Short essay: The following data are from the financial statements of The Home De

Question

Short essay:

The following data are from the financial statements of The Home Depot, Inc. (Home Depot) and Lowe’s Companies, Inc. (Lowe’s):

Home Depot:

Total assets, 1/29/17                                                                 $42,966

Total assets, 1/31/16                                                                 $41,973

Net income, year ended 1/29/17                                                 $7,957

Net cash from operating activities, year ended 1/29/17                $9,783

Lowe’s:

Total assets, 2/3/17                                                                   $34,408

Total assets, 1/29/16                                                                 $31,266

Net income, year ended 2/3/17                                                  $3,093

Net cash from operating activities, year ended 2/3/17                  $5,617

Required (round all ratios to one decimal place):

1.Compute the return on total assets for Home Depot.

2.Compute the return on total assets for Lowe’s.

3.Which company does a better job of using its assets to generate net income?

4.Compute the cash flow on total assets for Home Depot.

5.Compute the cash flow on total assets for Lowe’s.

6.Which company does a better job of using its assets to generate cash flow?

Explanation / Answer

Average Total assets(ATA) = (Opening assets + Closing assets) / 2

ATA for Home Depot = (41,973 + 42,966) / 2 = 84,939 / 2 = $42,469.5

ATA for Lowe's = (31,266 + 34,408) / 2 = 65,674 / 2 = $32,837

1. Return On Total Assets for Home Depot =( Net Income / ATA) * 100

= (7,957 / 42,469.5) * 100 = 18.73%

2. Return On Total Assets for Lowe's = ( Net Income / ATA ) * 100

= (3,093 / 32,837) * 100 = 9.41%

3. Home Depot does a better job of using its assets to generate Net income as it provides a higher return on total assets as compared to Lowe's Company.

4. Cash flow on total assets for Home Depot = (Net Cash from operating activities / ATA) * 100

= (9,783 / 42,469.5) * 100 = 23.03%

5. Cash flow on total assets for Lowe's = (Net Cash from operating activities / ATA) * 100

  = (5,617 / 32,387) * 100 = 17.34%

6. Home Depot does a better job of using its assets to generate cash flows as it provides a higher percentage of cash flow on total assets percentage as compared to Lowe's Company.

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