Over the next five weeks, you will research and analyze financial information on
ID: 2784302 • Letter: O
Question
Over the next five weeks, you will research and analyze financial information on two companies listed on an exchange.
Choose any two companies that are in the same industry and listed on the NYSE or any other exchange. Collect the financial information for these two companies and make sure you have information that includes balance sheets, income statements, and statements of cash flow for the last three years. You may select any company except FedEx and Coca Cola.
Analyze the key characteristics of the companies selected, such as the industry in which they operate, the products they provide, their rankings in the industry, etc.
Go to the company Web sites. Find the “About ….” section and note the company's commitment to corporate governance and identify the key features of its commitment.
Identify the main competitors for each selected company. Compare and contrast the reputations of the selected companies and their competitors.
Explanation / Answer
In order to understand the financial position of companies listed on stock exchange, in our case we have take companies listed on NASDAQ, we first collect last three years financial statements. They include:
These financial reports can be found on company’s website, under Investor section, or on the U.S. Securities and Exchange Commission EDGAR database, and also in the company’s 10K filing.
Next step is to select two companies which are in the same segment.
For our analysis, we have selected two companies in Retail and Home Improvement sector, they are:
Home Improvement Industry
The home improvement stores industry is a mature retail industry with high levels of price competition, particularly between major companies Home Depot and Lowe’s.
The Home depot Inc. is the world’s largest home improvement company and the fourth largest retailer in the US Home Depot has more than 2,281 stores spanning across the U.S., Canada, and Mexico. It offers a wide range of products and installation services to professional builders and as well as individual home owners. In addition to the physical stores, they have online portal where customers can buy their products. Home Depot has deep penetration in the U.S., Canada, and Mexico.
Lowe’s Companies is its closest competitor, and operates majorly in U.S.
Next, we will start comparing these two companies’ financials.
Sales Comparison
Company
Year Ended
Sales ($bn)
Sales Growth (%)
Largest Region
Home Depot Inc
Jan-17
94.6
6.9%
The United States (91.5%)
Lowe's Companies, Inc.
Jan-17
65
10.1%
The United States (100.0%)
Clearly, HD is well ahead of its closest competitor Lowe in terms of total sales; however, HD’s growth has been modest at 6.9% compared to 10.1% growth of Lowe.
Profitability Comparison
Company
Fiscal Year
Gross Profit Margin (%)
EBITDA
Margin (%)
Net Earnings Margin (%)
Home Depot Inc
2016
34.2%
16.3%
8.4%
Lowe's Companies, Inc.
2016
34.6%
11.3%
4.8%
Clearly, EBITDA margins of HD are superior to LOW. In 2016, Net Earnings were $7.96 billion, or 8.4% of sales. This profit margin is an improvement over the level the company achieved in 2016, when the profit margin was 7.9% of sales. This shows HD’s strong position in terms of profitability.
Working Capital Ratios Comparison
Company
Fiscal Year
Days Payable
Days Accounts Receivable
Days Inventory
Home Depot Inc
2016
41.0
7.8
73.5
Lowe's Companies, Inc.
2016
57.0
15.7
89.7
Cash conversion cycle is a measure to know how quickly company converts its cash. HD’s cash conversion cycle (Days Account Receivable + Days Inventory – Days Payable) is the best among the two companies at 40 days, LOW’s is at 48 days.
Leverage Comparison
Company
Fiscal Year
Debt/ Equity
Net Debt/Equity
FCF/Total Debt
Home Depot Inc
2016
5.45
4.86
0.35
Lowe's Companies, Inc.
2016
2.44
2.35
0.28
As of FY16, HD’s Total debt to equity ratio of the company is 5.45x. This is significantly higher than its LOW’s. This shows that company uses its debt to grow business. If you look at the Free Cash Flow to Total Debt, HD is ahead at 0.35, which means it can generates enough cash to repay the debt.
Coverage Comparison
Company
Fiscal Year
EBIT / Interest
EBITDA / Interest
Fixed Charge Coverage Ratio
Home Depot Inc
2016
14.35
16.5
2.0
Lowe's Companies, Inc.
2016
9.06
11.37
1.56
It is evident from the above, that HD’s coverage ratios are significantly higher than LOW. HD’s cash from operations is sufficient to meet its interest and other obligations comfortably.
Based on the key parameters analyzed above, we can conclude that HD’s financial strength is far superior than LOW’s, although LOW is catching up and trying to improve its position.
Next, we will go to company’s website and find out their commitment towards corporate governance.
Home Depot
The Home Depot strives to be the employer, retailer, investment, and neighbor of choice in the home improvement industry. Corporate governance is part of their culture.
Company has adopted several best practices based on recommendations of the SEC-sponsored Blue Ribbon Committee and further strengthened its compliance procedures and improved its financial reporting processes. During 2002 and 2003, the Company built upon its strong corporate governance foundation by implementing a number of new significant procedures, including:
Company also adopted a majority vote standard for the election of directors, beginning with the election in May 2007. The majority vote standard requires each director to receive a majority of the votes cast with respect to that director. Previously, directors were elected under a plurality vote standard, which meant that the candidates receiving the most votes would win without regard to whether those votes constituted a majority of the shares cast at the meeting.
The Company's Board of Directors is dedicated to continuing the Company's leadership position in matters of corporate governance and to maintaining an active role in the business. In addition to attending Board and Committee meetings, the members of the Board regularly visit stores and engage in the operational review of stores throughout the year. A substantial majority of the Directors on the Board are independent and each Director serving on the Audit, Leadership Development and Compensation, and Nominating and Corporate Governance Committees is independent. Through its existing procedures and with the guidance of an informed, engaged, and independent Board, the Company has the structure and tools in place to continue to execute on its commitment to strong corporate governance.
Lowe’s Companies
Lowe’s companies website shows they are committed to Corporate Governance, company has provided information about their code of conduct and committees they have formed which demonstrates they take it very seriously.
Conclusion
Home Depot is the market leader and financially strong, whereas Lowe’s Companies is not far behind. Both the companies adhere to best corporate governance practices and are well placed in the Industry. If we have to choose one of them, it would be Home Depot, the market leader.
Sales Comparison
Company
Year Ended
Sales ($bn)
Sales Growth (%)
Largest Region
Home Depot Inc
Jan-17
94.6
6.9%
The United States (91.5%)
Lowe's Companies, Inc.
Jan-17
65
10.1%
The United States (100.0%)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.