Ratio Analysis and Statement of Cash Flows Financial ratios are "just a convenient way to summarize large quantities of financial data and to compare firms' performance" (Brealey & Myer & Marcus, 2003, p. 450). Financial ratios are very useful tools in order to determine the health of a company, help managers to make decision, and help to compare companies that belong to the same industry in order to know about their performance. Home Depot and Lowe's are two home improvement chains in the United States. Home Depot is the leading company in this industry followed by Lowe's as the second largest. This paper uses financial ratios to compare these companies regarding operating profitability, asset utilization, and risk management in the years 2005 and 2006. The evaluation compares the performances of these stores against the industry. Operating Profitability Home Depot closed the fiscal year of 2006 reporting that its sales were $90.8 billion, which was a 10% increase from fiscal year 2005. The Home Depot's operating profit was $27,427 million for 2005 and $29,907 million for 2006 (MarketWatch, 2007). Lowe's closed the fiscal year of 2006 reporting sales of $46.9 billion, an 8.5% increase compared to fiscal year 2005. Lowe's gross operating profit was $16,273.00 million for 2005 and $12,307.00 million for 2006 (MarketWatch, 2007). Both companies increase sales from the previous year. Home Depot had greater sales and higher operating profit than Lowe's. Profitability Ratios Profitability ratios determine the companies' earnings. The Net Profit Margin is calculated by dividing net income by sales. Home Depot's portion of revenue from profits equaled 7.2% in 2005 and 6.3% in 2006. Lowe's portion of revenue from profits equaled 6.4% in 2005 and 6.6% in 2006. Home Depot had a decreased in profit margin while Lowe's increased its profit margin in 2006. Home Depot's Net Profit Margin for 2005 = Home Depot's Net Profit Margin for 2006 = Lowe's Net Profit Margin for 2005 = Lowe's Net Profit Margin for 2006 = Another measure of profitability is the return on equity which is calculated by net income/average equity. This measure shows that Home Depot had a better return on equity in 2005 while Lowe's had a better return on equity in 2006. Nevertheless, Home Depot reinvested earnings to generate additional earnings in a better way than Lowe's in 2006. Home Depot's Return on Equity 2005 = Home Depot's Return on Equity 2006 =
...for Home Depots earnings, with the numbers overall being so close Lowes would probably be a better choice for investing. But, really either company is probably not a bad investment.
The first method we will review is the accounting method. Through this accounting approach we will analyze specific ratios and their possible impact on the company's performance. The specific ratios we will review include the return on total assets, return on equity, gross profit margin, earnings per share, price earnings ratio, debt to assets, debt to equity, accounts receivable turnover, total asset turnover, fixed asset turnover, and average collection period. I will explain each ratio in greater detail, and why I have included it in this analysis, when I give the results of each specific ratio calculation.
The individual will be researching these two companies, Home Depot and Lowes. However, this individual has chosen to do these two companies for research purposes with evaluating on comparison.
An article in CBSnews.com states that Home Depot has more stores than Lowe’s. However, Lowe’s has its advantage by setting up locations where it is easy for customers to shop. The article continues to say that Lowe’s focus more on service and customer’s experience compared to Home Depot.
Home Depot and Lowes sell basically the same products and are members of the dame industry, home improvement industry. Covalent Marketing article states that the way that you portray yourself to consumers will very likely determine the type of people that decide to associate themselves with your brand, and shape the consumers that you target (2016). The article also pointed out that Home Depot marketing is directed toward the professional home improvement customer and Lowes is directed towards the novice do-it-yourself customer (Covalent Marketing, 2016). The marketing strategies are geared towards each type of customer respectively. Home Depot has a more rugged look and feel catering to contractors and professional builders which evident
The main functional strategy to compare and contrast is the marketing functional strategy. Home Depot markets to home improvements, and is geared toward males. The stores are primarily stocked with products for these projects. Lowe’s on the other hand, primarily targets women and their product offerings are geared toward female buying patterns. Lowe’s has more products that make a home comfortable and inviting, whereas, Home Depot has more products for the overall structure of the home. Men spend 35% more than women on home improvement (If Lowe’s Wants, 2013). Financially, Home Depot outsells Lowe’s and operates mores stores; 1,977 Home Depot and 1,805 Lowes. However, both stores performed well in 2016 and both are leaders in the home
In the year 2014, Home Depot has taken the opportunity to open an online distribution center. They’ve always followed a traditional retail model by adding stores in areas where they thought they could make profit, but the problem was that in an over saturated market, they started to cannibalize their profits by having many stores in the same area. Home Depot has found one way to differentiate itself, by fitting the changing shopping behavior of Americans and not lose out on their profits (WSJ).
Financial ratios analysis is conducted by managers, creditors, and investors alike. Ratio analysis uses line items of financial statements, either alone in or conjunction, to help users understand and quantify raw data. Attachment 22 (page XXX) shows the formulas for the financial statement ratios; Attachment 23 (page XXX) presents many the financial ratios for both Dollar Tree and Dollar General.
In spite of the economic fluctuations, the bargaining power of customers has been steady, where Home Depot managed to gain the loyalty of its customers in the face of another strong competition such as Lowe’s and Rona. Home Depot also succeeded in maintaining low/moderate costs in order to lessen the move and switch of customers to other competitors.
In an article published in 1995 by “Discount Merchandiser”-, According Lowes CEO Leonard G. Herring, the company sought to increase its retail sales in the early 1980s. At that time, about 70% of Lowe's business was with home building contracts and 30% was with the general public. After shifting its focus to the retail and consumer market profits nearly doubled from, “from $3.8 billion in fiscal 1992 to $6.1 billion in fiscal 1994” (Johnson 1). Home Depot on the other hand came out of the woodworks targeting the retail and do it yourself home owner. Leading Lowes in sales and total store numbers across the United States. As of late both companies have been investing heavily in marketing and advertisement focused on getting people out the house and into the big box stores to start on new projects. With people buying new homes all across the nation the need for repairs is nonexistent but the chance at upgrading, renovating, or remodeling has been on the rise. With media outlets like YouTube and network television both companies have been battling heavily for screen
Their performance, however, due to numerous expansions and/or mismanagement, has declined, specifically, customer service and operating efficiency. Statement of The Problem The main problem is the quantification of qualitative data and how Carrie Galeotafiore will incorporate all relevant data to create a reliable, to the extent of her professional judgement, five-year pro forma forecast for Lowe’s. In addition to this, after the creation of the pro forma forecast, the analysts have to analyze the results and create an interpretation of its implications and determine whether the companies’ stocks are overvalued. To do this, the analysts will consider the performance and financial statement forecasting of the two leading companies in the retail building supply industry.
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006.
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
In order to evaluate the financial ratios, this document uses the following analyses to assess the financial statements of the company:
Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.