Part II Summary – Analysis of Home Depot & Lowes’ Financial Statements
Home Depot
Liquidity
The liquidity position of the company is measured using the current ratio. The current rate measures the ability of the company to pay off its current liabilities using its current assets. The current ratio rating for both year 2019 and 2018 is 2.74. The current ratio of Home Depot for 2019 is 1.11, less than the ratio for 2018. The ratio is greater than 1, showing the company can pay off its current liabilities entirely using current assets. The current ratio decreased in 2019, showing a decrease in liquidity.
Profitability
The company’s profitability is measured using the profit margin and return on assets. Profit margin measures the ability of the company to control its costs, while return on assets measures the management’s effectiveness in utilizing company resources to support its operations. The company’s profit margin for 2018 is 8.55%, and the ratio for 2019 ratio is 10.28%; the ratio increased in 2019, showing an increase in profitability. The profit margin ratio is above the year ratings of 5.70%; this implies that the company’s profitability level is greater than the year’s average. The return on assets for 2018 is 19.73%, and the ratio for 2019 is 25.12%; the ratio increased in 2019, showing an increase in profitability. The return on assets ratio is above the year ratings of 11.60%, which indicates an increase in management’s effectiveness.
Long Term Solvency
The debt-to-equity ratio measures the company’s gearing level. A lower ratio is preferred because it shows the company is not subjected to high financial risk. The debt-to-equity ratio is extremely high, meaning the company will likely go bankrupt. HD operates under high financial risk.
Lowes’
Liquidity
The current ratio of Lowe’s for 2018 is 1.06, higher than its 2019 current ratio, which is less than 1. This ratio shows that Lowe’s could not pay 100% of its current liabilities using its current assets in 2019.
Profitability
The profit margin for 2018 is 5.02%, and the ratio for 2019 is 3.25%; the ratio decreased in 2019, showing a decrease in profitability. The profit margin ratio is below the year’s ratings of 5.70%; this implies that the company’s profitability level is lower than the year’s average. The return on assets for 2018 is 9.89%, and the ratio for 2019 is 6.63%; the ratio decreased in 2019, showing a decrease in profitability. The return on assets ratio is below the year ratings of 11.60%; this indicates a decrease in management effectiveness.
Long Term Solvency
Just like Home Depot, the debt-to-equity ratio for Lowe’s is extremely high, which means that the company operates under high financial risk and may be insolvent.
Questions
Which of the two companies controlled their Costs and Expenses the Best?
Home Depot controls its costs and expenses better than Lowe’s because it has a higher and increasing profit margin compared to Lowe’s. The profit margin and return on assets for HD increased in 2019, while the same ratios for Lowe’s decreased in 2019.
Which of the two companies would you invest in (you must choose one of the two) and why?
I would invest in Home Depot because its financial performance improved in 2019, except for the high gearing level. Lowes has poor liquidity as well as experiencing high financial risk.
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Part II Summary – Analysis of Home Depot & Lowes’ Financial Statements
This is the first part of a continuing project to analyze two companies – Home Depot and Lowe’s. We will begin with retrieving information for the companies and perform analysis of 4 ratios. After completion of this phase of the project we will expand the analysis and complete the project at the end of the course, in Session 7.
Session 3 Financial Analysis Project:
Due Date is end of Session 4 (see Due Dates and Grades for specific dates and times).
Part II Summary – Analysis of Home Depot & Lowes’ Financial Statements
The companies to be compared and analyzed are Home Depot & Lowe’s. Find the websites on the internet for the two companies and locate their latest annual reports. This part of the project is to help students become familiar with locating financial information for a given company. Companies’ websites change routinely as well as the data in their annual reports, the location of specific data varies for each company as well. Their annual reports may be under “Investor Information,” “Financial Information,” or a similar topic.
Part I-Ratio Calculation:
We will analyze Home Depot & Lowe’s by calculating 4 ratios: Current Ratio; Profit Margin; Return on Assets and Debt to Equity. Templates for calculating and presenting the information are at the following link: HD – Lowes- Ratio Analysis
Use the Industry comparison information at the top of page 215 for current ratio) in the text to make your assessment of Strong, Weak or Neutral.
Part II- Summary:
Briefly discuss whether or not Home Depot & Lowe’s can pay their debts (Liquidity), whether or not each are Profitable (Profitability or Performance), and finally whether each will likely continue to operate (Long Term Solvency).
Explain which company would you invest in and why (you must choose one of the two). Use the format at the following link: Financial Analysis Project- Summary week 3 Financial Analysis Project- Summary week 3 – Alternative Formats
The textbook readings are from
- Financial and Managerial Accounting 10th Edition by Belverd E. Needles, Martin Powers, and Susan V Crosson