First company Home Depot

Second company Lowes

c.

Write Comparisons of the companies and all other analysis (observations and/or

interpretations).

d.

Write Conclusions and recommendation for investment. Write conclusive summary on the firms you have studied. Based upon your conclusions, recommend the better performing firm for potential investment. Your conclusions should be based upon, and specifically reference, the analyses prepared in this report.

Executive Summary

The following analysis centers around two popular home improvement stores, Home Depot (HD) and Lowes Home Improvement (LOW). The analysis of the financial statements of these home improvement stores has produced beneficial evidence on the successes and failures spanning the years 2016, 2017, and 2018. Presented is a brief background of both companies, respectively, as their patterns of operation and decision-making impact investors' perspectives. Followed by a report of both company's income statement and balance sheet with common size and comparative analysis calculations, completed to depict the progression of the companies over the course of three-years. Additionally, the financial ratio analysis of each company assisted by its profitability, productivity, solvency, and liquidity computations to better assess the risk speculation field.

Brief Background

When purchasing a new apartment or home, the excitement not only lies within the purchase but the decorating also. Each person has a unique sense of style, and it necessary to have a variety of stores catered to this variety. Stores like Home Depot and Lowe's pride themselves on their ability to fulfill wants for low costs. Lowe has joined the top ranks of worldwide retailers, while Home Depot has expanded to over 2000 stores in three countries.

LOW started as a small hardware store in North Carolina when founder H. Carl Buchan saw its potential to become more. Spanning 70+ years later, they stock over 40,000 items with Canada and Mexico as location as of 2007 and 2010 respectively. In 1982, Lowes celebrated its highest profit of 25 million, and have successfully been increasing ever since.

HD success stores are one of determination, because of the termination of two individuals in 1978. Bernie Marcus and Arthur Blank opened their first store in Atlanta, Ga June of 1979. Forty years later, they are the top tier in providing hardware. With a combined 2200 stores and almost 400,000 associates across the U.S, Mexico, and Canada, HD is one of the world's largest home improvement retailers.

Financial Analysis

Objective

The main objective is to examine, assess, and then distinguish the companies, Home Depot and Lowe's Home Improvement, with the use of financial data accumulated from the vertical and horizontal analysis. The data collected for the span of 3-years, 2016, 2017, and 2018, determines which company is better for investing. The better opponent is regarded as the best for future investments granted that their financial evaluation is the optimum depiction of the company's operations.

Common-size Analysis

The common size analysis, or vertical analysis, is a strategy for assessing budgetary data by communicating everything in a financial report as a level of a base sum for a similar timeframe. By subtracting the current from the previous year data, then dividing that data by the base year (2018) and multiplying by 100, the result is a positive or negative percentage for an income statement. While the balance sheet takes the data of each total listed and divides by the total liabilities. Therefore, both produce percentage calculations about the company from the numerical findings.

Common- Size Income Statement Analysis

First, from the income statement of both, LOW, and HD, the main accounts for analysis are Selling, general and administrative, depreciation and amortization, and Net Income. Over the span of three years, HD has accumulated 18.03 percent and LOW's 23.27 percent in the year of 2018. Compared to 2016, HD decreased by 0.08 percent, while LOW's increased by 1.15 percent. Considering both companies produce the same classification of items,

Secondly, is Depreciation and amortization which are non-money costs on an organization's income statement. Depreciation speaks to the expense of capital resources on the monetary record being utilized after some time, and amortization is the comparable expense of utilizing elusive resources like altruism over the long run. Representing Depreciation and amortization, each company had 1.73 percent and 2.07 percent for HD and LOW's respectively, at the end of the base year 2018. Each company has experience >1% loss over the span of three years.

Lastly, is Net Income which is the company's sum of individual gains after taking away expenses and different findings from net salary. For a business, the overall gain is the measure of income left in the wake of taking away all costs, charges, and expenses. The accumulative net income of HD totals 10.28 percent, a 1.87 percent increase from 2016. While LOW's totals 3.25 percent, a 1.25 percent decrease compared to 2016 percentage.

Financial Ratios

Profitability

In this report four different profitability ratios were used to calculate the profitability of the two companies, which measure the efficiency with which your company turns business activity into profits. Profit margins of these two companies are very close. It shows that these two companies' ability to turn revenue into profits are very similar. Home Depot's return on assets is higher than Lowes, it means that Home Depot has better ability to use assets to produce net income. However, Home Depot's return on equity is negative in 2018, it means its shareholders are losing, rather than gaining. This is usually a very bad sign for investors and managers.

Productivity

Productivity measures the efficiency of a company's production process. There are four different ratios used to calculate these two companies' productivity.

The Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level. Both companies have good turnover rate.

Days inventory outstanding is the average number of days that a company holds its inventory. Home Depot is slightly low than Lowes, and it also has slightly declined over 3 years. It means Home Depot is able to sell inventory at a quicker pace than Lowes is.

PPE turnover is a measure of how efficient you are at generating revenue from fixed assets such as buildings, vehicles, and machinery. Home Depot is a little higher than Lowes, which means that Home Depot is more efficient than Lowes on its capital investments.

Asset turnover is the ratio of total sales or revenue to average assets. Lowes has higher number than Home Depot, it means that Lowes is effective than Home Depot on using their assets to generate sales.

Solvency

Solvency is the ability of a company to meet its long-term debts and financial obligations. There are three ratios used to evaluate these two companies' solvency. Debt-to-equity is calculated by dividing a company's after-tax net operating income by its total debt obligations. Due to Home Depot's 2018 Total stockholders' equity is deficit, so the ratio is negative. It means it has interest rates on its debts that are greater than the return on investment. Negative debt to equity ratio also means Home Depot has a negative net worth.

Times interest earned is the ratio of Operating Income for the most recent year divided by the Total Non-Operating Interest Expense, Net for the same period.Lowes has negative ratio for all 3 years, it is loss-making for all 3 years.

After calculated ROA and ROE, we got the number of Return on Financial leverage. Lowes has good number on ROFL. However, Home Depot has Negative leverage occurs, it assume that Home Depot purchased an investment using borrowed funds, and the borrowed money has a greater cost, or higher interest rate, than the return made on the investment. Home Depot may have problems raising money to cover historical net losses.

Liquidity

The three ratios used in this report to measure both companies' liquidity. The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. Lowes has higher current ratio than Home Depot, which a creditor would consider a high current ratio to be better than a low current ratio, because a high current ratio indicates that the company is more likely to pay the creditor back.

The quick ratio another measurement in this report, which is considered a more conservative measure than the current ratio, which includes all current assets as coverage for current liabilities. Home Depot has the higher the ratio result, the better a company's liquidity and financial health; the lower the ratio, the more likely the company will struggle with paying debts.

Working capital that is in line with or higher than the industry average for a company of comparable size is generally considered acceptable. For 2018, Home Depot has negative working capital, because its current liabilities exceed its current assets. This means that the liabilities that need to be paid within one year exceed the current assets that are monetizable over the same period.

Home Depot Balance Sheet

Balance sheet Income Statement NOTE: 2015 BALANCE SHEET INFORMATION SHOULD BE USED ONLY FOR RATIOS Report Date 2018 2017 2016 2015 $ in Thousands Cash & cash equivalents $511,000 $568,000 $558,000 $405,000 Short-term investments $218,000 $102,000 $100,000 $307,000 Merchandise inventory, net $12,561,000 $11,393,000 $10,458,000 $9,458,000 Other current assets $938,000 $689,000 $884,000 $391,000 Total current assets $14,228,000 $12,772,000 $12,000,000 $10,561,000 Property, less accumulated depreciation $18,432,000 $19.721,000 $19.949,000 $19,577,000 Long-term investments $256,000 $408,000 $366,000 $222,000 Deferred income taxes - net $294,000 $168,000 $222,000 $241,000 Goodwill $303,000 $1,307,000 $1.082,000 50 Other assets $995.000 $915,000 $789.000 $665.000 Total assets $34,508,000 $35,291,000 $34,408,000 $31,266,000 Liabilities Short-term borrowings $722,000 $1.137,000 $510.000 $43,000 Current maturities of long-term debt $1,110.000 $294,000 $795.000 $1,061,000 Accounts payable $8,279,000 $6.590,000 $6.651,000 $5,633,000 Accrued compensation & employee benefits $662,000 $747,000 $790,000 $820,000 Deferred revenue $1,299,000 $1,378,000 $1 253,000 $1,078,000 Other current liabilities $2,425,000 $1.950,000 $1.975,000 $1,857,000 Total current liabilities $14,497,000 $12,096,000 $11,974,000 $10,492,000 Long-term debt, excluding current maturities $14,391,000 $15,564,000 $14.394,000 $11,545,000 Deferred revenue - extended protection plans $827,000 $803,000 $763,000 $729,000 Other liabilities $1,149,000 $955,000 $843,000 $846,000 Total liabilities $30,864,000 $29,418,000 $27,974,000 $23,612,000 Stockholders' Equity Common stock $401.000 $415,000 $433,000 $455,000 Capital in excess of par value SO $22.000 Retained earnings $3,452.000 $5,425,000 $6.241,000 $7,593,000 Accumulated other comprehensive income (loss) -$209,000 $11,000 $240.000 -$394,000 Total shareholders' equity $3,644,000 $5,873,000 $6.434,000 $7,654,000 Total liabilities and stockholders' equity $34,508,000 $35,291,000 $34,408,000 $31,266,000 Additional Information "Property and Equipment, at cost Land $7,196,000 $7.414,000 $7,329,000 $7.086,000 Buildings & building improvements $18,052,000 $18,521,000 $18,147,000 $17,451,000 Equipment $10,090.000 $10.475,000 $10.978.000 $10,863,000 Construction in progress $525,000 $530,000 $464,000 $513,000 Total cost $35,863,000 $36,940,000 $36,918,000 $35,913,000 Less: accumulated depreciation $17,431,000 $17 219,000 $16,969,000 $16,336,000Balance Sheet Income Statement NOTE: 2015 BALANCE SHEET INFORMATION SHOULD BE USED ONLY FOR RATIOS Report Date 2018 2017 2016 2015 $ in Millions Current assets: Cash and cash equivalents $1,778 $3.595 $2,538 $2,216 Receivables, net $1,936 $1.952 $2.029 $1,890 Merchandise inventories $13,925 $12.748 $12.549 $11,809 Other current assets $890 $638 $608 $569 Total current assets $18,529 $18,933 $17,724 $16,484 Net property and equipment $22,375 $22,075 $21,914 $22,191 Goodwill $2,252 $2.275 $2,093 $2, 102 Other assets $847 $1,246 $1,235 $1,196 Total assets $44,003 $44,529 $42,966 $41,973 Current Liabilities: Short-term debt $1,338 $1.559 $710 $350 Accounts payable $7.755 $7 244 $7,000 $6.565 Accrued salaries and related expenses $1.506 $1.640 $1.484 $1.515 Sales taxes payable $656 $520 $508 $476 Deferred revenue $1,782 $1.805 $1.669 $1,566 Income taxes payable $11 $54 $25 $34 Current installments of long-term debt $1,056 $1.202 $542 $71 Other accrued expenses $2.611 $2.170 $2.195 $1,941 Total current liabilities $16,716 $16,194 $14,133 $12,524 Long-term debt, excluding current installments $26,807 $24.267 $22,349 520,789 Deferred income taxes $491 $440 $296 $379 Other long-term liabilities $1,867 $2.174 $1,855 $1,965 Total liabilities $45,881 $43,075 $38,633 $35,657 Common stock, par value $0.05: authorized: 10,000 shares; issued: 1,782 $89 $88 $88 Paid-in capital $10,578 $10,192 $9.787 59.347 Retained earnings $46,423 $39,935 $35.519 $30,973 Accumulated other comprehensive loss -$772 -$566 $867 -$898 Treasury stock, at cost, 677 shares at February 3, 2019 and 622 shares at -$58,196 -$48.196 $40.194 $33,194 Total stockholders' (deficit) equity $1,878 $1,454 $4,333 $6,316 Total liabilities and stockholders' equity $44,003 $44,529 $42,966 $41,973 Additional Information No allowance account is created for receivables, i.e. Net receivables is equal to gross receivables "Property and Equipment, at cost: Land $8,363 8352 58.207 8,149 Building's 18199 $18,073 $17.772 17,667 Furniture, Fixtures and Equipment 12460 11506 11,020 10.279 Leasehold Improvements 1705 1637 1.519 1.481 Construction in Progress 820 538 739 670 Capital Leases 1392 1308 1.169 1.020 Less Accumulated Depreciation and Amortization 20564 19339 18.512 17,075 Net Property and Equipment 22375 22075 21,914 22,191Balance sheet Income Statement As Reported Annual Income Statement Report Date 2018 2017 2016 Scale Thousands Thousands Thousands Net sales 71.309,000 68,619.000 65.017.000 Cost of sales 48,401,000 45,210,000 42.553,000 Gross margin 22,908,000 23,409,000 22,464,000 Selling, general & administrative expense 17,413,000 15,376,000 15.129,000 Depreciation & amortization 1,477,000 1.447,000 1,489,000 Operating income (loss) 4,018,000 6,586,000 5,846,000 Interest income (expense), net -624,000 -633,000 -645,000 Loss on extinguishment of debt 0 -464.000 0 Pre-tax earnings (losses) 3,394,000 5,489.000 5,201,000 Income tax provision 1,080,000 2,042.000 2.108,000 Net earnings 2,314,000 3,447,000 3,093,000 Additional Information Weighted average shares outstanding - basic 811,000 839,000 880,000 Cash dividends per share 1.85 1.58 1.33 Net cash flows from operating activities 6, 193,000 5,065,000 5,617,000Balance Sheet Income Statement shares in Millions, $ in Millions 2018 2017 2016 Income Statement Net Sales $108,203 $100,904 $94,595 Cost of sales 71,043 66,548 62,282 Gross profit 37,160 34,356 32,313 Operating expenses: Selling, general and administrative 19,513 17,864 17,132 Depreciation and amortization 1,870 1,811 1,754 Impairment loss 247 0 0 Total operating expenses 21,630 19,675 18,886 Operating income 15,530 14.681 13,427 Interest and other (income) expense: Interest and investment income 93 -74 -36 Interest expense 1,051 1,057 972 Other 16 0 0 Interest and other, net 974 983 936 Earnings before provision for income taxes 14,556 13,698 12,491 Provision for income taxes 3,435 5,068 4,534 Net earnings $11,121 $8,630 $7.957 Additional Information Basic weighted average common shares 1,137 1,178 1,229 Cash dividend per share 4.12 3.56 2.76 Operating cash flow for the year 13,038 12,031 9,78317 PROTECTED VIEW Be careful-files from the Internet can contain viruses. Unless you need to edit, it's safer to stay in Protected View. Enable Editing C29 X V A B C D E F G H (3) Prepare ratio analyses (for 2018, 2017, and 2016) for both companies. You should include the following ratios in your computations: w Home Depot LOWES 2018 2017 2016 2018 2017 2016 5 Profitability ratios 6 Gross Profit margin 34.34% 34.05% 34.16% 32.12% 34.11% 34.55% 7 Profit margin 10.28% 8.55% 8.41% 3.25% 5.02% 4.76% 8 Return on assets 26.94% 21.25% 21.02% 5.41% 8.75% 8.25% 9 Return on equity -5246% 298% 149.44% 48.63% 56.02% 43.91% 10 Productivity 11 Inventory Turnover 5.33 5.26 5.11 4.04 1.14 4.27 12 days inventory outstanding 68.52 69.37 71.37 90.32 88.21 85.42 13 PPE Turnover 4.87 4.59 4.29 3.74 3.46 3.29 14 Asset Turnover 2.44 2.31 2.23 5.28 5.54 5.76 15 Solvency 16 Debt-to-equity -24.43 29.63 8.92 8.47 5.01 4.35 17 Times interest earned 15.94 14.93 14.35 -6.44 -10.40 -9.06 18 Return on Financial leverage 52.73 2.77 1.28 0.43 0.47 0.36 19 Liquidity 20 Current Ratio 1.11 1.17 1.25 2.38 2.92 2.87 21 Quick Ratio 0.22 0.34 0.32 0.05 0.06 0.05 22 Working capital -1878.00 1454.00 4333.00 3644000.00 5873000.00 6434000.00 23 24 25 26 27 28 29 30 31 32 33