Comparing Walmart And Target's Debt-To-Equity Ratio

Besides observing the earning trend, stability of income, and ROA of the three companies, it is important to consider debt-to-equity ratio and return on shareholders’ equity (ROE) in order to evaluate the relationship between risk and profitability of each company. Debt to equity ratio is a debt ratio which measures a company’s leverage. It is caculated by dividing total liabilities by total shareholder equity. During the fiscal year 2016, the debt-to-equity ratio of Costco, Target, Walmart were 1.72, 2.42, and 1.52, perspectively. Target had the highest ratio 2.42. This means for every dollar of the company owned by shareholders, it owed $2.42 to creditors. In order words, the company did not perform well and has a lot of debt financing during the year. Shareholders cannot receive return until all debts are paid to creditors; thus, if the ratio became higher in the future, shareholder could receive nothing. On the other hand, Walmart had the lowest debt to equity ratio which indicated a relative low debt and low risk. By comparing the debt-to-equity ratio of the three companies, it is obvious that investing in Walmart is the safest choice for investors.
Another important ratio which
helps investors to make the best investment decision is return on shareholders’ equity (ROE). The ratio measures a company’s profitability and efficiency. In other words, it shows how much profit a company earns with the money invested by sharesholders. ROE is caculated by dividing a company’s income before discontinued operation by its average shareholders’ equity. During the year, Target had the highest ROE which was 22.33% ( Costco’s ROE was 20.94%, and Walmart’ ROE was 18.05%). This means Target earned $0.2233 of profit for every $1 of shareholders’ equity. In other words, the company efficiently generated profit and provided its shareholders with higher return than Costco and Walmart did. Considering the tradeoffs between risk and profitability made by the three companies in 2016, it is great choice for shareholders to invest in Costco since had a average debt-to-equity ratio and a relatively high ROE.
Target had the highest ROE, but it cannot ensure that the company’s shareholders can recieve a high return. The reason for this is that a high level of debt and a relative low value of shareholders’ equity can increase ROE. Also, the company had the highest debt-to-equity which means it had a lot of debt and did not perform well during the year. Target, therefore, can be considered as the most risky investment in the three companies. In contrast to Walmart, investing in Walmart is a safe choice since it has the lowest debt-to-equity ratio and risk and a average
ROE.