You are considering an investment in the common stock of Wal-Mart. The following information is from the consolidated statements of income of Wal-Mart Stores, Inc. and Subsidiaries for the years ended January 31, 2012 and 2011 and the consolidated statements of operations for its competitor Target Corporation for the years ended January 28, 2012, and January 29, 2011 (included in the companies’ Form 10-Ks, amounts in millions of dollars):
Required
Part A. The Ratio Analysis Model
An investor must assess a company’s profitability before buying its stock. The gross profit ratio tells us how many cents on every dollar are available to cover expenses other than cost of goods sold and to earn a profit. Replicate the five steps in the Ratio Analysis Model on page 238 to analyze the gross profit ratios for Wal-Mart and Target:
1. Formulate the Question
2. Gather the Information from the Financial Statements
3. Calculate the Ratio
4. Compare the Ratio with Other Ratios
5. Interpret the Ratios
Part B. The Business Decision Model
An investor must consider a variety of factors, including financial ratios, before buying stock. Replicate the five steps in the Business Decision Model on page 239 to decide whether to buy stock in Wal-Mart.
1. Formulate the Question
2. Gather Information from the Financial Statements and Other Sources
3. Analyze the Information Gathered
4. Make the Decision
5. Monitor Your Decision