Question

P5-38 Analysis and Interpretation of Return on Investment for Competitors

Balance sheets and income statements for The Home Depot, Inc., and Lowe’s Companies, Inc., follow. Refer to these financial statements to answer the requirements.

HOME DEPOT, INC. LOWE'S COMPANIES Balance Sheets Balance Sheets ($ millions) Assets Cash and cash equivalents .. . 2014 2013 2014 2013 . .. .. . .. . .. . .. . .. . . ...1,723 1,929 466 125 391 185 1,398 11,057 895 15,279 1,484 9,127 593 10,080 10,296 20,034 20,834 8,911 578 1,016 1,353 1,289 354 1,359 279 1,323 602 Liabilities and shareholders' equity Short-term debt and current maturities of long-term debt......$ 328 33 $ 552 435 5,008 785 892 5,797 1,428 1,337 12 2,142 10,749 14,691 514 2,042 5,124 773 979 Accrued compensation and related expenses.·····..·..·..·.. . . 1,391 1,468 1,920 9,348 10,815 97 1,599 21,859 9,968 1,756 8,876 10,086 291 1,626 642 1,844 27996 12,522 20,879 11,853 9,322

1. Compute return on equity (ROE), return on assets (ROA), and return on financial leverage (ROFL) 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.

Given information:

1. ICA 1 statutory tax rate = 35 %

2. The “Receivables, net” values for Lowe’s in 2014 and 2013 are 0.

Answer 1