(1) LIQUIDITY:
| 2016 | 2015 | |
| Current Ratio | ||
| Home Depot | 1.36 | 1.36 |
| Lowe Companies | 1.01 | 1.08 |
| Quick Ratio | ||
| Home Depot | 0.59 | 0.53 |
| Lowe Companies | 0.11 | 0.10 |
Comments on the Company’s Liquidity:
The liquidity ratios show how a company is managing its current accounts. The liquidity ratios are a measure to represent the liquidity of the company. The Home Depot’s current ratio is greater than one showing that its current assets are greater than its current liabilities. Moreover, it is also greater than its competitor Lowes companies. Furthermore, Home Depot’s Quick ratio is about half of the current ratio showing that more than half of the current assets are bound in inventory. However, comparing it with the Lowe’s Companies shows that its measure is far better (Morningstar.com).
(2) ASSET MANAGEMENT
| Total Asset Turnover | ||
| Home Depot | 2.08 | 2.08 |
| Lowe Companies | 1.89 | 1.77 |
| Average Collection Period | ||
| Home Depot | 6.96 | 7.40 |
| Lowe Companies | – | – |
(Note: Lowe’s Companies Average collection period cannot be found as there are no accounts receivables of the company)
Comments on the Company’s Asset Management:
The total asset turnover of the company Home Depot is greater than 2, showing that the company is effectively using its assets and converting it into revenue double its own worth. It is also better in comparison with its rival Lowe’s Companies. The collection period of 7.4 days in 2015 and 6.96 days in 2016 shows that the company has improved its collection period by collecting the receivables in fewer days. The Lowe’s companies have not reported their account receivables, thus it cannot be shown (Home Depot).
(3) DEBT MANAGEMENT:
| Total Debt to Total Asset | ||
| Home Depot | 0.85 | 0.77 |
| Lowe Companies | 0.76 | 0.69 |
| Times Interest Earned | ||
| Home Depot | 7.63 | 7.64 |
| Lowe Companies | 4.55 | 5.13 |
Comments on the Company’s Debt Management:
The debt management ratios show better performance of the company Home Depot regarding its debt management. The Debt to Asset ratio of 0.77 in 2015 and 0.85 in 2016 shows; the company has increased its reliance on debt. It is not always the best way. Moreover, it is also greater than that of its competitor Lowe’s. Regarding the times interest earned ratio, the company depicts its strength through having the capability of paying the interest more than 7 times. It is a very good performance as compared to its competitor as well (Morningstar).
(4) PROFITABILITY:
| Net Profit Margin | ||
| Home Depot | 7.92% | 7.63% |
| Lowe Companies | 4.29% | 4.77% |
| Return on Assets | ||
| Home Depot | 16.47% | 15.88% |
| Lowe Companies | 8.10% | 8.43% |
| Return on Equity | ||
| Home Depot | 110.97% | 68.06% |
| Lowe Companies | 33.11% | 26.91% |
Modified Du Pont Equation, FY 2016:
Home Depot Lowe’s Companies
Net Profit Margin 7.92% 4.29%
Total Asset Turnover 2.08 1.89
Equity Multiplier 6.74 4.08
Comments on the Company’s Profitability:
The company Home Depot profitability measures show how profitable its operations are. The net profit margin is higher as compared to Lowe’s and has also increased in one year as well. Similarly, the return on Assets is also showing its efficiency from its 15% return extracted from the use of its assets. It is also better than Lowe’s. The return on equity is also better than Lowe’s for Home Depot. The ROE is far greater than ROA; it is because of the reason that the most of the assets, i.e., more than 80% of the assets are financed by debt. The DuPont Equation shows the profitability of the company by using all the three profitability measures. This measure is also greater because of the smaller equity dependency of the company (Home Depot).
(5) MARKET VALUE RATIOS:
| PE Ratio | ||
| Home Depot | 23.53 | 26.50 |
| Lowe Companies | 25.89 | 26.76 |
| Market to Book Ratio | ||
| Home Depot | 29.05 | 22.01 |
| Lowe Companies | 9.37 | 8.31 |
Comments on the Company’s Market Value Ratios:
The Price per earnings ratio shows how much greater price as compared to the earnings of the company investors is willing to pay. Thus, it can be said that the investors are relatively satisfied as they are willing to pay more price for the shares of the company then it has earned for them. The Market to Book ratio shows how much the company has grown regarding its stock price. It is better for Home Depot as compared to Lowe’s Companies.
CONCLUSIONS AND RECOMMENDATIONS
The overall financial ratio analysis of the company shows that the company is financially doing well and has stable operations. The profitability ratios show the company is more profitable than its competitor and also has shown growth as compared to its past years. Moreover, the company liquidity ratios are also favorable. The net profit margin of 7% is good enough, but it also shows there is a huge potential to raise it more. The cost of revenue can also be decreased to increase the profit margin. For better results, costs should be reduced by introducing automation and better processes. The only concerning point is the greater dependency of the company on debt as compared to equity. Furthermore, the company can also work on employing strategies for the betterment of liquidity of the company. The better liquid position of a company attracts investors and shows the financial strength of the company as well.
- The company Home Depot should consider lowering its debt ratio
- Increasing equity dependency by raising capital through shares can be one way to do so.
- Home Depot can also work on increasing its liquidity by increasing its quick ratio.
- The collection period of receivable can also be made better through making the collections in fewer days.
- The Asset turnover also shows there is margin to utilize the resources better and raise the profitability of the company.
Work Cited
Home Depot. “Annual Report 10K Home Depot.” 10K Report. 2016.
Morningstar. “Home Depot.” Morning Star. Morning Star, 17 Feburary 2018. Web. 17 Feburary 2018. http://www.morningstar.com/stocks/XNYS/HD/quote.html.
Morningstar.com. “Lowe’s Comapnies.” Morning Star. Morning Star, 17 February 2018. Web. 17 February 2018. http://financials.morningstar.com/balance-sheet/bs.html?t=LOW®ion=usa&culture=en-US&platform=sal.
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