Financial Ratio Analysis Lowes vs.

Home Depot

Hasit Shah FINC 530-01 September 26, 2012

Abstract : In this paper we look at two companies in the same industry, Lowes and Home Depot, and compare the two to see how they are managed differently. We will look at second quarter earnings for both companies in the years ended in 2012 and 2011, to see how the companies fared in each year. To do this we will be comparing different ratios of profitability for each year, between both companies.

Lowes Analysis
We will be looking at Lowes in the second quarter earnings in the three months ended on August 3, 2012 and compare it to last year's 2Q earnings. We can see an increase in the value for each dollar the shareholder has invested implying that the company has multiplied their shareholders investment from 1.62 to 1.99. Lowes had a decrease in EVA due to having more long-term debt from last year. Looking at the Debt Ratio shows us that this is true since they have an increase in their liabilities since more than 50% of their financing is done through short and long-term debt. Lowes seems to not have been using their assets efficiently as well since they have a decrease in assets per dollar value from the year before. They are making sales on their inventory though it has decreased since last year also showing the efficiency of asset usage, in this case their inventory. This decrease affected their net income which affected their EPS from last year since they had a greater net income last year. Lowes has a good interest ratio though it has decreased probably due to more financing through their long-term debt.

Lowes Ratio Analysis Market to Book Ratio EVA ROA ROE Earnings Per Share (EPS) Inventory Turn-over Average Collection Period Total Debt Ratio Times Interest Earned

Three Months Ended August 3, 2012 July 29, 2011 1.99 1.62 710.29 762.15 2.3% 2.6% 5% 4.9% .482 .518 1.127 1.145 N/A* N/A* 57.7% 50.7% 13.47 15.77

*Average collection period could not be calculated since according to Lowes their receivables mostly come from commercial businesses. They have an agreement with GE Money Bank in which GE would purchase their commercial receivables at face value till December 2016. Also noted was that GE issued Lowes credit cards to customers and would GE would buy the receivables also at face value.

Home Depot Analysis

Home Depot has been doing rather well for itself from last year's second quarter. They have multiplied their shareholder's investments 1.5 times in a year's time. They have also increased their capital by a big margin probably due to their efficiency in their return on assets, generating more income. They have provided an adequate return for shareholders since net income was higher this year than last. This is also helped increase their EPS due to the greater net income which shows that asset usage is being used correctly and also correlates to inventory turn-over, where cost of goods sold is higher this year than last. The collection period increased however, which is probably the reason for a higher asset total as well as their being a higher inventory turn-over, since customers can buy now and pay back later which is appealing to customers. The debt ratio is high showing that more than half of their financing is done through borrowing and with their interest earned they are adequately able to pay off their debt.

Home Depot Ratio Analysis Market to Book Ratio EVA ROA ROE Earnings Per Share (EPS) Inventory Turn-over Average Collection Period Total Debt Ratio Times Interest Earned

Three Months Ended July 29, 2012 July 31, 2011 4.57 3.004 1518.7 1310.75 3.9% 3.4% 8.7% 7.5% .434 .360 1.31 1.26 5.45 4.83 58% 57% 17.01 15.71

Comparative Analysis
Lowes and Home Depot are competitors that sell similar types of products ranging from home improvement items to gardening items. Let us see how both companies compare with each other on the NYSE. The following chart compares the prices and volume of each company's stock:

Why is it that Home Depot's stock prices have such a wide gap compared to Lowes stock prices? The answer is in the ratios that we discussed. Home Depot uses their assets wisely compared to Lowes and get a better return on their cost of goods sold. This in turn is more appealing to investors especially when looking at the ROE ratio since Home Depot is using the money from shareholders to increase their net income after dividends have been paid. The other reason is Home Depot's capital has been steadily increasing over the years, once again due to wise asset

management through cost of goods sold. Lowes on the other hand seems to be declining from last year since they have more long term debt and less consumer purchases in cost of goods sold. They also sell their accounts receivables to GE at face value and do not get the full price they would have gotten from consumers. Home Depot on the other hand collects their receivables instead of selling them off which also contributes to their higher capital. Looking at an investors point of view you can see why Home Depot would be the more appealing company and this is certainly why their stock prices have been soaring compared to Lowes since they have a good return on their investments and assets.

Summary and Conclusion

In this paper we have seen a comparison of Lowes and Home Depot in two separate years against each other as well as against themselves. We have seen why Lowes market value is so much more lower than the market value of Home Depot through different financial ratios that calculate asset management, company capital, and shareholders return on equity. Though both companies are similar in appearance it is through advertising and management of company image and assets that distinguish how the company performs in the long-run. This is how Home Depot has been able to increase their economic value compared to Lowes.