Profitability
To achieve a competitive advantage, it is important to understand a company’s profitability. Profitability is used to “assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.” (Investopedia, 2014) To be sustainable, businesses must understand what their profitability is, and how it compares to their competition. When comparing a business’s profitability with another company, they must be within the same market and during the same time period to ensure an appropriate analysis. To better define a business’s profitability, different measurements are used to calculate the success of the company called profitability ratios. The business that has the higher profitability ratio for a specific time period would mean that business has a competitive advantage in that area of profitability. Some examples of a profitability ratio are Net Profit Margin, Return on Assets, and Return on Equity. To calculate these different ratios, several items from each business’s 2012 income statement would be used compute the equations. Both Wal-Mart and Target are competitors in the same market that reach out to the global marketplace for the sale of goods and services. Both businesses are also publically traded companies within the New York Stock Exchange, and operate under a similar management hierarchy.
Net Profit Margin
NPM = (Net Income/Sales)
Wal-Mart 3.54%
Target 4.28%
“The Net-Profit margin narrows the focus on profitability and highlights not just the company’s sales efforts, but also its ability to keep operating costs down, relative to sales”. (Carlberg, 2007) The Net Profit Margin shows how well these major retail businesses can control...
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...mpany’s earning performance. In 2012, Wal-Mart had a higher the Return on Equity percentage compared to Target. This which shows that Wal-Mart is more effective in utilizing their equity base, and it also indicates to investors that Wal-Mart is more efficient at applying their money. Wal-Mart has a 22.01% Return on Equity compared to Target’s Return on Equity at 18.51%. For Target this shows that they are receiving less on their return on their investment compared to Wal-Mart. As Target’s debt increases, their Return on Equity will increase as well as long as their Return on Assets are higher than the interest rate paid on the debt.
References
Investopedia. (2014). Profitability ratios. Retrieved from http://www.investopedia.com/terms/p/profitabilityratios.asp
Carlberg, C. (2007). Business analysis with microsoft excel. Indianapolis, IN: Pearson Education.
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