Common-sized financial statements show line items as a percentage of one common figure. These financial statement analyses make it easier to analyze a company over time and compare it with competitors or peers (Porter & Norton, 2017). The analyses also help investors detect trends that a raw financial statement may not reveal. For the balance sheet, an investor can assess and determine an optimal capital structure for a give industry and compare it to the company being analyzed. This can help conclude whether the debt level is too high, surplus cash is being retained on the balance sheet, or inventories are growing excessively. An investor can capture substantial changes at a company. Rapid decreases or increases can be readily observed, including a rapid decline in reported gross profits during one financial year.

The analysis also offers insight into the different strategies firms follow. For example, one firm may be ready to sacrifice margins for market share, making total sales bigger at the expense of gross, net, or operating profit margins. Besides, this analysis type minimizes bias that may happen and permits for the analysis of an organization over different periods (Kristanti & Herwany, 2017). This analysis can show the percentage of sales for the cost of goods sold and how the value changes over time. predictions for future common figures such as profits and revenues can also be made.

Comparing Target Corporation with Walmart’s common-sized financial statements

Target Corporation’s annual report for 2021 and 2020 are extracted from the 10-K report. The company’s common-sized income statement shows that gross margin was 28.38% of total sales in the year ending January 30, 2021, and 28.87% for the year ending February 1, 2020. In comparison, Walmart’s gross margin for the same periods was 24.3% and 24.1%, respectively (SEC, 2021).

Target Corporation’s common-sized balance sheet shows that noncurrent assets totaled to 59.5% and 69.84% of the total assets as at January 30, 2021 and February 1, 2020, respectively. In comparison, Walmart’s noncurrent assets for the same period totaled to 64.33% and 73.87% of total assets, respectively (SEC, 2021).

Finally, Target Corporation’s percentage of cash for investing activities in relation to cash from operating activities is 24.6% and 41.4% for the year ending 2020 and 2019, respectively. In comparison, Walmart’s data for the same period and items indicate 27.9% and 36.1%, respectively (SEC, 2021).

Implication

Target Corporation has a stable financial condition based on the common-sized financial statement analysis. For example, the company has a larger percentage of its assets being long-term types for the two periods. The company also invests significantly in various ventures using its cash. However, the percentage of investment has reduced from 2020 to 2021. Target Corporation displays a better financial performance in terms of gross margin percentage of total sales than Walmart. This implies that the company makes more profit from its sales than Walmart. Generally, from 2020 to 2021, Target Corporation has seen reduced percentages for the three analyzed items from the financial statements (gross margin/total sales; long-term assets/total assets; cash for investing/cash from operations).

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Analysis of gross margin Gross margin is the amount of money which is retained by a company after incurring direct costs which are associated with manufacturing and selling of a product If the gross m... View the full answer