Analysis and Interpretation of Return on Investment for Competitors Balance shee
ID: 2546945 • Letter: A
Question
Analysis and Interpretation of Return on Investment for Competitors Balance sheets and income statements for The Home Depot, Inc., and Lowe's Companies, Inc., follow. Refer to these financial statements to answer the requirements. HOME DEPOT, INC. Balance Sheets LOWE'S COMPANIES Balance Sheets ($ millions) Assets Short term investments 2013 2014 2013 Receivables, net. 1484 11,057 8,911 895 10.29 10,080 20,034 Other current assets 593 Total current assets.. .. 15,302 22,720 15,279 23,348 20,834 WI Long-term investments. 354 1,359 571 602 1,323 $31,827 $32,732 Total asse Liabilities and shareholders' equity Short term debt and current maturities of long-term debt. $ 328 33552 5,797 1,428 435 5,807 5,124 Accrued compensation and related expenses Deferred revenue Income taxes payable... 2,240 1,920 2,142 10,749 4,691 2,042 27996 Long-term debt, excluding current maturities 8,876 97 10086 1,626 10,815 Deferred income taxes Other long-term liabilities.... Total liabilities. Total stockholders' equity 642 30,624 9968 20,879 11,853 21,859 9,322 12,522 $39,946 $40,518 $31,827 $32,732 HOME DEPOT, INC. Income Statements LOWE'S COMPANIES Income Statements $ millions) Net sales Cost of sales Gross profit Selling, general and administrative $83,176 54,222 S78,812 $56,223 $53,417 36,665 51,422 27,390 16,597 34,941 28,954 19,558 13,281 1,485 4,792 12,865 1,462 Operating income 10,469 337 12 480 3,673 1,387 6,345 5,385 2,698 2,286 522 9,976 3,631 8,467 4,276 1,578 Provision for income taxes Net earnings. REQUIRED a. Compute return on equity (ROE), return on assets (ROA), and return on financial leverage (ROFL) for each company in 2014 b. Disaggregate the ROA's computed into profit margin (PM) and asset turnover (AT) compo- c. Compute the gross profit margin (GPM) and operating expense-to-sales ratios for each com d. Compute the accounts reccivable turnover (ART), inventory turnover NVTd property nents. Which of these factors drives ROA for each company? y. How do these companies' profitability measures compare plant, and equipment turnover (PPET for each company. How do these companies turnoverExplanation / Answer
Assumptions and Begging Note.
A.
Computation of ROE
Company
Net income
Shareholder equity
ROE (E1)
Home Depot Inc
6,345
9,322
68.06%
Lowes Companies
2,698
9,968
27%
Computation of ROA
Company
Net income
Total Asset
ROA (E2)
Home Depot Inc
6,345
39,946
15%
Lowes Companies
2,698
31,827
8%
Computation of financial leverage
Company
Total Asset
Total Equity
Financial Leverage Ratio (E3)
Home Depot Inc
39,946
9,322
4 Times
Lowes Companies
31,827
9,968
3 times.
B.
Net Profit Margin.
Company
Net income
Total Sales
Net profit Margin (E4)
Home Depot Inc
6,345
83,176
7%
Lowes Companies
2,698
56,223
4.%
Asset Turnover Ratio
Company
Total Sales
Total Asset
Asset Turnover Ratio (E5)
Home Depot Inc
83,176
39,946
2 times
Lowes Companies
56,223
31,827
1 time
ROA
Company
Net profit Margin Ratio
Asset turnover ratio
Return on Asset Ratio (E6)
Home Depot Inc
7.5%
2 times
15%
Lowes Companies
4%
2 time
8 %
As asset turnover ration remains constant for both companies the factor affect is Net profit Margin Ratio.
c.
GP.P Ratio
Company
Gross income
Total Sales
Gross profit Margin (E7)
Home Depot Inc
28,954
83,176
34.80%
Lowes Companies
19,558
56,223
34.79%
Operating Expense to sales Ratio.
Company
Operating Expense
Total Sales
Operating Expense Ratio (E8)
Home Depot Inc
18,485
83,176
22.22%
Lowes Companies
14,766
56,223
26.26%
As G.P Ratio for both companies Remains Constant the Operating Expense Raito affects the Net profit ratio more.
D.
Accounts Receivable Turnover ratio.
Company
Credit Sales
Beginning Receivables
Ending Receivables
Average Receivables (E9)
Accounts Receivable Ratio (E10)
Home Depot Inc
83,176
1,398
1,484
1,441
57 times
Lowes Companies
56,223
Cannot compute because they have no receivables
Inventory turnover ratio
Company
Cost of Goods sold
Beginning Inventory
Ending inventory
Average inventory(E11)
Inventory turnover Ratio (E12)
Home Depot Inc
54,222
11,057
11,079
11,068
4 times
Lowes Companies
38,665
9,127
8,911
9,019
4 Times
PPE Ratio.
Company
Net PPE
Total Sales
PPE Ratio (E13)
Home Depot Inc
22,720
83,176
4 Times
Lowes Companies
20,034
56,223
3 Times.
The Second company is having No receivable that means they are only making cash sales,.
The inventory turnover ratio for both companies that means both of them are effected ion same way.
The PPE Ratio of first company is 1 time more than the second company that means the use of its property to make revenue than the 2nd company.
Equations Used.
ROE (E1)= (Net income/Shareholder Equity.)*100
RIOA (E2)= (Net income/Total Assets.)*100
Financial Leverage (E3)= total Asset /Total Equity.
Net profit Margin Ratio (E4)= 9Net income/Total Sales) *100
Asset turnover Ratio (E5) = Total Sales/Total Assets.
Return on Asset (E6)= Net profit margin*Asset turnover ratio.
Gross profit Ratio (E7) = (Gross profit/Sales) *100
Operating Expense Ratio (E8)= (Operating Expense/ Total sales)*100
Accounts Receivables Ratio (E9) = Net credit Sales/ Average Accounts Receivable.
Average accounts Receivable (E10)= (Begging Accounts Receivable +ending Accounts Receivables)/2
Inventory turnover Ratio(E11) = Cost of goods sold/ Average Inventory.
Average Inventory (E12) = (binging inventory +ending inventory)/2
PPE Ratio (E13)= Net sales / Fixed Assets.
Notes.
Company
Net income
Shareholder equity
ROE (E1)
Home Depot Inc
6,345
9,322
68.06%
Lowes Companies
2,698
9,968
27%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.