In order to determine the investment worthiness of a company, it is safe for potential investors to perform deeper analysis and evaluation into a firm’s financial performance. In this research paper, the main focus is on providing an extensive analysis into both Home Depot and Lowes financial position and, in turn, it suggests the more promising of the two in terms of performance. It should be noted that while conducting this research analysis, such evaluative models as ratio analysis, stock price analysis, company’s policies and way of governance are taken into consideration.
Ratio Analysis
In order to perform the inter-firm analysis of ratios, it is fair to indicate that only relevant ratios are calculated and their respective values compared to those of preceding years. Tables below depict relevant ratios for two companies within a two-year financial period.
Home Depot Ratio Analysis for Period: 2010-2011
|
Ratio |
Formula |
Financial Year:2010 |
Financial Year: 2011 |
|
Return on Capital Employed(R.O.C.E) |
(Profit before Interest & Tax/ Capital Employed) * 100 |
(4,803/19,393)*100 = 24.77 % |
(5,839/18,889)*100 = 30.9 % |
|
Asset Turnover |
(Sales/ Capital Employed) *100 |
(66,176/19,393)*100 = 341.23 % |
(67,997/18,889)*100 = 360 % |
|
Gross Profit Percentage |
(Gross Profit/Sales) * 100 |
(22,412/66,176)*100 = 33.87 % |
(23,412/67,997)*100 = 34.43 % |
|
Net Profit Percentage |
(Net Profit/Sales)* 100 |
(2,661/66,176)*100 = 4.02 % |
(3,338/67,997)*100 = 4.9 % |
|
Current Ratio |
Current Assets/ Current Liabilities |
13,900/10,363 = 1.34 : 1 |
13,479/10,122 1.33: 1 |
|
Quick Ratio |
Current Assets Less Stock/Current Liabilities |
(13,900-0)/10,363 1.34 : 1 |
(13,479-0)/10,122 = 1.33 : 1 |
Lowes Ratio analysis for Financial Period: 2010-2011 (Lowes, 2010).
|
Ratio |
Formula |
Financial Year:2010 |
Financial Year: 2011 |
|
Return on Capital Employed(R.O.C.E) |
(Profit before Interest & Tax/ Capital Employed) * 100 |
(3,112/19,069) * 100 = 16.32 % |
(3,580/18,112)*100 = 19.77 % |
|
Asset Turnover |
(Sales/ Capital Employed) *100 |
(47,220/19,069)*100 = 247.62 % |
(48,815/18,112)* 100 = 269.52 % |
|
Gross Profit Percentage |
(Gross Profit/Sales) * 100 |
(16,463/47,220)*100 = 34.86 % |
(17,152/48,815)*100 = 35.13 % |
|
Net Profit Percentage |
(Net Profit/Sales)* 100 |
(1,783/47,220)*100 = 3.78 % |
(2,010/48,815)*100 = 4.12 % |
|
Current Ratio |
Current Assets/ Current Liabilities |
9,732/7,355 = 1.32 : 1 |
9,967/7,119 1.41 : 1 |
|
Quick Ratio |
Current Assets Less Stock/Current Liabilities |
(9,732-8,249)/7,355 0.2: 1 |
(9,967-8,321)/7,119 = 0.23 : 1 |
Stock Price Analysis: Gordon Model
Home Depot: Gordon Model Formula, Current Price = Current Annual Dividends (1+g)/ k-g
= 86(1+0.045)/90.57-0.045
Project stock price = $ 0.993
Lowes, Gordon Model formula, Current Price = Current Annual Dividends (1+g)/k-g
= 677(1+0.5)/100.21-0.5
= $ 10.55