Question

Balance sheets and income statements for the home depot inc. and lowe's companies inc .

1.Compute return on equity, return on assets, and return on financial leverage for each company in 2014

2. Disaggregate the ROA's computed into profit margin (PM) and asset turnover (AT) components. Which of these factors drives ROA for each company?

3. Compute the gross profit margin (GPM) and operating expense-to-sales ratios for each company. How do these companies' profitability measures compare?

4. Compute the accounts receivable turnover (ART), inventory turnover (INVT), and property, plant, and equipment turnover (PPET) for each company. How do these companies, turnover measures compare?

5. Compare and evaluate these competitors' performance in 2014.

Analyzing and interpreting Financial Statements * COMPANIES NIE HOME DEPOT, INC. LOWE'S CO Balance Sheets Balancs 2014 2013 2014 2013 (5 millions $ $ 1,929 $ 1,723 456 125 391 195 1,484 11,079 9.12 1,398 11.057 895 15,279 23,348 1.289 1,016 15,302 22,720 1,353 8,911 578 10,080 20,034 593 1024 20034 278 571 $39.946 602 $40,518 354 1,359 $31,827 $32,730 Assets Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Other current assets Total current assets Property and equipment, net.. Goodwill Long-term investments Other assets. Total assets. Liabilities and shareholders' equity Short-term debt and current maturities of long-term debt ... Accounts payable... Accrued compensation and related expenses... Deferred revenue.. . Income taxes payable ..................... Other current liabilities..... Total current liabilities. ..... Long-term debt, excluding current maturities ..... Deferred income taxes... Other long-term liabilities ....... $ 552 5435 5,807 1,391 1,468 5,797 1,428 1,337 5,124 773 979 35 12 2,240 1.920 11,269 16,869 642 2.142 10,749 14,691 514 2,042 27,996 12,522 9,348 10,815 97 1,599 21,859 9,968 1.756 8,876 10,086 291 1,626 20,879 11,853 1,844 30,624 9,322 Total liabilities Total stockholders' equity ...... $39,946 $40,518 $31,827 $32,732 Total liabilities and shareholders' equity. ... HOME DEPOT, INC. LOWE'S COMPANIES Income Statements Income Statements 2014 ($ millions) 2013 2014 $56,223 36,665 19,558 13,281 1,485 $53,417 34,941 18.476 12,865 1,462 2013 $78,812 51,422 27,390 16,597 1,627 9.166 12 711 8,467 3,082 $ 5,385 $83,176 54,222 28,954 16,834 1,651 10,469 337 830 9,976 3,631 $ 6,345 Net sales. .... Cost of sales. Gross profit Selling, general and administrative. Depreciation and amortization ..... Operating income.. Investment and other income... Interest expense.... Earnings before income taxes Provision for income taxes..... Net earnings. 4,792 4,149 480 3,673 522 4,276 1,578 $ 2,698 1,387 $ 2,286 $ 2,698

Answer 1

Ratio	Formula	Home Depot Inc. (Calculation)	Home Depot Inc (Year 2014)	Lowes Companies (Calculation)	Lowe's Companies (Year 2014)
Return on Equity	Net income / Shareholders equity	$6345/ $9322 * 100	68.06%	$2698/$9968 *100	27.07%
Return on Assets	Net income / Total Assets	$6345/$39946 * 100	15.89%	$2698/$31827 *100	8.48%
Return on Financial leverage	Net income / Long- term debt	$6345/$16869 *100	37.61%	$2698/$10815 *100	24.95%
ROA	Net profit margin * Asset turnover		15.89%		8.48%
Profit margin	Net income/ Net sales	$6345/$83176 *100	7.63%	$2698/$56223 *100	4.80%
Asset turnover Ratio	Return on assets / Profit margin	15.89/7.63	2.08	8.48/4.80	1.77
Gross Profit Margin	Gross Profit/Sales * 100	$28954/$83176 * 100	34.81%	$19558/$56223 * 100	34.79%
Operating expenses to sales ratio	Operating expenses/ sales	($16834+$1651)/$83176	0.22	($13281+$1485)/$56223	0.26
Average accounts receivable	(accounts receivable at end of year + accounts receivable at beginning of year or previous year closing ) / 2	($1484 + $1398) /2	$1441	Nil as per balance sheet	Nil
Accounts receivable turnover ratio	Net credit sales / avg. accounts receivable	$83176 / $1441	57.7	Since avg accounts receivable is nil, so all are cash sales	NA
Average inventory	(Inventory at end of year + Inventory at beginning of year or previous year closing ) / 2	($11079+$11057) / 2	$11068	($8911+$9127)/2	$9019
Inventory turnover ratio	Cost of Goods Sold / Average inventory	$54222/$11068	4.90	$36665/$9019	4.07
Property Plant & Equipment turnover	Net Sales / Net Fixed assets	$83176/$22720	3.66	$56223/$20034	2.80

Discussion :

Q1. Ratios calculated in the table above.

Q2. ROA = Net Profit Margin * Asset turnover ratio. And as can be seen in the calculations in the above table, for both the companies, their profit margin components are the major contributors for higher ROA.

Q3. Ratios calculated as per table above. As can be seen, GPM for both companies stands almost equal at approx. 34%. However, operating expense-to-Sales ratio is better for Home Depot Inc. , being lower than Lowe's Companies, indicating its better management of operating expenses.

Q4. Ratios calculated as above. Inventory turnover ratio and Fixed assets turnover ratio are both better for Home Depot Inc. since they are higher as compared to Lowe's companies, indicating that the inventory is rotated faster and the assets are better utilised for generating sales. Accounts receivable ratio is not comparable since accounts receivable are Nil for Lowe's Companies in both the years 2014 and 2013.

Q5. Comparing all the ratios above, we can see that Home Depot Inc. has a better financial position vis-a-vis Lowe's Companies as its profitability ratios,i.e., ROE, ROA, Return on financial leverage , are higher than Lowe's. Its profit margin is also higher and expenses ratio lower, coupled with better turnover ratios, indicate its sound financial position vis-a-vis Lowe's.