Bu 5120 – Financial Analysis

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Matt Johnson BU 5120 – Financial Analysis Value Line Publishing, October 2002 12/15/2013 1. What do the financial ratios in case Exhibit 7 tells you about the operating performance of Home Depot? What additional information do the different ratios provide? Complete and compare a similar analysis for Lowe’s using the Excel Template provided – Lowe’s Financial Ratios. The financial ratios in exhibit 7 show Home Depot has an overall profitability given growth in the market compared to sales and liabilities. Home Depot 5 year average ROC was 15.22% showing a positive company profit as a percentage of total company value and ownership. The ROE was 17.52% indicating a positive combined total worth of the company. The average for Lowe’s was ROC of 6.95% and a ROE of 14.70%. Using these benchmarks, an investor would want to go with the better average and invest in Home Depot. Home Depot also showed a higher 5 year average gross margin of 30.52% compared to Lowes of 27.59%. The gross margin represents the percent of total sales revenue that the companies retain after incurring direct costs with producing the goods and services sold. The averages here show that Home Depot retains more on each dollar of sales to other cost obligations which performs stronger than Lowes. The operating margin which indicates how much a company makes (before taxes and interest) on sales is a good indicator of the quality of the company. Home Depot showed an increase from 1997 to 1999 then a decrease and stabilization in 2000 and 2001. Lowes showed a steady increase indicating that Lowes was earning more dollars per sales across the 5 year period and was performing better than Home Depot. The NOPAT margin fluctuated for Home Depot showing changes in the firm operating efficiencies. Lowes showed a steady increase indicating operating efficiencies

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