Data Source
The considered financial data of the selected company, Target, was taken from its official website. The resource contains all necessary reports and summary tables open for everyone (Annual reports & proxy info, 2023). Thus, it became possible to make a precise assessment and detailed examination of the accounting side of the company’s existence and search for potential problems. To begin with, the main items of Target’s liabilities, specified in its accounting file, are detailed.
Background
Target Corporation is a well-established American retail company with a history dating back to 1902. It runs a chain of retail stores that sell a variety of commodities, such as clothing, electronics, food, and home goods. The latest available data shows that the company has a significant presence in the United States, serving millions of customers annually through its physical stores and online platforms.
Components of Target’s Current Liabilities
Thus, three main items for the last fiscal year can be identified: accounts payable, accrued and other current liabilities, and a portion of long-term debt and other borrowings. Specific amounts are $13,487, $5,883, and $0.13 million, respectively (Annual reports & proxy info, 2023). In comparison, the data for the previous period exceeds these amounts, signaling a stabilization of the situation and a decrease in the amounts owed. These three components accumulate amounts owed to suppliers, creditors, and others for services or goods received but not yet paid for. Accrued and other current liabilities are mostly short-term expenses and liabilities.
Assets and Ratio
To generally determine the ability of a company and its current assets to cover its current liabilities, it is necessary to calculate the liquidity ratio for the most current period. The current assets and liabilities can be evaluated through the current ratio, calculated by dividing current assets by current liabilities. For the fiscal year ended January 28, 2023, the current assets amount to $17,846 million, and the current liabilities amount to $19,500 million. Therefore, the current ratio is 17,846/19,500, which equals approximately 0.915. The current ratio for FY 2023 is higher than that of the prior year; it may indicate improved short-term liquidity. Based on the calculated current ratio, it is insufficient to cover the current liabilities for the January 28, 2023 fiscal year.
Avoiding Ratio Instability
According to the previous calculations and considerations, it becomes evident that avoiding a fall in the current liquidity ratio should take an essential place in Target’s overall financial strategy. An excessively high ratio often indicates an inefficient use of funds and not utilizing all of the company’s potential for growth.
Operational Efficiency
Operational efficiency may not be high enough, as signaled by the indicators. It is, therefore, necessary to invest less capital in non-productive assets and to avoid excessive short-term debts.
Creditworthiness
Creditworthiness is risky because many investors and lenders evaluate this ratio when considering an investment or financial relationship. A low current ratio may mean the company can’t meet its immediate financial obligations. This could lead to defaulting on loans, missing supplier payments, or being unable to pay employee salaries, damaging the company’s reputation and operations. A company’s primary goal is to generate returns on its assets. If it keeps an excessively high current ratio, it holds a significant portion of its capital in low-yielding assets like cash, which doesn’t generate returns. This can lead to missed investment opportunities for growth and profitability.
Accruing Losses Approach Analysis
Based on the relevant information, the company has its approach to accounting for contingencies, particularly litigation and claims. This approach is shown in note 14 and should be considered in more detail for interpretation (Annual reports & proxy info, 2023):
- The lowest amount in the range is recorded, which does not consistently demonstrate the materiality of the loss.
- Accruals are recorded based on actual and reasonable estimates of amounts, which is reasonable enough but only considers the best estimate.
- The belief in the adequacy of the provisions recorded implies a denial of the materiality of adjustments to the estimates recorded in the consolidated financial statements for this topic when accounting for all liabilities.
- Target’s approach for accruing losses for litigation liabilities, as disclosed in Note 14, includes recording the lowest amount within a range, accruing losses based on actual and reasonable estimates, believing in the adequacy of provisions recorded, and recognizing claims as having no material impact on operations, conditions, or cash flows.
- Target’s approach for accruing losses for litigation liabilities appears to follow standard accounting principles and responsible financial reporting practices.
Recommendations to Improve Current Ratio
Given the underperformance of the current ratio under investigation, considering options to improve or develop it is required. Judging by the general information, many of these techniques are already used in one way or another in the company’s policy. However, it is possible to insist on increased attention to achieve the desired result (Annual reports & proxy info, 2023). Among the most effective techniques are:
- Refinancing Debt: Evaluate and potentially refinance debt agreements to align them with cash flow and match maturities, which can help reduce current liabilities.
- Cost Reduction: Identify and reduce unnecessary expenses in the operational area to free up funds that can be used to strengthen the current ratio.
- Strategic Investments: Explore strategic investments that can generate short-term returns on assets.
Target Corporation has made strides in stabilizing its financial situation, as evidenced by a decreased current liability profile and an improved current ratio compared to the previous year. However, there is room for further enhancement in short-term liquidity. Target should remain vigilant in managing its current assets and liabilities, considering strategies such as debt refinancing, cost reduction, and strategic investments to achieve a more favorable current ratio and ensure its continued financial health.
Reference
Annual reports & proxy info. (2023). Target Corporate. Web.
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