?Home Depot and Lowes Company Comparative Industry Analysis Key contextual elements should include the three compulsory financial statements: Income Statem

?Home Depot and Lowes Company Comparative Industry Analysis Key contextual elements should include the three compulsory financial statements: Income Statement, Balance Sheet and the Cash Flow Statement. Also, other important data from the Annual Report together with industrial benchmarking using ratio analysis, that demonstrate a clear understanding of the learning objectives.
Title page, Written Body, along with a Bibliography of any written references, images, or diagrams used (if applicable). NOTE: Formal Written Reports must include a Title Page, Table of Contents, and Appendix of Financial Statements
Task:
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 Analyze the balance sheet of both companies.Write a summary that includes important points about each company that analysts would use in assessing the financial condition of The Home Depot and of Lowe’s as one of its competitors.

o 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.

o 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

o 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.

o 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. FINANCIAL ANALYSIS 1
Home Depot Inc. Financial Analysis
FINANCIAL ANALYSIS 2
Table of Contents
Introduction ……………………………………………………………………………………………………………………. 3
Liquidity Ratios ……………………………………………………………………………………………………………… 3
Solvency Ratios ……………………………………………………………………………………………………………… 5
Efficiency Ratios …………………………………………………………………………………………………………….. 6
Profitability Ratios ………………………………………………………………………………………………………….. 6
Management Discussions and Analysis ……………………………………………………………………………… 8
Stock performance……………………………………………………………………………………………………….. 9
Risk Factors ………………………………………………………………………………………………………………… 9
Other important information …………………………………………………………………………………………… 11
References ……………………………………………………………………………………………………………………. 12
Appendices …………………………………………………………………………………………………………………… 13
Appendix I ………………………………………………………………………………………………………………… 13
Appendix II ………………………………………………………………………………………………………………. 15
FINANCIAL ANALYSIS 3
HOME DEPOT INC. FINANCIAL ANALYSIS
Introduction
Home Depot Incorporated is the biggest home furnishing and improvement company
globally. It was established in 1978. The two primary founders consist of Marcus and Mr. Blank
and have grown rapidly, becoming a global home improvement dealer. The company deals with
selling of various assortments of construction materials, improvements in homes together with
lawn as well as garden-related types of equipment. The companies headquarter located in
Atlanta, Georgia. As of January of the year 2010, the company had an overall 317,000
employees.
Liquidity Ratios
Working Capital
It can be defined as a company’s CA less CL of the company. A working capital over
zero shows that a firm can meet all its debts as well as obligations if required in the short term.
Some companies, however, tend to operate on negative working capital, which could either be
because its short term capital is not managed properly (for example, a company that takes on too
much short-term debt, but generates huge operating losses), or because its business model
ensures that it receives cash upfront (for example, a gym that receives its membership fees
upfront). Some multiple factors and items make up working capital. The most common operating
method of improving working capital is to increase the days payable while reducing days
receivable (receive cash from customers sooner than it is paid out to suppliers).
14520 – 9376 = 5144. Therefore, Home Depot’s WC was 5.144 billion dollars, which is a
positive number.
FINANCIAL ANALYSIS 4
Current Ratio
The ratio is calculated by equating the company’s current assets (CA) to its Current
Liabilities (CL). It is calculated to assess the liquidity of a business and also to assess the
business’s ability to repay its present obligation using its existing resources. The current ratio is
Current Assets/Current Liabilities
CR = 14520/9376 = 1.55
On a common-sized balance sheet, the current ratio is equivalent and represented as a
percentage which is given as 1.55 times 100 percent which gives us 155%
The current ratio is a comparative ratio, and it can be either higher or lower than a suitable base.
Generally, it is perceived that the current ratio should be at least 1:1 (Hermason, 2011). But that
is not the all-time case. Some businesses operate in such sectors where high liquidity is preferred
due to the high uncertainty of operations. On the other side, there are some industries where
higher liquidity is not the utmost priority of the business as operations are predictable. In both
cases, an industry average current ratio is desirable. However, if the asset management objectives
are prime, then a minimum or maximum limit of this ratio can be defined.
Quick Ratio
This provides a measure of quick assets to quick liabilities of the company. Quick assets
are measured to be easily manipulated than any other asset, CA, less inventory or stock, and due
expenses. Quick obligations require existing liabilities, less bank overdraft. Many times, current
liabilities are taken as fast liabilities to be more stable.
Liquid or Quick = Quick Assets ÷ Current Liabilities
Liquid assets need cash and all other assets that can be turned into money in a very short
time. Those are properties that can be disposed of quickly. They are called fast properties, too.
FINANCIAL ANALYSIS 5
Liquid Assets (Quick Assets)
= Current Assets – Inventory (Stock) –Prepayments
= 4856/17898
=0.27
The Quick Ratio on the common balance sheet translates to 27 percentages. A quick ratio
exceeding 1 indicates that the organization seems to its CL with the available liquid assets. Quick
assets are current assets that can quickly be turned into cash. Thus, companies with better quick
ratios are preferred by shareholders and in this case, the quick ratio is less than one, which is
0.27. This shows that the business is not in a better financial position in covering its current
liabilities as far as profitability is concerned.
Solvency Ratios
Debt to Equity Ratio
This ratio of a business is a measure of the contribution of the creditors and shareholders
or owners towards the capital invested in a company. It is a financial tool used to get an idea of
how much of the borrowed money can be repaid in liquidation using the shareholder’s
contribution. It is a simple equation that provides data regarding the collection of funds and how
they have been raised in the operation of the business and is considered to be an important
indicator of the financial health of a business. It is mainly used to understand the company’s
stability and the ability to raise additional capital in order to fund expansion and growth.
D/E = Total liabilities/shareholder equity The total stockholders’ equity of this company is 40518
in dollars, while its total liabilities are 22620 in dollars. Therefore D/E is 22620/40518
= 0.56
FINANCIAL ANALYSIS 6
On the common balance sheet, this can be expressed as 0.56 x 100, giving a percentage
of 56.
Efficiency Ratios
Return on Investment
It is also known as the return on initial capital investment. The ratio is a common
business term used to recognize past and potential budgetary returns. Directors and officials look
to the ROI of an undertaking or attempt since this shows how fruitful a wander will be. Regularly
communicated as a rate or a proportion, this esteem portrays anything from a budgetary return to
expanded efficiencies. ROI = (Net Profit / Cost of Investment) x 100
= 70395/16028, giving a translation of 44 percent. The ROI equation has a “multipurpose” if you
can say so and can be adjusted for different purposes. A business may be using the calculation to
compare the ROI for various power investments.
Profitability Ratios
Gross Profit Margin
Gross Profit Margin measures how much money a company generates after paying the
Cost of Products Sold (COGS) costs. This benefit represents the amount of any dollar in sales or,
in other words, how much a corporation has left a profit after spending the Cost of Products
Sold. According to Home Depot (2011), gross profit increased by 4.1 percent in 2011 from 23.3
billion to 24.3 billion dollars. Therefore, this shows that this firm is in good financial health and
thus, it can sustain the competitive edges.
FINANCIAL ANALYSIS 7
Net Profit Margin
The company’s net income can be calculated by subtracting the total expenses of a company,
including the operating cost and tax expenses, from its revenue.
Net Profit Margin =Total revenue –total expenses
NPM = (70395 – 17601)
= 52794 / 70395= 0.75
Operating Margin
This is a measure concerned with the proportion of the firm’s profits remains after having
paid variable costs of output, such as wages, raw materials, etc. It can be measured by dividing
the operating profits of a company (also known as “operating profit”) for a given period by net
revenues for the same period.
Operating Margin = Operating income / net sales
= 6661/70395
=0.094
This indicates the firm is capable of covering its non-operating costs, such as paying
interest using the available revenues proportionally.
ROA
The company’s ROA is significantly contributed by each capital invested. Overall, the
higher the ROA, the more efficient the management is to generate profits. This technique is used
to analyze the Ratio of Profitability. The formula for the same is “ROA= Net Income/ Average
Total Assets.”
= 3883/40518
=0.095
FINANCIAL ANALYSIS 8
This one on the common balance sheet gives a translation of
0.095 x 100
That is 9.5%
Management Discussions and Analysis
According to Home Depot’s annual report of 2011, the following were the critical
discussions and analyses from the management. Home Depot was able to record 3.9 billion
dollars in Net earnings with 2.47 dollars in diluted EPS. This was an increase from the previous
year 2010. Also, net sales rose by 3.5 percent in the year 2011. The company’s success can be
closely linked with the four critical initiatives: customer service, product authority, productivity
and efficiency, and interconnected retail. Home depot’s inventory turnover rose from 4.1in the
year 2010 to 4.3 in the year 2011. This ratio typically measures how fast the firm was able to sell
its inventory. An increase within this period implies that Home Depot enjoyed strong sales from
the year 2011.
Home Depot’s ability to build shareholder value increased significantly in the year 2011,
where management was able to repurchase over ninety-seven million shares for an estimated 3.5
billion dollars. The quarterly cash dividend increased by 16 percent in the 2011 financial year.
Also, the company opened eleven new stores and closed five others. Therefore, the total number
of physical stores by the close of the 2011 fiscal year was 2,252. Cashflow from the company’s
operations was 6.7 billion dollars. Out of this, a total of 2.5 billion dollars was used to fund an
estimated 3.5 billion dollars for share repurchasing, payment of 1.6 billion dollars for dividends
as well as funding of 1.2 billion dollars for capital expenditures.
FINANCIAL ANALYSIS 9
Stock performance
Home Depot’s stock continued to perform well in the stock market. In the financial year
2011, Home depot share price was trading at 131.54 dollars above the S & P 500 index and S &
P Retail Composite Index.
Long term debt to equity ratio rose from 0.461 to 0.601 in the year 2011. This was the case
because of the higher debt levels that Home Depot experienced in 2011. The return on invested
capital increased significantly from 12.8% in 2010 to 14.9% in 2011.
Risk Factors
There are several risks explained below that will impact the materiality of Home Depot.
These risks will affect the financial operations and results of Home Depot in the fiscal year 2011.
Effect of the current economic conditions on the demand of Home Depot’s products is critical in
the success of the firm (Weygandt, Kimmel, &Kieso 2011). Housing stability, markets for home
improvement and the company’s economic conditions have a detrimental impact on the
company’s financial performance. These factors play a crucial role in delaying purchases by
customers. Also, the rising levels of unemployment experienced in 2011 are significant in
FINANCIAL ANALYSIS 10
lowering the purchasing powers of the customers. Also, weather and other natural disasters
played a crucial role in the demand for Home Depot’s products for the year 2011.
Another risk factor is the high competition in the construction and home mortgage
market, which would significantly affect the prices and demand for the company’s products.
Competition is critical for reducing the company’s overall market share. The metrics of
competition in this industry are based on pricing, customer service, and location of stores,
packaging, or the appearance of their commodities and their quality of merchandise. Home depot
primarily competes with other home furnishing and improvement stores, plumbing stores,
electrical shops, other specialty showrooms, and online stores. All these affect the pricing
strategy adopted by the company. Therefore, the company’s management must respond to all the
above competitive forces and remain profitable to remain ahead of the competition.
Inflation or deflation in consumer markets may affect our costs, the demand for our
goods, revenue, and profit flow. The prices of these commodities are generally unpredictable.
They are based on changes realized in both local and foreign demand and supply, rates of labor,
pricing, customer sentiment, laws, and regulations, and frequent delays in the production
process. Frequent changes in the pricing of the company’s products can directly impact the
prices of the products, our earnings, and productivity.
Fluctuations in our production process and certain other factors influencing our products’
delivery could negatively affect our business. Disturbance to our distribution or value chains,
including disruption or loss to our retail outlets, could negatively impact the company’s
capability to produce the inventory within reasonable timelines. This could hinder the company’s
potential to manage market demand for goods bringing about a reduction in revenue or harm to
Home Depot’s brand.
FINANCIAL ANALYSIS 11
Other important information
Just like any other retailing firm, Home Depot has got internal and external factors in its
business. This includes strengths and weaknesses. The strengths include:
Strong and significant bargaining power: This is the pressure that is applied to firms by
suppliers through increasing the prices; lower the quality as well as carrying out the reduction of
their products. This has helped in shaping the competitive landscape of Home Depot and aids it
in attracting clients.
Supply chain transition: This has increased effectiveness, thus creating a better position
for competition. Proprietary brands of the firm: This has led to the offering of exclusivity and
increased customer footfall. The weakness of the firm is that there is a mature domestic market.
This has posed stiff and intense competition in the industry.
FINANCIAL ANALYSIS 12
References
Hermanson and Edwards. 2011. Accounting Principles: A Business Perspective,
FinancialAccounting: Creative Commons license Attribution-Noncommercial-Share
Alike
Home Depot. 2011. HD-1.29.2012-10-K. Retrieved 19 June 2020, from
https://www.sec.gov/Archives/edgar/data/354950/000035495012000003/hd-1292012x10xk.htm
Weygandt, J.J., Kimmel, P. D., &Kieso, D. E., 2011 Accounting Principles. Hoboken, NJ: John
Wiley &Sons, INC
FINANCIAL ANALYSIS 13
Appendices
Appendix I
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended(1)
29 January,
30 January,
31 January,
2012
2011
2010
amounts in millions, except per share data
NET SALES
$ 70,395
$ 67,997
$ 66,176
Cost of Sales
46,133
44,693
43,764
24,262
23,304
16,028
15,849
15,902
Depreciation and Amortization
1,573
1,616
1,707
Total Operating Expenses
17,601
17,465
17,609
6,661
5,839
4,803
GROSS PROFIT
22,412
Operating Expenses:
Selling, General and Administrative
OPERATING INCOME
Interest and Other (Income) Expense:
Interest and Investment Income
(13)
(15)
(18)
FINANCIAL ANALYSIS 14
Interest Expense
606
530
676
—
51
163
593
566
821
6,068
5,273
3,982
2,185
1,935
1,362
3,883
3,338
2,620
—
—
41
$ 3,883
$ 3,338
$ 2,661
1,562
1,648
1,683
Other
Interest and Other, net
EARNINGS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES
Provision for Income Taxes
EARNINGS FROM CONTINUING OPERATIONS
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAX
NET EARNINGS
Weighted Average Common Shares
BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS
$
2.49
$
2.03
$
1.56
BASIC EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS
$
—
$
—
$
0.02
BASIC EARNINGS PER SHARE
$
2.49
$
2.03
$
1.58
Diluted Weighted Average Common Shares
1,570
1,658
1,692
DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS
$
2.47
$
2.01
$
1.55
DILUTED EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS
$
—
$
—
$
0.02
DILUTED EARNINGS PER SHARE
$
2.47
$
2.01
$
1.57
FINANCIAL ANALYSIS 15
Appendix II
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
29 January,
30 January,
2012
2011
amounts in millions, except share and per share data
ASSETS
Current Assets:
Cash and Cash Equivalents
Receivables, net
$
1,987
$
545
1,245
1,085
10,325
10,625
963
1,224
14,520
13,479
8,480
8,497
Buildings
17,737
17,606
Furniture, Fixtures and Equipment
10,040
9,687
1,372
1,373
Merchandise Inventories
Other Current Assets
Total Current Assets
Property and equipment, at cost:
Land
Leasehold Improvements
FINANCIAL ANALYSIS 16
Construction in Progress
758
654
Capital Leases
588
568
38,975
38,385
14,527
13,325
24,448
25,060
135
139
1,120
1,187
295
260
Less Accumulated Depreciation and Amortization
Net Property and Equipment
Notes Receivable
Goodwill
Other Assets
Total Assets
$
40,518
$
40,125
$
4,856
$
4,717
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
Accrued Salaries and Related Expenses
1,372
1,290
391
368
1,147
1,177
Income Taxes Payable
23
13
Current Installments of Long-Term Debt
30
1,042
Sales Taxes Payable
Deferred Revenue
FINANCIAL ANALYSIS 17
Other Accrued Expenses
Total Current Liabilities
Long-Term debt, excluding current installments
Other Long-Term Liabilities
Deferred Income Taxes
Total Liabilities
1,557
1,515
9,376
10,122
10,758
8,707
2,146
2,135
340
272
22,620
21,236
87
86
6,966
6,556
17,246
14,995
293
445
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.05; authorized: 10 billion shares; issued: 1.733 billion shares at 29
January, 2012 and 1.722 billion shares at 30 January, 2011; outstanding: 1.537 billion shares at 29
January, 2012 and 1.623 billion shares at 30 January, 2011
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock, at cost, 196 million shares at 29 January, 2012 and 99 million shares at 30 January,
2011
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$
(6,694)
(3,193)
17,898
18,889
40,518
$
40,125

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