Independent Auditors Report Analysis To The Directors Of Target Supermarket Limited (Term Paper Sample)

Independent Auditor’s Report Analysis To The Directors Of Target Supermarket Limited
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Independent Auditor’s Report Analysis To The Directors Of Target Supermarket Limited
Ellingwood and Awesome, LLC audited the financial statement of Target Corporation for the year ended 2016-01-30. The audit scope comprised of investigation of the balance sheet, income statements, statements of cash flows and statements in changes of equity. This report provides analysis of the financial position of the company, how it as changed in the period and recommendations.
Target Corporation made a net income after tax of 1.9 billion us dollars, a loss of 1.6 billion dollars and a profit of 3.3 billion dollars. The company’s net income after tax increased by almost 4 billion U.S. dollars in the year 2016 to 3.3 billion dollars. This increase can be attributed to a 620 U.S. million dollars decrease in unusual expenses in the year ending January 2016. Total revenue as also increased consistently in the three years to 7.3 billion 1n 2016 as compared to 7.2 billion in 2015 and 7.1 billion in 2014. The gross profit increased in the three years by 100 million dollars in 2015 and 444 million in 2016. On the other hand operating expenses increased substantially in 2015 but increased with a much lesser margin in 2016. Dividends per share increased from 1.65 in 2014 to 1.99 2015 and 2.2 U.S dollars in 2016. The company also bought back some of its shares as it increased to in 2013 from 2015 (Boritz & No, n.d.).
The profitability ratios of 2016 were higher than those of the previous 2 years. Gross profit ratios for the three years were determined by dividing the gross profit by net sales. Gross margin ratios were 30%, 29% and 30% in 2016, 2015 and 2014 respectively. This ratio is healthy and stable indicating that the company has high profitability that is sustainable. The increase in gross profit margin may be attributed to a reduction in discount offered to customers, better product mix and increase in website sales. In 2014 the company online sales were adversely affected by a bleach of its customers database a problem that the company had fully recovered from by 2015. The improvement of the financial profitability of the business may also be due to a reduction in the company’s selling, general and administration expenses (SGA) by approximately 0.3% in 2016. Therefore, the company’s SGA margin increased improved further in 2016. This is because of a decline in marketing expenses and adoption of cost saving practices. However, this improvement was undermined by increased labor costs and a high rollout of Red card users. Target Corporation had an earning before interest, tax, depreciation and amortization (EBITDA) margin of 9.4%. This was a result of a reduction in costs in the year ended January 2016. Net profit margin was also calculated by dividing the net profit after-tax with the net sales. The net profit margin for 2014, 2015 and 2016 were determined as 3%, 2% and 5% respectively this indicates that the company has improved its efficiency and thus its profitability. After-tax return on equity (ROE) ratio was constant at 12% in 2014 and 2015 but more than doubled in 2016 to 26%. This indicates an increase of the share of the net profit after tax that is available to the owners of the company. This ratio also indicates an increase in the overall profitability of the business and soundness of the financial position of the company (2016).
The current ratio was determined by dividing current assets by current liabilities for the three years. It was determined as 0.91:1, 1.16:1 and 1.12:1 for 2014, 2015 and respectively. This falls short of the recommended 2:1 ratio and indicate that the company may have difficulties in meeting its short-term liabilities. However, this ratio has been improving and indicates that the company’s financial position is improving. The liquidity test was conducted by dividing cash and other liquid assets by the current liabilities. This was determined to be30% and indicates that the company has not met the prescribed threshold. Alternatively, it indicates the company has over utilized its liquid asset by buying of stock or prepaid expenses.
The results of the analysis reveal that the company is growing in terms of sales, profits and assets. The increase in the net profit ratio shows a growth in the company’s profit. The acquired ratios determined the stable growth of the company in the three consecutive years. This portrays that the company may continue to grow in the subsequent years provided they maintain their current profitability levels. However, the company should exercise caution in reducing the discounts allowed to customers so as to maintain and increase the profit margins as this could reduce customer satisfaction and lead to a reduction in sales.
The liquidity ratio is below the recommended standard of 2:1.This ratio indicates that the business might experience some difficulties in settling some of its short-term liabilities. However, this ratio has been increasing reflecting an improvement in the financial position of the business regarding settling its short-term obligations. The reduction in the marketing expenses and savings on the cost of sales improved the Company’s SGA and therefore in a good position to satisfy the upcoming needs of the customers.
The increased profits in the three years as indicated by the increasing net profitability rations showed an increase in the net sales which increased the revenue. The net sales over the three years show a rising trend and this signposts increased commodity consumption by customers. The return on equity ratios showed no growth in both the year 2014 and 2015 at 12% and doubled in 2016 indicating an increase in the dividends paid per share. This indicates that the value of shares for the company is likely to rise. This is significance to the company as its shares are attractive to investors and are highly demanded. This eases the process of searching for more capital through the issuance of more shares into the market.
It is recommended that the management should pinpoint the source of the increase in sales that lead to the increase in profits. It should major its resources and efforts...