Hechinger Co. and Home Depot are two home improvement retailers. Compared to Hechinger, which was founded in the early 1900s, Home Depot is a relative newcomer. But, in recent years, while Home Depot was reporting an average increase in net income of 28% per year between 1995 and 1998, Hechinger was reporting increasingly large net losses. Finally, in 1999, largely due to competition from newcomer Home Depot, Hechinger was forced to file for bankruptcy.

Here is financial data for both companies at their most recent year-ends (in millions).

Instructions Using the data, perform the following analysis.

(a) Calculate working capital, the current ratio, the acid-test ratio, and the current cash debt coverage ratio for each company. Discuss their relative liquidity.

(b) Calculate the debt to total assets ratio, times interest earned, and cash debt coverage ratio for each company. Discuss their relative solvency.

(c) Calculate the return on assets ratio and profit margin ratio for each company. Comment on their relative profitability.

(d) The notes to Home Depot's financial statements indicate that it leases many of its facilities using operating leases. If these assets had instead been purchased with debt, assets and liabilities would have increased by approximately $2,347 million. Calculate the company’s debt to total assets ratio employing this adjustment. Discuss the implications.

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Hechinger 10/3/98 Cash Short-term investments $ 21 0 Home Depot 1/31/99 $ 62 0 Receivables 0 469 Total current assets 1,153 4,933 Beginning total assets 1,668 11,229 Ending total assets 1,577 13,465 Beginning current liabilities 935 2,456 Ending current liabilities 938 2,857 Beginning total liabilities 1,392 4,015 Ending total liabilities 1,339 4,716 Interest expense 67 37 Income tax expense 3 1,040 Cash provided (used) by operations (257) 1,917 Net income (93) 1,614 Net sales 3,444 30,219