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In this report we will compare the Income Statement and Balance Sheet of Home Depot

and Lowe’s Inc. over a period of three years taking 2016 as the base year.

Comparative Income Statement Analysis

The income statement of Home Depot shows that its revenue and gross margins have

increased on an average by about 7% since 2016. The maximum portion of expenses has been

towards impairment loss and interest. There was a good amount of increase in net earnings by

around 19%, mainly because of the reduced income tax liability.

Lowe’s has not shown very good performance over the past three years, with average

revenue increasing only by 4.73% and net profits dipping down by around 11%. This net loss has

been because of a huge loss from extinguishment of debt and an increase in selling and

administrative expenses. However, it has also managed to keep their tax expense under control.

Comparative Balance Sheet Analysis

Over the three years, Home Depot has invested more in current assets. Home Depot has

been focusing on changing its capital structure by taking on more debt, and reducing its

dependence on equity capital. Having so much leverage in the financial structure can deter

potential investors from considering Home Depot as a safe investment.

Over these three years, Lowe’s has also focused on reducing its equity capital and raising

more debt, but its leverage position is better than that of Home Depot. Accounts payables have

increased by around 12% which indicates that its liquidity position is not very strong. When we

look at the assets, there has been a substantial decrease in the goodwill by more than 28%. This

means that its reputation has been harmed in the market.

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Financial Ratios

Profitability Ratios

Five profitability ratios have been used to compare both the firms. Home Depot’s gross

profit, operating profit and net profit margins have been much better than that of Lowe’s. Home

Depot has also produced better return on its assets. But Lowe’s has shown better returns on its

equity (15.41%) because of its better leverage position.

Productivity Ratios

Eight ratios have been used to compare the productivity of two firms. Lowe’s payable

days are very high when compared to Home Depot’s which indicates a potential loss of

credibility if the same trend continues. Lowe’s has no receivables in its balance sheet; this means

Lowe’s is not giving good credit terms to its customers. Cash conversion cycle of Lowe’s is

slightly better of Home Depot; in fact, Home Depot’s cash conversion cycle had worsened by

more than 3% from 2016 levels. This is because it is not giving credit to its customers. This can

also be one of the reasons of its declining goodwill. Fixed assets turnover of Home Depot has

been better in the past three years.

Coverage Ratios

Four coverage ratios were used to compare the two firms and all of them indicate that

Lowe’s has a low credit risk. Home Depot has not performed well on this front because of its

high dependence on debt capital and major portion of its cash goes into principal and interest

payments.

Liquidity Ratios

Current ratio and quick ratio were used in comparing the liquidity of Home Depot and

Lowe’s. Both of these ratios show that Home Depot is much better in paying off its short term
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obligations on time. But because of its increasing dependence on debt financing, Home Depot’s

liquidity position has declined drastically from 2016 levels (current ratio declining by 6% and

quick ratio by 12%) and high chances of defaulting in the future.

Conclusions and Recommendation for Investment

From the above comparison, we can conclude that Home Depot has performed much

better than Lowe’s in the past three years in almost all the aspects. It has better profitability,

better relationship with suppliers as well as customers and better goodwill in the market. The

only risk factor involved when considering investment in Home Depot is its aggressive financing

through debt. If it anyhow tries to maintain a proper debt equity ratio, then we can expect more

benefit from investing in Home Depot.

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References

1. Ratio Analysis: Where investments meet mathematics- by Susan D. Barton, Denise

Woodbury, The Mathematics Teacher, Vol. 95, No. 1 (January 2002), pp. 60-68

2. www.corporatefinanceinstitute.com

3. Data on Home Depot’s financial statements retrieved from yahoofinance.com

finance.yahoo.com/quote/HD/financials?p=HD

4. Data on Lowe’s financial statements retrieved from yahoofinance.com

finance.yahoo.com/quote/LOW/financials?p=LOW&.tsrc=fin-srch