American School of Business Home Depot & Lowes Co Financial Analysis Report Review and compare the financial statements and annual reports of The Home Depo

American School of Business Home Depot & Lowes Co Financial Analysis Report Review and compare the financial statements and annual reports of The Home Depot and of Lowe’s companies Inc.of fiscal year 2012, in comparison to fiscal 2011, according to the below structure and questions:
Analyze the balance sheet of both companies. Write a summary that includes important points about each company that an analyst would use in assessing the financial condition of The Home Depot and of Lowe’s as one of its competitors.
Analyze the income statement of The Home Depot and of Lowe’s. Write a summary that includes important points that an analyst would use in assessing the profitability of The Home Depot and of Lowe’s as one of its competitors.
Analyze the consolidated statements of cash flows for The Home Depot and for Lowe’s for fiscal years 2012, 2011 and 2010. Write a summary that includes important points that an analyst would use in assessing the companies’ relative abilities to generate cash flows and the appropriateness of the use of cash flows
Using data, common size statements, ratio and trend calculations for The Home Depot and Lowe’s, write a comprehensive comparative analysis of the companies over the major areas: Short term liquidity, operating efficiency, capital structure and long term solvency, and profitability.
Perform the Dupont analysis and compare variation of The Home Depot and Lowe’s ROE, Return on Equity, as the combined effect of profitability, liquidity, and financial leverage.

Formalities:

Word count: 2000
Cover, Table of Contents, References and Appendix are excluded of the total word count.
Font: Arial 12,5 pts.
Text alignment: Justified.
The in-text References and the Bibliography have to be in Harvard’s citation style. FINANCIAL STATEMENTS ANALYSIS
HOME DEPOT INC.
Daniil Alekseev
Professor: Florent Vezin
Table of Contents
Introduction ………………………………………………………………………………………………………………………………. 3
Financial Performance analysis ……………………………………………………………………………………………….. 3
Liquidity ………………………………………………………………………………………………………………………………… 3
Leverage/Solvency ……………………………………………………………………………………………………………….. 4
Profitability ……………………………………………………………………………………………………………………………. 5
Efficiency ………………………………………………………………………………………………………………………………. 5
Stock performance ……………………………………………………………………………………………………………….. 6
Conclusion ……………………………………………………………………………………………………………………………….. 7
References ………………………………………………………………………………………………………………………………. 8
Appendices ………………………………………………………………………………………………………………………………. 9
Statement of Financial Position …………………………………………………………………………………………….. 9
Statement of Profit or Loss ………………………………………………………………………………………………….. 10
Dividends ……………………………………………………………………………………………………………………………. 10
Performance ……………………………………………………………………………………………………………………….. 10
Introduction
Home Depot, Inc. is a public limited liability company, incorporated in the United
States in 1978. It was first listed in the New York Stock Exchange in 1984 and paid its
first cash dividends in June 1987. The company’s core business is retailing of assorted
building materials, home, landscaping, and farming products and also the provision of
services, under the Home Improvement Retail Industry (Home Depot 2012).
Boasting of over 2,252 stores, with 1,974 across the United States, and 278 shared
between Mexico, China, and Canada, Home Depot. Inc. serves three types of
customers namely; customers purchasing merchandise and personally do the works
required, customers who purchase both merchandise and service, and professionals
clients who offer services to other customers. The four revenue streams arising from
these customers are; plumbing electrical and kitchen, Hardware and seasonal,
Building materials, lumber, and millwork, and Paint and flooring products and services.
Sales outside the United States accounted for about 11.4% of the company’s net sales
(Home Depot 2012).
Through technology, innovation, and customer-focused strategic approach, the
Company has grown over the years into one of the world’s largest retailer in the Home
Improvement industry.
Financial Performance analysis
The company’s financial strengths are indicated by its ability to generate revenues
and ultimately net earnings that translate to positive cash flows for the settlement of
financial obligations, and also a return on investment to the shareholders. Its analysis
includes determination of how efficiently the company is in generating said revenues
and utilization of investments to have profitable net earning positions (Leopold and
Wild 2000).
To determine the financial performance of Home Depot Inc.for both the current and
previous period through the company’s financial report, we employ the ratio analysis
technique, aimed at evaluating how profitable the company is, its liquidity and
leverage levels, and also its efficiency in operations (Steve and Swain 2005).
Liquidity
The liquidity analysis measures the company’s ability to meet its short term obligation
including creditors and short term portion of borrowings. It is a measure of the
percentage of assets that can be easily liquidated to cover short term liabilities, without
causing disruptions in operations and without a significant change in the value of the
assets.
The Home Depot, Inc. liquidity is measured through the current ratio and the acid-test
ratio.
As at the close of the financial year 2011, the company’s current ratio stood at 1.55:1.
This is an indication that for every $1 in current liabilities, the company had $1.55 to
cover it. This is a show that the company’s liquidity position was sufficient to meet
obligations that fell within the succeeding 12 months from the point of the financial
report. This is a notable improvement from the fiscal year 2010’s ratio of 1.33:1. The
current assets formed 36% of total assets, with heavy investment in Fixed Assets.
Given the nature of the core business, the company has invested heavily in inventory.
Its acid-test ratio as at the close of the fiscal year 2011 stood at 0.85:1. The company
can operate effectively with this ratio since inventory forms the major resource.
From the Liquidity point of analysis, the company was able to cover its current
obligations having posted favorable ratios. The Net Cash Provided by Operating
Activities, according to the financial report, was significantly higher than the prior
periods, standing at $6.7 Billion up from $4.6 Billion, brought about by increased Net
Earnings and Inventory management.
Leverage/Solvency
The company’s debt stood at $10.788 Billion, with $30Million due within 12 months
and $10.758 Billion being Long-term. All the short term debt was under commercial
papers, obtained from various banks, with a weighted average interest rate of 0.5%.
The total equity was $17.898 Billion bringing the debt-equity ratio to 60.3%, with the
long-term component being 60.1% and short-term 0.2%. This is a balanced position
given that the company trades in capital intensive products and lenders are not
worried about the repayment of funds lent, thus no restrictive agreements are needed
to safeguard timely payments. It is however a 17% increase as compared to the fiscal
year 2010, indicating additional borrowing in the year. The industry average debtequity ratio was 70% (Ready Ratios n.d.).
For the period ended January 29,2012, 27% of the company’s assets were financed
through debt, arrived at after calculation of the company’s debt ratio. The debt ratio
for the 2010 fiscal year was 24%. This, again, increased due to increased debt levels
which comprised of fixed-rate debt and floating-rate debt distributed as 82% and 18%
respectively. The retail trade industry debt ratio was 66% (Ready Ratios n.d.). The
corresponding Equity ratio stood at 44% for the year fiscal 2011.
The Interest-Coverage ratio for the 2011 fiscal year was 10.32, while the 2010 ratio
was 5.85. This was an improvement, indicating the company’s ability to meet its debt
obligations from the profits, a show of strong financial status. Total debt formed 48%
of Total Liabilities.
Profitability
The profitability analysis is used to analyze the company’s performance for the period,
which involves the analysis of resources deployed and the returns, in form of revenues
and profits, earned thereof. It is used to measure how efficient the company is in
utilizing available resources to generate revenues and the transformation of these
revenues into profits distributable to the shareholders and/or retained earnings for
growth and reinvestment.
The company’s revenues increased by 3.5% in 2011standing at $70.395 Billion as
compared to $67.997 Billion in 2010. Consequently, the Net Earnings grew by 16.3%.
The Gross Profit Margin ratio for the year 2011 was 34.5%, indicating that for every
$1 in sales, about 66 cents is spent in direct costs while 34cents is retained to cover
other operating expenses. On the other hand, the Net Profit Margin ratio was 5.5%, a
notable growth compared to the previous period, which was 4.9%, indicating
improving efficiencies in converting revenues earned into actual sales attributable to
the shareholders of the company, which was $2.47 per share, 22.9% higher than the
diluted Earnings Per Share in 2010. The retail trade industry Gross Profit Margin and
Net Profit Margin ratios stood at 21.8% and 3.6%, with the company performing
slightly above the industry levels (Ready Ratios n.d.).
In assessing how efficient the company is in utilizing the available financial resources
to generate wealth, the Return On Assets ratio for the fiscal year 2011 stood at 175%.
The corresponding Return On Invested Capital was 14.9%, a 16% improvement from
a reported 12.8% return in 2010. These two depicted highly efficient levels of
utilization of assets and funds invested respectively. Compared to the industry ratio of
4% on Return On Assets the company performed pretty well during the period.
The rate of return for the shareholders’ equity, measured by the Return On Equity,
was 22% in 2011 compared to 18% in 2010, attributed to the growth in net earnings
and also the buy-back of 97 million shares worth $3.5 billion during the period, which
also strengthened the stake ownership for the existing shareholders. The industry’s
Return On Equity stood at 4.6%
The overall profitability of the firm is seen to be getting better over the period, with the
increase in sales and a marginal increase in costs. This, according to the management
discussion, is attributed to the continued focus on customer service, product authority,
efficiency and productivity, and interconnected retails.
Efficiency
The efficiency of a company will dictate how much resources are utilized in the
generation of revenue, including raw materials and time. It is a measure of the
company’s ability to utilize assets while containing the liability levels efficiently in
generation of revenues.
During the fiscal year 2011, the company collected its receivables 30.21 times and an
indication of an average 12 days’ credit period policy, as arrived at after calculation of
the Receivables turnover ratio. This was excellent compared to the industry’s 52 days’
average (Ready Ratios n.d.).
The Inventory Turnover ratio had been consistently 4 times on average for the
previous 5 years. This was a very low turnover ratio compared to the industry’s 56
times. This is mainly due to the type of merchandise the company trades in – including
assorted building materials, home, landscaping, and farming products, stocked in
bulk. According to the management discussion, the company has rolled out rapid
deployment centers (RDCs), aimed at reducing inventory levels held by the company
stores. This is expected to improve the inventory turnover ratio over time.
The company generated 2.88 times in revenue against the available fixed assets,
using the Fixed Asset Turnover ratio. Therefore, the company generates more sales
with less investment in fixed assets. The fixed assets formed 60% of total assets
compared to 62% in 2010.
Stock performance
The company’s stock performances are an indicator of its performance. Wellperforming companies will report an Earning Per Share that is high while a poorly
performing Company’s Earning Per Share continues declining over the period.
During the period, the company’s stock price was $38.48(high) and $35.68(low) by
the close of the first quarter ended May 1, 2011. The value of the stock increased
through the period to close at $45.41(high) against a low of $35.54.
The Earnings Per Share for the fiscal year 2011 was $2.47, a 22.9% increase from
$2.01 in 2010. According to the Five Year Summary report under the annual report,
the company’s Earnings Per Share increased at an increasing rate since 2009, when
it was $1.55, indicating a 59.4% increase in a span of three years-2009 to 2011.
The company’s dividend payout ratio for the fiscal year 2011 was 56%, compared to
52% in 2010, indicating an improvement in the ratio. For the comparable periods 2011
and 2010, 44% and 48% of the net surplus were retained for debt repayment, cash
reserve increment, or reinvestment. The company declared dividends quarterly and,
according to the Management Discussion report, during the fiscal year 2011, a
dividend payout policy of 50% of net earnings up from the initial 40%. This is in
anticipation of returning excess cash to the shareholders, over and above the share
repurchases.
Conclusion
Home Depot Inc. has good financial health, with revenues consistently growing with
marginal growth in expenses, posting growing net earnings over the periods. The
Company’s liquidity position is favorable, to the extent that it increased dividend
payout rates and repurchased part of its shares. Activity ratios, save for inventory
turnover, are also good.
However, the company’s debt levels are significantly high, with the debt-equity ratio
standing at 60.3%. The Inventory turnover ratio is also another area of concern as
presented by the company’s financial report for the fiscal year 2011.
References
Home Depot Inc. (2012) Annual Report 2011.
Steve, H., and Swain M.(2005) Financial Accounting. Thomson South-Western.
Leopold B., and Wild J.(2000) Analysis of Financial Statements. New York: McGrawHill
Ready Ratios (n.d.) Industry Ratios of 2011. Retrieved June 17, 2020, from:
https://www.readyratios.com/sec/industry/G/#sic-form
Appendices
Statement of Financial Position
Statement of Profit or Loss
Dividends
Performance
•
Review and compare the financial statements and annual reports of The Home
Depot and of Lowe’s companies Inc.of fiscal year 2012, in comparison to
fiscal 2011, according to the below structure and questions:
o
o
o
o
o
Analyze the balance sheet of both companies. Write a summary that
includes important points about each company that an analyst would
use in assessing the financial condition of The Home Depot and of
Lowe’s as one of its competitors.
Analyze the income statement of The Home Depot and of Lowe’s.
Write a summary that includes important points that an analyst would
use in assessing the profitability of The Home Depot and of Lowe’s as
one of its competitors.
Analyze the consolidated statements of cash flows for The Home
Depot and for Lowe’s for fiscal years 2012, 2011 and 2010. Write a
summary that includes important points that an analyst would use in
assessing the companies’ relative abilities to generate cash flows and
the appropriateness of the use of cash flows
Using data, common size statements, ratio and trend calculations for
The Home Depot and Lowe’s, write a comprehensive comparative
analysis of the companies over the major areas: Short term liquidity,
operating efficiency, capital structure and long term solvency, and
profitability.
Perform the Dupont analysis and compare variation of The Home
Depot and Lowe’s ROE, Return on Equity, as the combined effect of
profitability, liquidity, and financial leverage.
Use in order to Review and compare the financial statements and annual reports of The
Home Depot and of Lowe’s companies Inc.of fiscal year 2012, in comparison to fiscal
2011:
Also kindly use these files. They are in the attachment:
The Home Depot fiscal year 2012 10-K:
https://www.sec.gov/Archives/edgar/data/354950/000035495013000008/hd232013x10xk.htm
-The Home Depot fiscal year 2012 annual report
-Lowe’s fiscal year 2012 annual report and 10k
-In case, I have attached my previous assignment, it could also help in order to
compare years.
Formalities:
•
•
•
•
•
Word count: 2000
Cover, Table of Contents, References and Appendix are excluded of the total
word count.
Font: Arial 12,5 pts.
Text alignment: Justified.
The in-text References and the Bibliography have to be in Harvard’s citation
style.
Building Better
Home Improvement
Experiences
2012 ANNUAL REPORT
Building Better
Home Improvement
Experiences
Learn more by visiting our online Annual Report
at www.Lowes.com/2012annual or scan the
QR code with your smartphone.
Shareholder Letter
Great customer experiences start with our associates, whether they
interact with customers face-to-face or work tirelessly behind the
scenes to simplify the complex business of home improvement. And
together, Lowe’s associates are building better home improvement
experiences. We’ve laid the foundation to transform our core business
over the past two years, and we will continue our efforts in 2013 and
beyond. We expect to generate compelling returns for shareholders
as we further align our people, processes and financial resources to
provide better home improvement experiences.
2012 PERFORMANCE
We delivered solid performance in 2012. Comparable store sales grew 1.4% and total sales
Robert A. Niblock
Chairman of the Board, President
and Chief Executive Officer
grew 0.6% to $50.5 billion. Net earnings increased by 6.5% to $2.0 billion and diluted earnings
per share increased 18.2% to $1.69. Operating cash flows, along with the net issuance of
$1.4 billion of long-term debt, were used to acquire $1.2 billion in fixed assets and return
$5.1 billion to shareholders through dividends and share repurchases.
OUR PROGRESS
Our transformation is centered on the customer. In the inspiration phase of a project, customers
realize they want to change something about their home whether it’s a room, their home’s
exterior or their yard. They are looking for assistance, recommendations and solutions. With
the breadth of products and services we offer and the support of our distribution and technology platforms, we have a unique opportunity to make home improvement simpler and to
seamlessly meet customer needs across selling channels. When done well, we expect to unlock
consumer demand that has been contained by real or perceived barriers to starting projects.
Even as we redefine our business to become more seamless and simple, we must also protect
retail relevance, keeping what customers love about us and constantly improving our retail
operations. We expect to improve our performance by offering more intuitive line designs
Lowe’s Companies, Inc. 2012 Annual Report
page 1
to simplify the customer’s decision, by having the right items available in sufficient quantities,
priced competitively and displayed in an inspiring manner, and by equipping our associates
with the tools and skills necessary to instill confidence and close sales.
Our transformation is a multi-year journey. In 2011, we focused on upgrading the information
RETAIL
RELEVANCE
technology within our stores. Store-based investments included expanding the data pipeline
into our stores to facilitate transmitting data-rich content, like inspirational project pictures,
installing wi-fi to enhance customers’ and associates’ ability to access data, and providing
iPhone technology to our associates to enhance their ability to serve customers. We also
began installing the foundational elements to allow customers to shop with us anytime and
anywhere. Customers can shop on their own terms, whether in a store or on a mobile device,
“Even as we redefine our
business to become more
seamless and simple, we
must also protect retail
relevance, keeping what
customers love about us
and constantly improving
our retail operations.”
and have the product shipped directly to their home or to a store for pick-up. Or, they could
choose to have a Lowe’s associate visit them at home or at a jobsite, equipped with the tools
to gener…
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