14-1
Chapter 14
Financial
Statement
Analysis
Electronic Presentation
by Douglas Cloud
Pepperdine University
14-2
Learning Goals
1. Construct and interpret horizontal and vertical
After studying this
analyses.
chapter, you should
2. Calculate and interpret the rate earned on
be able to:
stockholders’ equity and the rate earned on
total assets.
3. Analyze the rate earned on total assets by
evaluating the profit margin and the asset
efficiency of a business.Anal
Continued
14-3
Learning Goals
4. Determine and interpret leverage.
5. Calculate and interpret shareholder ratios:
earnings per share, price-earnings ratio, and
dividend yield.
6. Summarize the uses and limitations of
analytical measures.
7. Describe the contents of corporate annual
reports.
14-4
Your Need to Know
 Value investing is an attempt to discover stocks with
an intrinsic value that are greater than the stock prices.
 In growth investing, the investor tries to identify
companies that are growing sales and earnings
through new products, markets, or opportunities.
 Income investing is where investors purchase
common stocks for their dividend stream.
 Technical investing involves investors using technical
analysis to find clues about future performance from
past performance.
14-5
Learning Goal
1
Construct and
interpret horizontal
and vertical
analyses.
14-6
Horizontal Analysis
It’s an analysis of the percentage
increases and decreases of related items
What is horizontal
in comparative financial statements.
analysis?
14-7
14-7
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Increase (Decrease)
Feb. 3, 2002 Jan. 28, 2001 Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities
Total liabilities
$10,361
15,375
658
$26,394
$ 7,777
13,068
540
$21,385
$2,584
2,307
118
$5,009
33.2%
17.7
21.9
23.4
$ 6,501
$ 4,385
$2,116
48.3
1,250
372
189
$ 1,811
$ 8,312
1,545
256
195
$ 1,996
$ 6,381
(295)
116
(6)
$ (185)
$1,931
(19.1)
45.3
(3.1)
(9.3)
30.3
The stockholders’ equity section is not displayed.
14-8
14-8
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Increase (Decrease)
Feb. 3, 2002 Jan. 28, 2001 Amount Percent
Assets
Current assets
$10,361
$ 7,777
Property and equipment, net
15,375
13,068
Other assets
658
540
Horizontal
Analysis:
Total assets
$26,394
$21,385
Liabilities
Current liabilities
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities
Total liabilities
Difference
Base year
$ 6,501
$ 4,385
1,250
372
189
$ 1,811
$ 8,312
1,545
256
195
$ 1,996
$ 6,381
$2,584
2,307
118
$5,009
33.2%
17.7
21.9
23.4
$2,584
= 33.2%
$7,777
$2,116
48.3
(295)
116
(6)
$ (185)
$1,931
(19.1)
45.3
(3.1)
(9.3)
30.3
14-9
14-9
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Increase (Decrease)
Feb. 3, 2002 Jan. 28, 2001 Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities
Total liabilities
$10,361
15,375
658
$26,394
$ 7,777
13,068
540
$21,385
$2,584
2,307
118
$5,009
33.2%
17.7
21.9
23.4
Horizontal Analysis:
$ 6,501
$ 4,385
$2,116
48.3
372
189
$ 1,811
$ 8,312
256
195
$ 1,996
$ 6,381
116
(6)
$ (185)
$1,931
45.3
(3.1)
(9.3)
30.3
Difference
1,250
Base
year
$2,307
= 17.7%
1,545
(19.1)
$13,068 (295)
14-10
14-10
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Increase (Decrease)
Feb. 3, 2002 Jan. 28, 2001 Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities
Total liabilities
$10,361
15,375
658
$26,394
$ 7,777
13,068
540
$21,385
$2,584
2,307
118
$5,009
33.2%
17.7
21.9
23.4
$ 6,501
$ 4,385
$2,116
48.3
1,250
372
189
$ 1,811
$ 8,312
1,545
256
195
$ 1,996
$ 6,381
(295)
116
(6)
$ (185)
$1,931
(19.1)
45.3
(3.1)
(9.3)
30.3
14-11
14-11
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
2001
Increase (Decrease)
Amount Percent
17.1%
Sales (net)
$53,553
$45,738
$7,815
Cost of merchandise sold
37,406
32,057
5,349
Gross profit
$16,147
$13,681
$2,466
Selling and store operating exp.
10,280
8,655
1,625
General and administrative Horizontal
exp.
935
100
Analysis: 835
Total operating expenses
$11,215
$ 9,490
$1,725
Difference
$7,815 $ 741
Income from operations
$ 4,932
$ 4,191
= 17.1%
Other income and expenses:
Base year
$45,738
Interest and investment inc.
53
47
6
Interest expense
(28)
(21)
(7)
Income before income tax
$ 4,957
$ 4,217
$ 740
Income taxes
1,913
1,636
277
Net income
$ 3,044
$ 2,581
$ 463
14-12
14-12
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
2001
Increase (Decrease)
Amount Percent
Sales (net)
$53,553
$45,738
Cost of merchandise sold
37,406
32,057
Gross profit
$16,147
$13,681
Selling and store operating exp.
10,280
8,655
General and administrative exp.
935
835
Total operating expenses
$11,215
$ 9,490
Horizontal
Analysis:
Income from operations
$ 4,932
$ 4,191
Other income and expenses: Difference
$5,349
Interest and investment inc.
53
47
Base year
$32,057
Interest expense
(28)
(21)
Income before income tax
$ 4,957
$ 4,217
Income taxes
1,913
1,636
Net income
$ 3,044
$ 2,581
$7,815
5,349
$2,466
1,625
100
$1,725
$ 741
= 16.7
6
(7)
$ 740
277
$ 463
17.1%
16.7
14-13
14-13
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
Increase (Decrease)
Amount Percent
2002
2001
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
$45,738
32,057
$13,681
8,655
835
$ 9,490
$ 4,191
$7,815
5,349
$2,466
1,625
100
$1,725
$ 741
17.1%
16.7
18.0
18.8
12.0
18.2
17.7
53
(28)
$ 4,957
1,913
$ 3,044
47
(21)
$ 4,217
1,636
$ 2,581
6
(7)
$ 740
277
$ 463
12.8
33.3
17.5
16.9
17.9
14-14
14-14
HOME DEPOT INC.
Comparative Retained Earnings Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
2001
Retained earnings, beginning
$10,151
$ 7,941
Net income for the year
3,044
2,581
Total
$13,195
$10,522
Dividends:
On common stock
396
371
Retained earnings, ending Horizontal
$12,799
$10,151
Analysis:
Difference
Base year
Increase (Decrease)
Amount Percent
$2,210
463
$2,673
27.8%
25
$2,648
$2,210
= 27.8%
$7,941
14-15
14-14
HOME DEPOT INC.
Comparative Retained Earnings Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Retained earnings, beginning
Net income for the year
Total
Dividends:
On common stock
Retained earnings, ending
Increase (Decrease)
Amount Percent
2002
2001
$10,151
3,044
$13,195
$ 7,941
2,581
$10,522
$2,210
463
$2,673
27.8%
17.9
25.4
396
$12,799
371
$10,151
25
$2,648
6.7
26.1
14-16
Vertical Analysis
A percentage analysis can be
used to show the relationship
of each component to a total
within a single statement.
14-17
Vertical Analysis
The total, or 100% item,
on the balance sheet is
“total assets.”
14-18
14-18
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Feb. 3, 2002
Amount Percent
Jan. 28, 2001
Amount Percent
$10,361
15,375
58
$26,394
$ 7,777
13,068
540
$21,385
100.0%
$ 6,501 Total assets
1,811
is 100.0%
$ 8,312
$ 4,385
1,996
$ 6,381
$ 5,529
12,553
$18,082
$26,394
$ 4,926
10,078
$15,004
$21,385
14-19
14-19
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Feb. 3, 2002
Amount Percent
Jan. 28, 2001
Amount Percent
$10,361
15,375
58
$26,394
$ 7,777
13,068
540
$21,385
39.3%
100.0%
Liabilities
Current
liabilities
$ 6,501
Vertical
Analysis:
Long-term liabilities
1,811
Current
$10,361
Total
liabilitiesassets
$ 8,312
= 39.3%
Stockholders’
Equity
Total assets
$26,394
Common stock/paid-in capital $ 5,529
RE & accumulated comp. loss 12,553
Total stockholders’ equity
$18,082
Total liabilities and SE
$26,394
$ 4,385
1,996
$ 6,381
$ 4,926
10,078
$15,004
$21,385
14-20
14-20
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Feb. 3, 2002
Amount Percent
Jan. 28, 2001
Amount Percent
$10,361
15,375
58
$26,394
39.3%
58.2
2.5
100.0%
$ 7,777
13,068
540
$21,385
$ 6,501
1,811
$ 8,312
24.6%
6.9
31.5%
$ 4,385
1,996
$ 6,381
$ 5,529
12,553
$18,082
$26,394
20.9%
47.6
68.5%
100.0%
$ 4,926
10,078
$15,004
$21,385
14-21
14-21
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Feb. 3, 2002
Amount Percent
Jan. 28, 2001
Amount Percent
$10,361
15,375
58
$26,394
39.3%
58.2
2.5
100.0%
$ 7,777
13,068
540
$21,385
$ 6,501
1,811
$ 8,312
24.6%
6.9
31.5%
$ 5,529
12,553
$18,082
$26,394
20.9%
47.6
68.5%
100.0%
100.0%
$ 4,385
Total assets
1,996
$ 6,381 is 100.0%
$ 4,926
10,078
$15,004
$21,385
14-22
14-22
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Feb. 3, 2002
Amount Percent
Jan. 28, 2001
Amount Percent
$10,361
15,375
58
$26,394
$ 7,777
13,068
540
$21,385
39.3%
58.2
2.5
100.0%
36.4%
100.0%
Liabilities
Current liabilities
$ 6,501
$ 4,385
24.6%
Vertical
Analysis:
Long-term liabilities
1,811
1,996
6.9
Current
assets31.5%
$7,777$ 6,381
Total liabilities
$ 8,312
= 36.4%
Stockholders’ Equity Total assets
$21,385
Common stock/paid-in capital $ 5,529
$ 4,926
20.9%
RE & accumulated comp. loss 12,553
10,078
47.6
Total stockholders’ equity
$18,082
$15,004
68.5%
Total liabilities and SE
$26,394 100.0%
$21,385
14-23
14-23
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2002 and January 28, 2001
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Feb. 3, 2002
Amount Percent
Jan. 28, 2001
Amount Percent
$10,361
15,375
58
$26,394
39.3%
58.2
2.5
100.0%
$ 7,777
13,068
540
$21,385
36.4%
61.1
2.5
100.0%
$ 6,501
1,811
$ 8,312
24.6%
6.9
31.5%
$ 4,385
1,996
$ 6,381
20.5%
9.3
29.8%
$ 5,529
12,553
$18,082
$26,394
20.9%
47.6
68.5%
100.0%
$ 4,926
10,078
$15,004
$21,385
23.0%
47.1
70.2%
100.0%
14-24
14-24
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
Amount Percent
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
2001
Amount Percent
$53,553 100.0%
37,406
$16,147
10,280 Net sales is
935
100.0%
$11,215
$ 4,932
$45,738 100.0%
32,057
$13,681
8,655
Net sales is
835
$ 9,490 100.0%
$ 4,191
53
(28)
$ 4,957
1,913
$ 3,044
47
(21)
$ 4,217
1,636
$ 2,581
14-25
14-25
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
Amount Percent
2001
Amount Percent
Sales (net)
$53,553 100.0% $45,738 100.0%
Cost of merchandise sold
37,406
32,057 70.1
Gross profit
$16,147
$13,681
Selling and store operating exp.
10,280
8,655
General and administrative exp.
935
835
Total operating expenses
$11,215
$ 9,490
Income from operations
4,932
$2001
4,191
Vertical$ Analysis:
Other income and expenses:
Sold
$32,057
Interest and investmentCost
inc. of Merchandise
53
47
Interest expense
(28)
(21)
Net Sales
$45,738
Income before income tax
$ 4,957
$ 4,217
Income taxes
1,913 = 70.1%
1,636
Net income
$ 3,044
$ 2,581
14-26
14-26
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
Amount Percent
Sales (net)
$53,553 100.0%
Cost of merchandise sold
37,406
69.9
Gross profit
$16,147
Selling and store operating exp.
10,280
General and administrative exp.
935
Total operating expenses
$11,215
2002
Vertical
Analysis:
Income from
operations
$ 4,932
Other income and expenses:
Cost of Merchandise Sold
$37,406
Interest and investment inc.
53
Net Sales
$53,553
Interest expense
(28)
Income before income tax
= 69.9%$ 4,957
Income taxes
1,913
Net income
$ 3,044
2001
Amount Percent
$45,738 100.0%
32,057 70.1
$13,681
8,655
835
$ 9,490
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
14-27
14-27
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
Amount Percent
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
53
(28)
$ 4,957
1,913
$ 3,044
100.0%
69.9
2001
Amount Percent
$45,738 100.0%
32,057 70.1
$13,681 29.9%
8,655 18.9%
1.8
835
$ 9,490 20.7%
9.2%
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
0.1
(0.1)
9.2%
3.6
5.6%
14-28
14-28
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
Amount Percent
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
53
(28)
$ 4,957
1,913
$ 3,044
100.0%
69.9
30.1%
19.2%
1.7
20.9%
9.2%
0.1
(0.0)
9.3%
3.6
5.7%
2001
Amount Percent
$45,738 100.0%
32,057
70.1
$13,681 29.9%
8,655 18.9%
1.8
835
$ 9,490 20.7%
9.2%
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
0.1
(0.1)
9.2%
3.6
5.6%
14-29
14-29
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
2002
Amount Percent
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
53
(28)
$ 4,957
1,913
$ 3,044
100.0%
69.9
30.1%
19.2%
1.7
20.9%
9.2%
0.1
(0.0)
9.3%
3.6
5.7%
2001
Amount Percent
$45,738 100.0%
32,057
70.1
$13,681 29.9%
8,655 18.9%
1.8
835
$ 9,490 20.7%
9.2%
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
0.1
(0.1)
9.2%
3.6
5.6%
14-30
Learning Goal
2
Calculate and interpret
the rate earned on
stockholders’ equity and
the rate earned on total
assets.
14-31
Rate Earned on
Stockholders’ Equity
The stockholder desires a return on
his or her investment. One measure
of this return is the rate earned on
stockholders’ equity.
14-32
Rate Earned on
Stockholders’ Equity
Net income
Average stockholders’ equity
$3,044,000,000
($15,004,000,000 + $18,082,000,000)/2
= 18.4%
14-33
Rate Earned on
Stockholders’ Equity
Net income
Average stockholders’ equity
$1,023,000,000
($5,494,000,000 + $6,674,000,000)/2
= 16.8%
14-34
Rate Earned on Total Assets
Another ratio to measure the relative
profitability of a firm is rate earned
on total assets.
14-35
Rate Earned on Total Assets
Net income
Average total assets
$3,044,000,000
($21,385,000,000 + $26,394,000,000)/2
= 12.8%
14-36
Rate Earned on Total Assets
Net income
Average total assets
$1,023,000,000
($11,358,000,000 + $13,736,000,000)/2
= 8.1%
14-37
Comprehensive
Profitability Analysis
The exhibit on the next slide
diagrams the comprehensive ratio
relationship that can be used to
analyze the rate earned on
stockholders’ equity.
14-38
14-39
Comprehensive
Profitability Analysis
The rate earned on
stockholders’ equity
is normally higher
than the rate earned
on total assets when
a company uses
debt, or leverage.
14-40
Comprehensive
Profitability Analysis
Leverage Formula
Rate earned on total
Rate earned on
assets × leverage
stockholders’ equity =
Net income
=
Average Stockholders’ Equity
Net income
Average Total Assets
×
Average Total Assets
Average Stockholders’ Equity
14-41
Learning Goal
3
Analyze the rate
earned on total assets
by evaluating the
profit margin and the
asset efficiency of a
business.
14-42
Rate Earned on Total Assets
Profit Margin × Asset Turnover
Net Income
Net Sales
×
Net Sales
Average Total Assets
14-43
14-44
Margin Analysis
Why is the profit margin of Home
Depot over one percentage point
stronger than Lowe’s?
14-45
Home Depot and Lowe’s
Condensed Common-Size Income Statement
For the Year Ended February 3 and February 1, 2002
HomeDepot’s
Depot
Home
Sales (net)
has
higher
Cost of merchandise
solda selling
higher
Gross profit
gross profit
expenses
are
Selling expenses percentage than
somewhat
Administrative expenses
Lowe’s.
offset
by lower
Total operating expenses
administrative
Income from operations
Other income
expenses.
Interest expense
Although
Income
before Home
incomeDepot
taxes pays
more
income taxes
Income tax
expense
Net income
(percentage-wise), the
overall profit percentage is
higher than Lowe’s.
Home Depot
Lowe’s
100.0%
69.9
30.1%
19.2%
1.7
20.9%
9.2%
0.1
(0.0)
9.3%
3.6
5.7%
100.0%
71.2
28.8%
18.3%
2.4
20.7%
8.1%
0.0
(0.8)
7.3%
2.7
4.6%
14-46
Asset Efficiency
14-47
Accounts Receivable Analysis
Accounts Receivable Turnover
Net sales
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Net sales on account
Average accounts receivable
Home Depot
$53,553
$
835
820
$ 1,755
$ 878
61.0
(all dollar amounts in millions)
Lowe’s
$22,111
$
$
$
161
166
327
164
134.8
14-48
Accounts Receivable Analysis
Accounts Receivable Turnover
Home Depot
$53,553
Lowe’s
$22,111
Net sales
Use: To receivable
assess the(net):
efficiency in collecting
Accounts
Beginning
of yearand in the management
$ 835 of $credit.
161
receivables
End of year
820
166
Total
$ 1,755
$ 327
Average
$ 878
$ 164
Net sales on account
Average accounts receivable
61.0
134.8
(all amounts except ratios in millions)
14-49
Accounts Receivable Analysis
Number of Days’ Sales in Receivables
Home Depot
Lowe’s
$920
$53,553
$166
$22,111
$147
$61
6.3
2.7
Accounts receivable (net)
end of year
Net sales on account
Average daily sales on
on account (net sales ÷ 365)
Accounts receivable, end of year
Average daily sales on account
(all dollar amounts in millions)
14-50
Accounts Receivable Analysis
Number of Days’ Sales in Receivables
Home Depot
Lowe’s
Accounts receivable (net)
Use: To assess the efficiency in collecting
end of year
$920
$166
receivables and in the management of credit.
Net sales on account
$53,553
$22,111
Average daily sales on
on account (net sales ÷ 365)
$147
$61
Accounts receivable, end of year
Average daily sales on account
6.3
(all amounts except ratios in millions)
2.7
14-51
Inventory Analysis
Inventory Turnover
Cost of merchandise sold
Inventories:
Beginning of year
End of year
Total
Average
Cost of merchandise sold
Average inventory
Home Depot
$37,406
Lowe’s
$15,743
$ 6,556
6,725
$13,281
$ 6,641
$ 3,285
3,611
$ 6,896
$ 3,448
5.6
4.6
(all dollar amounts in millions)
14-52
Inventory Analysis
Inventory Turnover
Home Depot
$37,406
Lowe’s
$15,743
Cost of merchandise sold
Inventories:
Beginning
of year
$ 6,556in the
$
Use: To
assess the efficiency
End of year
6,725
management of inventory.
Total
$13,281
$
Average
$ 6,641
$
Cost of merchandise sold
Average inventory
5.6
(all dollar amounts in millions)
3,285
3,611
6,896
3,448
4.6
14-53
Inventory Analysis
Number of Days’ Sales in Inventory
Inventories, end of year
Cost of merchandise sold
Average daily cost of
merchandise sold
(COGS ÷ 365)
Home Depot
$6,725
$37,406
Lowe’s
$3,611
$15,743
$102
$43
65.9
84.0
Inventories, end of year
Average daily cost of goods sold
(all dollar amounts in millions)
14-54
Inventory Analysis
Number of Days’ Sales in Inventory
Home Depot
$6,725
$37,406
Lowe’s
$3,611
$15,743
Inventories, end of year
Cost of merchandise sold
To assess
the efficiency in the
Average Use:
daily cost
of
of inventory.
merchandisemanagement
sold
(COGS ÷ 365)
$102
$43
65.9
Inventories, end of year
Average daily cost of goods sold
(all dollar amounts in millions)
84.0
14-55
Fixed Asset Analysis
Fixed Asset Turnover
Net sales
Fixed assets (net):
Beginning of year
End of year
Total
Average
Net sales
Average net fixed assets
Home Depot
$53,553
Lowe’s
$22,111
$13,068
15,375
$28,443
$14,222
$ 7,035
8,663
$15,688
$ 7,844
3.77
(all dollar amounts in millions)
2.82
14-56
Fixed Asset Analysis
Fixed Asset Turnover
Home Depot
$53,553
Lowe’s
$22,111
Net sales
Fixed assets
Use:(net):
To measure how many dollars
Beginning ofofyear
sales are being$13,068
made from$ 7,035
End of year
15,375
8,663
investments
in
stores
and
Total
$28,443
$15,688
fixtures.
Average
$14,222
$ 7,844
Net sales
Average net fixed assets
3.77
(all dollar amounts in millions)
2.82
14-57
Learning Goal
4
Determine and
interpret leverage.
14-58
Leverage
Rate earned on total assets
× Leverage
= Rate earned on
stockholders’ equity
14-59
Leverage
18.4%
20%
16.7%
Leverage
12.8%
Leverage
8.1%
10%
0%
Home
Depot
Rate earned on
total assets
Lowe’s
Rate earned on
stockholders’
equity
14-60
Current Balance Sheet Relationships
Working Capital and Current Ratio
Current assets
Current liabilities
Working capital
Current ratio
Lincoln Co.
$550,000
210,000
$340,000
2.6
Jefferson Corp.
$533,000
243,000
$290,000
2.2
Use: To indicate the ability
to meet
Divide
currently maturingcurrent
obligations.
assets by
current
(All dollar amounts liabilities
in millions)
14-61
Current Balance Sheet Relationships
Quick Ratio
Home Depot Lowe’s
Quick assets:
Cash
Temporary investments
Accounts receivable (net)
Total quick assets
Current liabilities
Quick ratio
$ 2,477
69
920
$ 3,466
÷6,501
0.53
$ 799
54
166
$ 1,019
÷3,017
0.34
Use: To indicate instant debt-paying ability.
(All dollar amounts in millions)
14-62
Long-Term Balance Sheet Relationships
Ratio of Fixed Assets to Long-Term Liabilities
Fixed assets (net)
Long-term liabilities
Ratio of fixed assets to
long-term liabilities
Home Depot Lowe’s
$15,375
$ 8,653
÷ 1,811
÷ 3,734
8.5
Use: To indicate the margin of safety
to long-term creditors.
(All dollar amounts in millions)
2.3
14-63
Long-Term Balance Sheet Relationships
Ratio of Liabilities to Stockholders’ Equity
Total liabilities
Total stockholders’ equity
Ratio of liabilities to
stockholders’ equity
Home Depot
$ 8,312
÷18,082
Lowe’s
$ 7,062
÷ 6,674
0.46
1.06
Use: To indicate the margin of safety to creditors.
(All dollar amounts in millions)
14-64
Long-Term Balance Sheet Relationships
Number of Times Interest Charges Earned
Net income
Add income tax
Add interest expense
Amount available for interest
Number of times interest charges
earned
Home Depot
Lowe’s
$3,044
1,913
28
$4,985
$1,023
601
174
$1,798
178.0
10.3
Use: To measure the relative risk of debtholders.
(All dollar amounts in millions)
14-65
Learning Goal
5
Calculate and
interpret shareholder
ratios: earnings per
share, price-earnings
ratio, and dividend
yield.
14-66
Earning per Share
Net income
Shares of common stock
Earnings per share on common
stock
Home Depot
$3,044
÷2,335
Lowe’s
$1,023
÷ 769
$1.30
$1.33
Use: To assess the profitability of the
investment by common stockholders.
(All amounts except EPS in millions)
14-67
Price-Earnings Ratio
Home Depot Lowe’s
Market price per share of common
Earnings per share on common
Price-earnings ratio on common
stock
$50.00
÷ 1.30
$46.15
÷ 1.33
38
35
Use: To indicate future earnings prospects,
based on the relationship between market
value of common stock and earnings.
14-68
Dividend Yield
Home Depot Lowe’s
Dividends per share of common
Market price per share of common
Dividend yield on common stock
$ 0.20
÷ 50.00
0.4%
$ 0.08
÷ 46.15
0.2%
Use: To indicate the rate of return to common
stockholders in terms of dividends.
14-69
Learning Goal
6
Summarize the
uses and
limitations of
analytical
measures.
14-70
Keep in mind that these
Use Exhibit 9 of this
measures are not a substitute
chapter as a handy
for sound judgment.
reference tool.
14-71
Learning Goal
7
Describe the
contents of
corporate annual
reports.
14-72
The financial highlights section
summarizes the operating results
for the last year or two. It’s
usually on the first few pages of
the annual report.
Financial Highlights
14-73
President’s Letter to
Stockholders
This letter
usually
discusses
reasons for
actions taken
by the company
during the year.
14-74
Management Discussion
and Analysis (MDA)
 A required disclosure in the annual report
 Includes an analysis of the results of
operations
 Discusses management’s opinion about
future performance
 An analysis of the company’s financial
condition
14-75
Independent Auditor’s Report
The
Before
CPAs
issuing
who
annual
conduct
statements,
the audit
render
all publicly
an opinion
heldon
the
corporations
fairness ofare
the
required
statement.
to have an
independent audit of
their financial
statements.
14-76
Historical Summary
This summary
reports selected
financial and
operating data of past
periods, usually for
five or ten years.
14-77
Chapter 14
The End
14-78