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Analysis
A) Describe the industry in which these two companies operate and assess the competitive
environment
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Items sold range from lumber
materials, building materials, and DIY project materials
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b) The current economic factors affecting Home Depot and Lowes is the switch to
consumers purchasing through online companies (e-commerce), the possibility of a
slowdown of home purchases (decrease in real estate sales), and an overall increase in
the cost of homes
...
In addition to in an increase in the cost of homes, items such as
increased utilities and property taxes affect the budget that home owners have which
decreases the amount they can spend on goods at either Lowes or Home Depot
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c) The main competitors in the industry are as follows
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i) Home Depot – 203,015,847
ii)Lowes Inc – 75,796,060
iii)
Sherwin-Williams Company (The) – 39,481,148
iv)
Fastenal Company – 16,321,659
v)Tractor Supply Company – 11,410,692
vi)
Floor & Décor Holdings, Inc
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d) The two companies of Home Depot and Lowes are similar for many reasons
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This could range from construction
companies, to individuals who do their own repairs
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iii)
They both offer products for home construction, remodeling, and
decoration
...
v)Both company’s consolidated financial statements include account of the
company and its wholly-owned subsidiaries
...
vii)
Both companies translate foreign currencies into domestic for financial
statements
...
i) In 2013, Home Depot reported that they operated a total of 2,263 stores while
Lowes reported 1,832 stores or 19% fewer stores
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This study source was downloaded by 100000867104267 from CourseHero
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B) Consider the income statements of both companies
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a) Home Depot’s income statement for 2012 includes a pre-tax income amount of $67
million
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The note goes into
greater depth discussing that this was a liability related to the guarantee of a senior
secured term loan of HD Supply terminated in April 2012
...
Another unusual
item for Home Depot would be the $145 million (net of tax) charge related to the
closure of stores in China during 2012
...
b) Lowe’s income statement does not have any noteworthy or obvious nonrecurring items
...
Although the previous is true,
Lowe’s also recorded impairment changes in each of the two prior years
...
C) Prepare common-sized income statements and balance sheets for each company for fiscal 2013
and 2012
...
To
common size the balance sheet, divide each item by total assets at the end of the year
...
Note: analysis of the common-size
income statement will be conducted in part e
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b) Differences
i)
Cash
1
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We can see that Home Depot has 4
...
1% Cash in 2012 when analyzed in the common-size
report
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2% Cash in 2013 and
1
...
ii)
Account Receivable
1
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5% receivables in 2013 and 3
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This is a stark difference showing the
liquidity difference between the two companies
...
iii)
Property and Equipment, Net / Net Property and Equipment
1
...
Home Depot reported 57
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6% in 2012 compared to Lowe’s at 63
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7% in
2012
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com on 05-15-2023 15:24:06 GMT -05:00
https://www
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v)
c) Similarities
i)
1
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In 2013 Home
Depot reported 36
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8% in the same year
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There is a stark difference between the companies when it comes to
Paid-In Capital
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7% in 2013 while Lowe’s is
showing 0
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Merchandise Inventories / Merchandise Inventories, Net
1
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0% against total
assets for both years 2013 and 2012
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In 2012, both companies were within a percentage of each other with
Home Depot showing 43
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4%
...
Calculate the five
components of ROE and verify that their product equals ROE
...
E) Refer to the common-sized income statement you prepared in part c and your ROE
decomposition from part d
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i)
When analyzing the ROE for Home Depot, we can see a strong increase
from 25
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54% in 2013 which we can translate to
increased substitutability for the company
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89% in 2012 to 25
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ii)
We can see that in terms of Asset Turnover (AT), Home Depot’s is
higher
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93 in 2013 as compared to 1
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iii)
We can see the Home Depot is the more profitable company
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We see that Home Depot
makes 11
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8 cents
...
Which firm is more efficient in its use of assets?
Specifically, use fixed asset turnover, Inventory Turnover, Accounts Payable Turnover, and Cash
Conversion analysis
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b) We can see that Home Depot’s Asset Turnover is higher than Lowe’s which shows that
Home Depot is more efficient in the use of their assets
...
c) We can see that Home Depot has a higher inventory turnover than Lowe’s
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33 days while Lowe’s was 92
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31 days in favor of Home Depot
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In 2013, Home Depot averaged 39
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com on 05-15-2023 15:24:06 GMT -05:00
https://www
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com/file/38174463/Accounting-Extra-Creditdocx/
days in payables while Lowe’s averaged 50
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This is an approximate 27% difference
between the two and shows that accounts stay in payables for 27% longer for Lowe’s
...
A cash conversion cycle
is the length of time (in days) that it takes for a company to covert its investment in
inventory and other resources into cash
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66 days compared to Lowe’s 42
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f) Overall, Home Depot is the more profitable company in all aspects
...
Are the companies likely to meet their debts as they
come due?
a) For dealing with liquidity and solvency we must look into the debt of the companies
...
These show that Home Depot has a higher leverage than Lowe’s
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b) DONE ON EXCEL SHEET
...
ii) In terms of solvency, Home Depot is better off in regard to solvency with a debt
to asset ratio of 0
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32
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Calculations are on the excel sheet
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Are cash flows from operations a source or a use of cash?
How are operations and investments being financed? What similarities and differences do you
note?
a) Both companies’ operating cash flows exceeded their income each year which is a
positive
...
b) Over the course of both years both companies were able for investing with operating
cash flows
...
I) As a potential investor, would you be interested in seeking additional information about either of
these companies? What sort of information would you want? Would you invest in either
company?
a) I could be interested in investing in either of these companies
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