relevantly high, as company’s value is at 10.05%, while industry average is 4.20%. Additionally, investor level of the company has 21.36%, while industry average is at 19.56%. Lastly, the total current asset of the organisation is relatively high in comparison with industry average, which indicates its high financial position (Olson & Wu, 2017, pp.119-132).

The liability section of the company comprises of current liabilities and non-current liabilities, which improved over the period of fiscal year. The non-current liabilities of the company have declined from the level of 37.50% to 36.47%, while is a positive attribute of the company, while the current liabilities have increased from 28.50% to 31.35%. Moreover, the retained earnings of the company have decline over the period of fiscal year from 23.42% to 20.34%, which relatively indicates the declining retained profits of the organisation. In addition, the industry average of accounts payable is relevantly high, where value of the company is at 18.42%, while industry average is 13.37%. In addition, accrued expenses of the company is relatively high from industry average, where company value is 10.52% and industry average is 10.40%. The total liabilities are at 67.82%, while industry average is 60.52%, which indicates the increased obligations of the organisation.

Identifying significant trends of income statement with horizontal analysis:

The evaluation of income statement with the help of horizontal analysis mainly helps in detecting the financial performance of the company. The company’s sales have relatively declined from 1.88% to 1.61%, which indicates that increment in sales value has not increased as compared to previous fiscal year. In addition, cost of sales of organisation has mainly declined over the period, from 2.48% to 1.40% in the current year, which indicates the low-cost sales incurred by the company. This relevantly allows the organisation to increase its gross profit margin from 0.47% to 2.10% in the current fiscal year. This relevantly indicates the financial expenses of the company has declined over the period. Moreover, the selling and administrative expenses of the company has declined over the period from 1.46% to -0.07%. Additionally, the depreciation has also declined over the period from 6.66% to 3.95% in the current fiscal year. The continuing operations before interest and taxes has declined over the period from -12.98% to 21.94%, which indicates that profits of the company mainly increased over the period due to low expenses incurred from operations (Yu et al., 2014, pp.296-302).

The net interest expenses of the company have declined exponentially in comparison with other years, which has declined from -15.92% to -31.18%. This decline in net interest expenses mainly indicate that financial cost of company has declined over the period, which helps in improving financial position of the company. Furthermore, provision for income taxes has mainly improved expenses from previous fiscal year from -15.63% to 33.06%. This high provision of the organisation for taxes indicates the financial liability of the company, which will reduce net profits of the company. Additionally, the net earnings from continuing operations has increased exponentially from -9.09% to 35.61%, which indicates the improvement in financial performance of the company over the fiscal years. The horizontal analysis indicates that financial improvement in cash inflow has increased, while expenses has decreased over the period of three fiscal years. Lastly, the improvement in net earnings can be seen by the company over the fiscal year, which indicates financial improvement of the company. This financial improvement mainly indicates the financial stability of the company, which improved its net earnings. 

Identifying significant trends of balance sheet statement with horizontal analysis:

The financial trend of Target can be identified from the balance sheet statement, which indicates its financial viability. The percentage change in cash and cash equivalents has mainly declined from 217.99% to 83.08%, which indicates that cash position of the company declined. The inventory level has increased from -5.25% to 3.85% over the period, which mainly indicates increased accumulation of the company. The other current assets of the company have declined over the period, which has declined from -1.80% to -44.02%. This decline in current asset components in balance sheet has mainly reduced total current asset value of the company from 17.72% to 3.71%. This indicate that increment in current assets has not increased relevantly from 2014 to 2015, as compared to 2013 to 2015. The property and equipment net value has declined over previous fiscal year, where from 2013 to 2014 has declined by -17.29% to -2.83% in 2014 to 2015. This decline in value mainly reduced total assets of the company from -7.59% to -2.21%, which indicates reduction in financial position of the company (Chikoto & Neely, 2014, pp. 570-588).

The liability section of the company has mainly increased over the period of three fiscal years, which indicates its rising obligations. Total current liabilities of the company have mainly increased from the levels of -8.15% to 7.55% over the period of three fiscal years, which indicates that current liabilities of the company have increased over the period. In addition, from the evaluation of horizontal analysis the overall noncurrent liabilities of the company have declined adequately. Moreover, the total liability of the company has increased over the period of, which has improved from -40.5% to 0.48% and indicates that financial obligation of the company has increased exponentially. This relevantly states that financial position of the company has deteriorated over the period.

Moreover, the retained earnings of the company have declined exponentially over the period of three rascal years, which mainly reduced the horizontal analysis value from -23.45% to -15.10%. This relevantly indicates that intensity of the value reduction has declined from 2013 to 2015. This decline also reduces the total shareholders’ investment value, which is due to the decline in retained earnings and common stock of Target (Investors.target.com, 2018).

Ratios

Measure of Liquidity:

Working capital:

The working capital of the Target has mainly declined over the period of 2014 to 2015, where the values has declined from $1,888 to $1,508. This relevantly indicates that working capital of the organisation has mainly declined, which blocks financial capability of the company. The working capital of the company declined due to high accumulation of inventory by the company over the fiscal year. This decline in working capital has obtained from current assets less the current liabilities of the company, which allows investors to detect financial stability of Target. In this context, researchers stated that working capital valuation indicates financial position of the company.

Current ratio:

The current ratio of Target has mainly declined over the period from 1.16 to 1.12, which indicates that current asset accumulation of the company is low. This decline in current ratio indicates that company does not have adequate assets, which could support its financial obligations. Moreover, the companies overall current assets are higher than industry average, as it indicates financial performance of Target. This relevantly indicates that operational capability of the company has declined over the period of fiasco year, when compared from 2014 to 2015. Researchers mentioned that current ratio evaluation mainly allows investor to analyse financial performance of the company, which might help in improving their investing criteria.

Quick ratio:

The quick ratio of the company has mainly improved over the period of one fiscal years, which indicates financial position of Target. The quick ratio of the company has mainly declined from the level of 0.46 in 2014 to 0.44 in 2015. This reduction in quick ratio indicates that financial position of the company has deteriorated, where the company has not maintained adequate current asset. The industry average is mainly at the levels of 0.28, which is relevantly lower in comparison to the actual value of Target. This indicates that financial position of the company reflects its financial health to survive in the competitive market.

Inventory turnover:

The inventory turnover ratio has mainly improved over the period of one fiscal year, which indicates its financial performance. The inventory turnover ratio has increased from the level of 6.07 to 6.16, which indicates management efficiency to clear the inventory levels. Moreover, the current level of inventory turnover ratio of the company is not adequate and does not fall under the industry average. The average industry value is mainly at the level of 8.92, while the value of Target is at 6.16. This indicates that performance of the company in accordance with industry average is not adequate and needs to be improved over the period (Floyd, Li & Skinner, 2015, pp.299-316).

Average days to sell inventory:

From the overall valuation of Average days to sell inventory has mainly declined by 1 day from 2014 to 2015, which indicates reduction in selling capability of the company. The Average days to sell inventory has mainly declined from 60 days in 2014 to 59 days in 2015. This mainly reflects the overall valuation of the company and its declining capability to support its inventory levels. The overall valuation is mainly conducted by declining 365 days from the inventory turnover ratio of the company. This relevantly reflects the actual selling days of investors, which is been maintained by the company. Hence, the decline in inventory clearance capability indicates the reduction in demand of company products. 

Measures of Solvency:

Debt to assets:

The debt to assets of the company has mainly increased from the level of 0.66 in 2013 to 0.68 in 2015, which indicates the rising insolvency position of Target. This relevantly indicates that high debt is been accumulated by the company, which will not help in supporting its financial performance. The accumulation of debt will also increase financing cost of the company, which will reduce its net income. Hence, the increment in debt accumulation mainly indicates the declining financial stability of the company due to its rising finance cost. Researchers mentioned that debt to asset formulation mainly divides total liability of the company with total assets to determine debt, which is been used to buy its assets.

Debt to equity:

Debt to equity position of the company has mainly increased over the period, where values of 1.94 in 2014 increased to 2.11 in 2015. This reflects financial defiance of the company, where the company is accumulating debt to support its financial requirements. The total liability of the company has mainly increased in comparison with its total stockholder’s equity, which indicates reduction in financial attribute of the company. The industry average is mainly at the levels of 1.53, while the actual value of Target is high. This depicts that declining financial capability of the company has been declining due to the accumulation debt to conduct its operations (Sun et al., 2014, pp.41-56).

Number of times interest earned:

The number of times interest earned of the company has mainly increased over the period, which indicates the financial capability of company to support extra debt and financial cost. The times interest earned of Target is mainly at the levels of 9.11 in 2015 in comparison with 5.14 in 2014. This mainly indicates that financial performance of the company has mainly inclined over the period, which increases times interest earned. This increment in times earned mainly states that Target can obtain additional debt, which could support its operational capability. In this context, some researchers mentioned that lenders use times interest earned to identify financial capability of the company to acquire more debt for supporting their capital requirements.

Plant assets to long-term liabilities:

Plant asset to long-term liabilities of the company has mainly increased over the period of 1 fiscal year. This rising value mainly indicates that Plant asset to long-term liabilities has increased over the period, which might indicate the use of debt to purchase plant and other assets. The Plant asset to long-term liabilities has mainly increased from 2.05 to 2.11, which indicates that financial stability has mainly increased. The division of net plant assets by long term liabilities can help in detecting the Plant asset to long-term liabilities of Target. Hence, it could be detected that long-term liabilities support net plant asset of Target.

Measures of profitability:

Net Margin (return on sales):

Net profit margin of the company has mainly inclined from -2.25% in 2014 to 4.56% in 2015, which helps in depicting its financial capability. The financial capability of the company has mainly improved over the period, where profits of the company has increased exponentially in 2015, where loss has incurred by the company in 2014. This increment in net margin is due to the rising revenue and low expenses incurred by the company during the fiscal year. The financial performance mainly indicates Target has increased its Net profit during 2015, as compared to 2014, which has increased over the period (Olson & Wu, 2017, pp.119-132).

Asset turnover:

The asset turnover ratio has mainly has mainly increased over the period, where values has raised from 1.69 in 2014 to 1.81 in 2015. This increase in asset turnover ratio indicates that financial performance of the company has improved over the period. This increment in overall asset turnover ratio is due to the rising net sales, which is obtained by the company during the fiscal year. This states that financial performance of Target has relatively improved, which could be used by investors in making adequate investment decisions. Some of the researchers stated that asset turnover ratio is mainly used by investors in declining financial position of the company.

Return on investment:

The return on investment can mainly help in detecting financial performance and profitability of the company. The return on investment has mainly increased from -3.82% to 8.26%, which indicate financial performance of Target in 2015. This increment in overall return on investment is due to the high net profits incurred by the company. In addition, the decline return on investment in 2014 is due to the loss incurred by the company during the fiscal year. This was mainly possible when the overall expenses of the company declined in 2015 in comparison with 2014. Hence, the evaluation indicates that return generating capability of the company by using the average total assets has improved over the period of one fiscal year. 

Return on equity:

The return on equity of Target has mainly increased from -10.82% to 24.95%, which indicates the improvement in financial performance of Target. This increment in overall return on equity mainly indicates the financial performance of target due to high net profits. The industry average of return on equity is mainly at the levels of 15.07%, which indicates that financial performance of Target is relatively high in comparison with industry standard. This indicates that equity capital used by the company has relatively increased over the period, which indicates the efficiency of management in raising the level of net income. This relevantly indicates that Target’s return on equity is relatively high in comparison with industry standard.

Budgeting

Comparing actual amounts from FY 2015 to the budget:

From the overall evaluation difference in actual and budged amount of 2015 financial year can be seen, which indicates that budget on certain attributes have not adequately supported actual results of the organisation. The budgeted figures were relevantly higher, which resulted in the major difference in actual and budgeted amount. The difference in revenue or sales prediction was the main reason behind the changes in budgeted cost and net profits of the company. Declining actual sales in comparison with the budgeted sales mainly results in the reduced cost incurred in production. The difference in actual and budgeted revenue is -823 or -1.10%, which resulted in the decline in expenses and profits of the organisation.

The cost of sales has declined in comparison with the budgeted figure by -865 or -1.64%, which is a positive attribute, as the company used less materials to produce profits. The selling, general and administrative expenses has also declined in value, while comparing it with budgeted amounts. The selling, general and administrative expenses has a difference of -369 or -2.46%, which resulted due to low production of units conducted by the company. On the other hand, the depreciation and amortization value of the company has inclined, which indicates that valuation of the expenses was not conducted adequately. This relevant non-assumption of the revenue and other expenses resulted in decline of total expenses of the company. The difference in initial expenses is at the levels of -1,114 or -1.59%, which indicates that performance of the budget was not adequate, as it does not help the company in supporting the actual revenue and expenses of the company in 2015. Hence, it could be understood that budget prepared for 2015 was not adequate, as anticipation of sales were higher than expected, which resulted in blockage of essential resources (Andor, Mohanty & Toth, 2015, pp. 148-172).  

References:

Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: A survey of Central and Eastern European firms. Emerging Markets Review, 23, 148-172.

Chikoto, G. L., & Neely, D. G. (2014). Building nonprofit financial capacity: The impact of revenue concentration and overhead costs. Nonprofit and Voluntary Sector Quarterly, 43(3), 570-588.

Floyd, E., Li, N., & Skinner, D. J. (2015). Payout policy through the financial crisis: The growth of repurchases and the resilience of dividends. Journal of Financial Economics, 118(2), 299-316.

Investors.target.com. (2018). Investors.target.com. Retrieved 28 February 2018, from https://investors.target.com/phoenix.zhtml?c=65828&p=irol-reportsannual

Olson, D. L., & Wu, D. D. (2017). Data Mining Models and Enterprise Risk Management. In Enterprise Risk Management Models (pp. 119-132). Springer, Berlin, Heidelberg.

Sun, J., Li, H., Huang, Q. H., & He, K. Y. (2014). Predicting financial distress and corporate failure: A review from the state-of-the-art definitions, modeling, sampling, and featuring approaches. Knowledge-Based Systems, 57, 41-56.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Yu, Q., Miche, Y., Séverin, E., & Lendasse, A. (2014). Bankruptcy prediction using extreme learning machine and financial expertise. Neurocomputing, 128, 296-302.