This report focuses on vertical, horizontal and ratio analysis of Lowes Companies, Inc. financial statements for the five year period 2016 through 2020. The past year ended January 29, 2021, shows significant growth of sales at 24.2% after its smallest sales growth in the prior year 2019 at only 1.2%. After increases in net earnings in both 2016 and 2017, a significant decrease of 32.9% occurred in 2018 due to increases in cost of sales and operating expenses which exceeded the increase in sales that year. Despite a small 1.2% increase in 2019s net sales, a decrease in operating expenses combined with a smaller increase in income taxes, caused net earnings to increase by 85.0%; all these figures come from the horizontal statement of earnings for Lowes.

Through analysis, Lowes financial performance will be compared to its larger competitor, Home Depot, in order to assess their relative strengths and weaknesses in the market. Home Depot has increased revenue and earnings in each of the five years but at different rates than Lowes according to the horizontal statements of earnings; however, it is hard to compare horizontal rates of change for these two companies because Home Depots revenues, expenses and income levels are much larger than their smaller competitors levels. Home Depot has more stores in more regions of the United States in comparison to Lowes so their scale of operations is larger plus Home Depot has a larger international presence.

Vertical analysis of the financial statements shows the relative size of each item to a base figure representing 100%. Preparing vertical analysis over a five-year period determines the relative composition and size of assets, liabilities, stockholders equity, revenues and expenses. Horizontal analysis calculates the rate and direction of change in accounts between two years so that trends in items on the financial statements can be determined as having increased, decreased or that it stayed constant. Ratio analysis compares the relationship of numbers reported in the financial statements in order to assess profitability, liquidity, solvency, or market performance. Upon completion of these analyses, the report will then evaluate the market performance of Lowes versus Home Depots stock, Lowes strengths and weaknesses, and finish by providing recommendations to management. The report begins with vertical analysis of the balance sheet.

Vertical Analysis of the Balance Sheet

Over the period 2016 through 2020, the two largest assets have been property, net of accumulated depreciation and merchandise inventory. Property declined from 58.0% in 2016 to 41.0% in 2020; the decreases were caused by exit activities in some markets, closure of stores, depreciation of the long-lived assets and increases in other assets such as operating leased assets, goodwill, merchandise inventory, and cash over the four most recent years. Discussion of property, related depreciation and exit activities/store closures can be found on pages 43 under Property and Depreciation and page 53 under note 6 Exit Activities.

Merchandise inventories have ranged from a low of 30.4% in 2016 to a high of 36.4% in 2018 before declining to 33.4% in 2019. Inventory increased to 34.6% of total assets in 2020 which is still below the portion of total assets it constituted in 2018; however, in dollars, inventory rose over the five-year period by about $5.5 billion due to the decision to offer customers greater inventory selection, the improving economy, and opening new stores. The merchandise inventory was a smaller percentage of total assets in 2019 due to a change in accounting rules requiring recognition of operating leased assets on the balance sheet; this new asset accounted for 9.9% of total assets and was the third largest asset in 2019.

The third largest asset was other noncurrent assets in 2018 at 2.9%. Goodwill, an intangible asset increased to 3.1% in 2016 and 3.7% in 2017 making it the third largest asset; this asset increased due to the acquisition of RONA and Maintenance Supply Headquarters in those two years. Lowes is pursuing growth by acquiring existing companies while expanding Lowes stores at a moderate pace. Goodwill decreased to 0.9% of total assets in 2018 due to the impairment of goodwill connected to Canada-Retail and Canada-Distribution; the write off was $952 million reducing goodwill to $303 million by the end of fiscal year 2018 for other acquired subsidiaries such as Maintenance Supply Hardware. As mentioned above, due to a change in accounting rules, companies were required to report operating lease right-of-use assets on the balance sheet; this asset became the third largest asset in 2019; this asset is still 8.2% of total assets in 2020 but cash and cash equivalents at 10.0% of total assets became the third largest asset in 2020. Over the entire five-year period, Lowes three largest assets ranged from a high of 92.7% in 2018 to a low of 85.6%; the decline in the total of these three assets is primarily due to the shift of amounts into other assets. See table 1 below:

Lowes Three Largest Assets

	2020	2019	2018	2017	2016
Property, net	41.0%	47.3%	53.4%	55.9%	58.0%
Merchandise inventories	34.6%	33.4%	36.4%	32.3%	30.4%
Goodwill				3.7%	3.1%
Other noncurrent			2.9%
Operating right of lease		9.9%
Cash and cash equivalents	10.0%
Total	85.6%	90.6%	92.7%	91.9%	91.5%

TabTable 1: See Vertical Balance Sheet in appendix A-1 and a Bar Graph in appendix A-2

Lowes largest asset is property which consists of land, buildings and building improvements, equipment and construction in progress according to footnote 4 on page 51 of the Lowes Companies, Inc. 2020 Annual Report. The stores and warehouses are critical assets in generating revenue as they house the inventories and provide retail space where customers can shop for the products they want. Merchandise inventory represents the products Lowes purchased from vendors and offers for sale to customers; inventory consists of construction materials, yard and garden products, hardware, tools, home improvement products, appliances, outdoor power equipment, etc. A typical Lowes store carries approximately 40,000 items according to page 3 of the annual report.

Other noncurrent assets consist of several assets and as identified in several sections of the annual report are primarily comprised of equity method investments, net carrying amount of excess properties, intangible assets including trademarks and dealer relationships, and extended protection plans deferred costs. Goodwill is an intangible asset which has an indefinite life and is therefore not amortized; it represents the excess of the purchase price above the fair value of the net assets of companies acquired by Lowes. Lowes evaluates goodwill annually for impairment and according to page 44, $952 million of impairment charges were recognized in 2018. Goodwill increased in 2016 as a result of the acquisition of RONA by $976 million which was allocated between Canada Retail and Canada Distribution while most of the impairment in 2018 was due to these two subsidiaries as mentioned previously. Leased operating assets are explained on page 45 of the Lowes

Companies, Inc. 2020 Annual Report. Next, the analysis looks at what has happened to cash and cash equivalents for the last five years; the vertical percentages are shown in table 2 below:

Lowes Cash and Cash Equivalents

	2020	2019	2018	2017	2016
Cash and cash equivalents	10.0%	1.8%	1.5%	1.7%	1.6%

TableTable 2: See Vertical Balance Sheet in appendix A-1

discusses the significant increase in cash and cash equivalents for 2020 as well as other references in the annual report. Continue the discussion of the remainder of question one dealing with vertical analysis of the balance sheet. You will need two more tables for this first section (question) and the best way is to copy and paste the format of the tables already provided here and you can add or delete rows and columns in each table as needed. Delete this paragraph before continuing with question one. Also delete the highlighted reference below table one to a graph unless you choose to show a stacked bar graph for the 3 largest assets to support table 1.