HOME DEPOT Analysis
What do the financial ratios in case Exhibit 7 tell you about the operating performance of Home Depot? What additional information do the different ratios provide? Complete and compare a similar analysis for Lowe’s.
a. Growth ratios are going down, loosing sales. Profitability ratios are declining after 1999 so that is not a good sign. Turnover rates seem to stay constant which means that they are selling the products at a constant rate. b. If their fixed assets are growing than the growth in sales should be increasing Looking at the financial forecast for Home Depot the return on capital is not strongly affected as the predictions in the ratios fluctuate. Receivable turnover and cash operating expenses will have to fluctuate greatly for the return on capital to drop below 12.3%. I don’t necessarily agree with her assumptions because I don’t think that there will be that much growth in the old stores. Soon there will be cannibalization between the new and old stores so there growth will eventually be relatively equal.
Lowes is increasing the amount of stores that they have as well as increasing the amount of inventory within each store so there assets are going to largely increase. This is going to cause them to have to borrow more money so they can keep up with the expenses. Also operating/administrative expenses are going to increase as well because they are going to train their employees on how to deal with professionals and carrying professional brands in store. Unlike Carrie’s assumption I have my growth rate for old stores slightly decreasing because in the beginning the newer stores will attract more customers until eventually the growth in new stores and old stores will even out. I also added an Internet Sales growth which I started out relatively small due to the fact that the fad of Internet Shopping for home supplies hasn’t necessarily been a fad among consumers yet.
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