How Financially Strong Is Target Corporation (NYSE:TGT)?

Target Corporation (NYSE:TGT), a large-cap worth US$38b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Target’s financial liquidity and leverage to give you an idea of Target’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TGT here.

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How much cash does TGT generate through its operations?

TGT’s debt levels surged from US$13b to US$14b over the last 12 months , which accounts for long term debt. With this increase in debt, TGT currently has US$825m remaining in cash and short-term investments , ready to deploy into the business. Moreover, TGT has produced US$6.1b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 44%, indicating that TGT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TGT’s case, it is able to generate 0.44x cash from its debt capital.

Can TGT pay its short-term liabilities?

With current liabilities at US$18b, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$15b, leading to a current ratio of 0.83x.

NYSE:TGT Historical Debt January 29th 19
NYSE:TGT Historical Debt January 29th 19

Can TGT service its debt comfortably?

With total debt exceeding equities, Target is considered a highly levered company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if TGT’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For TGT, the ratio of 8.59x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes TGT and other large-cap investments thought to be safe.

Next Steps:

TGT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for TGT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Target to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TGT’s future growth? Take a look at our free research report of analyst consensus for TGT’s outlook.
  2. Valuation: What is TGT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TGT is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.