Accounting Paper

Topics: Revenue, Financial ratio, Financial ratios Pages: 5 (1897 words) Published: January 31, 2013
Accounting 211- Ratio Project
23 November 2010
Home Depot has three basic strategies: assortment, price, and service. They carry the broadest range of merchandise priced below every competitor in every market where they compete. Lowe’s reported similar values when it came to their customers. They said that their top values are customer focused, respect, and passion for execution. In their letter to shareholders, Lowe’s said, “We know that providing great service is the driving force behind profitable sales and market share growth, and we feel our commitment to delivering great service has Lowe’s uniquely positioned to capitalize as the economy bottoms and home improvement demand improves.” After reading about all that each company reported about themselves we decided to see for ourselves. When we went to Home Depot and asked for help in a specific category the salesman pointed us in the right direction but did not help us out. He was not as helpful as he could have been. At Lowe’s one salesman helped us and showed us around the whole store. Therefore, we concluded that Lowe’s employees have a broader base of knowledge in all aspects while Home Depot hires past tradesmen who have knowledge in one specified area. Ratios:

The first ratio that we found was Return on Assets or ROA. ROA is computed by taking net income and dividing it by average total assets. This is an indicator of how profitable a company is with regards to their assets. It gives an idea into how efficient management is using their assets to generate earnings. Over the two years that we looked into Home Depot’s ROA rose by 1.2%. This rising trend is a result of good use of their assets in 2010 and they were able to generate more revenue than in 2009. On the other hand Lowe’s ROA went down by 1.48% over the course of the two years. They were not able to generate as much revenues in fiscal year 2010 as 2009 and therefore there ROA suffered. Even though Lowe’s ROA went down, its average ROA over the two years was still higher than Home Depot’s by .28%. From this we know that Lowe’s has a slight edge on Home Depot in their effectiveness of turning their investments into profits.

The next ratio that we found was the profit margin. The profit margin is calculated by net income divided by sales and it measures how much out of every dollar of sales a company actually keeps in earnings. A lot of a company’s sales dollars will go towards paying off debt, buying new inventory, or other costs of running a business, but the profit margin tells us how much of those sales dollars are retained in earnings. Home Depot’s profit margin rose by .85% over the two years. This means that Home Depot was able to keep more of their net sales rather than spending it on other costs in 2010 relative to 2009. In comparison, Lowe’s profit margin decreased by .77%. Lowe’s was not able to keep as much of their sales as income in 2010 relative to 2009. Again, even with this decrease, Lowe’s still had a higher profit margin than Home Depot by a mere .6%. So even with diminishing profit margins Lowe’s still able to keep more of their sales relative to Home Depot over the two years.

The asset turnover shows the amount of sales generated for every dollar’s worth of assets. It is calculated by dividing net sales or revenues by average assets. This number explains a firm’s efficiency at using their assets to generate sales and the higher the number the better. This ratio also tells about pricing strategies; companies with low profit margins tend to have high asset turnovers and those who have high profit margins have low turnover. Home Depot’s turnover stayed almost the same with a decrease of only .06 over the two years. This means that their pricing strategies stayed constant and they generated almost the same amount of sales with their assets. Lowe’s asset turnover also stayed relatively constant with only a .08 decrease. Home Depot had an overall higher asset turnover over the two years...
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