Value line Publishing is an investment company which is involved in doing an in-0depth analysis of the retail building supply industry. It is composed of the three major sectors which are hardware, lumberyards and home centres of the large formats. The hardware comprises of 22.8% share in the year 1997 and from there it has grown to 26% in total at the end of the year 2006 (Cao & Li, 2015). The leaders which are prevailing in the industry are the home depot Inc. and the Lowe’s companies which accounts for the 22.90% and 10.80% respectively.
Between the years 1998, the growth rate of the firm has reduced from 7.6% to 4.3% yet the company stood strong in the market due to the petty interest rate and the aid from the construction business (Bloomberg, 2018). These giant big companies are having a key rivalry as both the companies are engaged in improving themselves and the different policies are devised by each company to sustain and ensure longer market share and position. Both of the companies are seeking to boost their top and the bottom lines in order to cater to their customers and provide better services on time.
The size of the retail building industry is expanding and accelerating itself with the pace of the market and currently the US retail supply building industry is of worth $176 billion (Scarborough, 2016). The dominant players have covered a large market share and the new warehouse creates a bridge between the customers and the markets.
Results
The analysis of the ratio can be done under five categories. The ratios are namely liquidity, solvency ratios, Activity analysis, long term debt analysis and profitability analysis.
Lowe’s
|
Liquidity Ratio |
1997 |
1998 |
1999 |
2000 |
2001 |
|
Current Ratio |
1.46 |
1.46 |
1.55 |
1.43 |
1.63 |
|
0.15 |
0.14 |
0.24 |
0.16 |
0.28 |
Home Depot
|
Liquidity Ratio |
1997 |
1998 |
1999 |
2000 |
2001 |
|
|
Current Ratio |
1.82 |
1.73 |
1.75 |
1.77 |
1.59 |
|
|
Cash Ratio |
0.07 |
0.02 |
0.05 |
0.04 |
0.39 |
The current ratio of the Home depot is constantly decreasing as compared as compared to the Lowe’s in the financial years from 1997 to 2001. Due to the inventory problems and the assets are not readily convertible into cash therefore the current assets ratio is decreasing eventually (Accounting Explained 2018). The cash ratio of the Home depot is lower than the cash of the Lowe’s. The cash ratio basically determines the ability of the business to pay the current liabilities immediately. The reasons for lower cash ratio is due to the financial instability the company is facing and at times it can also be the strategy of the company to keep the low cash reserves.
Leverage Ratios
|
LEVERAGE |
1997 |
1998 |
1999 |
2000 |
2001 |
|
|
Total Capital/Equity |
1.24 |
1.22 |
1.09 |
1.13 |
1.10 |
|
LEVERAGE |
1997 |
1998 |
1999 |
2000 |
2001 |
|
Total Capital/Equity |
2.01 |
2.02 |
1.92 |
2.07 |
2.06 |
The impact of the leverage ratios is that how much capital is invested in terms of equity and the reason for decline in case of the home depot is due to debt financing.
Activity Analysis
Lowe’s
|
1997 |
1998 |
1999 |
2000 |
2001 |
|
|
Working capital turnover (Sales/WC) |
13.14 |
12.10 |
10.90 |
12.20 |
10.72 |
|
Receivable turnover (Sales/AR) |
85.61 |
85.08 |
107.54 |
116.65 |
133.54 |
Home Depot
|
1997 |
1998 |
1999 |
2000 |
2001 |
||
|
Working capital turnover (Sales/WC) |
12.0 |
14.5 |
13.9 |
13.5 |
13.9 |
|
|
Receivable turnover (Sales/AR) |
43.4 |
64.4 |
65.5 |
54.8 |
58.2 |
|
The above table shows a comparative analysis of the activity ratios of Home Depot and Lowe’s. The table shows the comparison between the working capital and receivable turnover ratio (Mathuva, 2015). It can be observed that the WC ratio of Home Depot had shown an increase in the 1997 and 1998 and after that ratio decreases and remains constant for the next three years. In comparison to that, Lowe showed the reverse trend as its working capital turnover reduces in the starting three years that is from 1997 to 1999. After that, the ratio increases to 12.20 and then again reduces in 2001.
Talking about receivable turnover, Lowe has high DTR as compare to Home Depot and has also shown an increasing trend in the past five years. The ratio of Lowe had continuously increased from $85.61 to $133.54 from 1997 to 2001. The reason of the increasing receivable turnover ratio is that the company is operating in cash and that the company is extending the credit efficiently.
Growth Ratios
|
GROWTH |
1998 |
1999 |
2000 |
2001 |
|
|
Total sales growth |
25.1% |
27.2% |
19.0% |
17.1% |
|
|
Growth in New Stores |
22.0% |
22.2% |
21.9% |
17.5% |
|
GROWTH |
1998 |
1999 |
2000 |
2001 |
|
Total sales growth |
20.8% |
29.9% |
18.1% |
17.7% |
|
Growth in New Stores |
9.0% |
10.8% |
12.8% |
14.5% |
This table shows the growth ratios for Home Depot and Lowe. The sales growth of Home is more than Lowe in year 1998 and 2000. In 1999, the growth of Lowe is 29% which is more than the growth of 27.2% enjoyed by Home Depot. In 2001, the growth is almost the same. The stores of Lowe have increased with a great pace and there was an increasing trend in the growth of Lowe’s stores (Heikal, Khaddafi, & Ummah, 2014). In 1998, the growth was 9% which increased to 14.5% in 2001, whereas in case of Home Depot the growth of stores has significant reduced in the past five years.
Profitability Ratios
Home Depot
|
PROFITABILITY |
1997 |
1998 |
1999 |
2000 |
2001 |
|
Return on capital (NOPAT/Total capital) |
13.2% |
15.3% |
17.3% |
15.1% |
15.2% |
|
Return on equity (Net earnings/S. Equity) |
16.3% |
18.5% |
18.8% |
17.2% |
16.8% |
Lowe’s
|
PROFITABILITY |
1997 |
1998 |
1999 |
2000 |
2001 |
|
Return on Assets |
12.9% |
14.1% |
14.0% |
13.4% |
14.3% |
|
Return on Equity |
13.7% |
15.4% |
14.3% |
14.7% |
15.3% |
From the above table it can be concluded that in case of the both the companies the profitability of the company is fluctuating. The return on equity of the Lowe’s was highest in the year 1998 and from thereafter it fell due to underlying stocks and unrecorded sales. On the other hand in case if the home depot the return on equity is escalating (Easton, 2015).
Future Projections
The position of the Home Depot can be improved before it becomes unit and the Lowe’s company can flourish well if it focuses on maintaining the proper cash ratio and current ratio (Kim, Kim, & Qian, 2018). Home depot is going to create more value and it reflects a better position in the market. The operating cash flow is more with the home depot and therefore it will create better opportunities for the company in the future. The strategy adopted by the Lowe’s is comparatively complicate and therefore the EBIT is growing but yet at the slower rate.
|
Free Cash Flow |
2001E |
2002E |
2003E |
|
Home Depot |
|||
|
EBIT |
4932 |
6050 |
7533 |
|
Depreciation |
764 |
902 |
1056 |
|
Taxes |
1904 |
2275 |
2825 |
|
Operating Cash Flow |
11215 |
13271 |
15328 |
|
Changes in Working Capital |
1277 |
1343 |
1510 |
|
Lowe’s |
|||
|
EBIT |
1798 |
2240 |
2808 |
|
Depreciation |
534 |
630 |
739 |
|
Taxes |
694 |
842 |
1053 |
|
Operating Cash Flow |
4036 |
5479 |
6329 |
|
Changes in Working Capital |
-521 |
387 |
457 |
Conclusions
From the above analysis it can be concluded that the Lowe’s Company is performing slowly as compared to the home depot overall. Below is the graph which depicts the reasons for why a person shall invest in the home depot as the return on equity as well as well as the return on capital is improving and in the long run it can benefit the shareholders if it can improve the cash as well as the current ratio. Therefore one should invest home depot to get good returns
References
Accounting Explained (2018). Cash Ratio.
Bloomberg, (2018). Value line Publishing market information.
Cao, L., & Li, L. (2015). The impact of cross-channel integration on retailers’ sales growth. Journal of Retailing, 91(2), 198-216.
Easton, P. (2015). Accounting?Based Estimates of the Expected Rate of Return on Equity Capital. Wiley Encyclopedia of Management, 1-5.
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.
Kim, K. H., Kim, M., & Qian, C. (2018). Effects of corporate social responsibility on corporate financial performance: A competitive-action perspective. Journal of Management, 44(3), 1097-1118.
Mathuva, D. (2015). The Influence of working capital management components on corporate profitability. New York: Springer.
Scarborough, N. M. (2016). Essentials of entrepreneurship and small business management. United States: Pearson.
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