Principles of Corporate Finance_ 12th Edition

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Chapter 28 Financial Analysis 751


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sales per dollar of assets and in earning a higher profit margin on these sales. Home Depot
was less conservatively financed than Lowe’s, but had more liquid assets.
It may also be helpful to compare Home Depot’s financial ratios in 2013 with the equiva-
lent figures in earlier years. Figure 28.2 does so. You can see that in 2007 and 2008 Home
Depot’s profitability was hit by the downturn in the housing market. The turnaround came
under new management in 2009 when there was a sharp improvement in profit margins. In
each of the following years, the company was able to increase both the rate of asset turnover
and the profit margin.


Fiscal 2013
Home
Depot

Lowe’s
Companies
Performance Measures:
Market value added ($ millions) Market value of equity – book value of equity 91,778 35,208
Market-to-book ratio Market value of equity/book value of equity 8.3 4.0
EVA ($ millions) (After-tax interest + net income) – (cost of capital × capital) 3,258 310
Return on capital (ROC, %) (After-tax interest + net income)/total capital 21.5 11.3
Return on equity (ROE, %) Net income/equity 30.3 16.5
Return on assets (ROA, %) (After-tax interest + net income)/total assets 14.2 8.0
Efficiency Measures:
Asset turnover Sales/total assets at start of year 1.92 1.64
Inventory turnover Cost of goods sold/inventory at start of year 4.8 4.1
Days in inventory Inventory at start of year/daily cost of goods sold 76 90
Receivables turnovera Sales/receivables at start of year 56.5 246.2
Average collection period (days)a Receivables at start of year/daily sales 6.5 1.5
Profit margin (%) Net income/sales 6.83 4.28
Operating profit margin (%) (After-tax interest + net income)/sales 7.42 4.86
Leverage Measures:
Long-term debt ratio Long-term debt/(long-term debt + equity) 0.54 0.46
Total debt ratio Total liabilities/total assets 0.69 0.64
Times-interest-earned EBIT/interest payments 12.9 8.7
Cash coverage ratio (EBIT + depreciation)/interest payments 15.2 11.8
Liquidity Measures:
Net-working-capital-to-total-assets ratio Net working capital/total assets 0.112 0.043
Current ratio Current assets/current liabilities 1.42 1.16
Quick ratio (Cash + marketable securities + receivables)/current liabilities 0.310 0.093
Cash ratio (Cash + marketable securities)/current liabilities 0.179 0.065

❱ TABLE 28.9^ Selected financial ratios for Home Depot and Lowe’s, 2013.


a (^) Both companies sell most of their receivables to a third party.

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