BU 5120 Financial Analysis Case 2

Value Line Publishing, October 2002
12/15/2013

1. What do the financial ratios in case Exhibit 7 tells 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 using the Excel Template provided – Lowe’s
Financial Ratios.
The financial ratios in exhibit 7 show Home Depot has an overall profitability given growth in
the market compared to sales and liabilities. Home Depot 5 year average ROC was 15.22%
showing a positive company profit as a percentage of total company value and ownership. The
ROE was 17.52% indicating a positive combined total worth of the company. The average for
Lowe’s was ROC of 6.95% and a ROE of 14.70%. Using these benchmarks, an investor would
want to go with the better average and invest in Home Depot. Home Depot also showed a
higher 5 year average gross margin of 30.52% compared to Lowes of 27.59%. The gross
margin represents the percent of total sales revenue that the companies retain after incurring
direct costs with producing the goods and services sold. The averages here show that Home
Depot retains more on each dollar of sales to other cost obligations which performs stronger
than Lowes. The operating margin which indicates how much a company makes (before taxes
and interest) on sales is a good indicator of the quality of the company. Home Depot showed
an increase from 1997 to 1999 then a decrease and stabilization in 2000 and 2001. Lowes
showed a steady increase indicating that Lowes was earning more dollars per sales across the
5 year period and was performing better than Home Depot. The NOPAT margin fluctuated for
Home Depot showing changes in the firm operating efficiencies. Lowes showed a steady
increase indicating operating efficiencies were improving. Here Lowes shows more strength
than Home Depot as they were stronger in improving operating efficiencies.

Who deserves the “management of the year” award in the retail-building-supply industry?
Provide a detailed explanation including support for your position.
2.

Home Depot demonstrated strong management practices in the industry by properly forecasting
market needs and through acquisitions of specialty stores (Georgia lighting, N-E Thing Supply
Company, plumbing, and wholesale distributors) they not only expanded their influence in the
market they set up a path to provide specialty services. This is important as Home Depot had
been seen in the industry as more of a large contractor services company. Therefore, I am
concluding that the Home Depot deserves the management of the year award in
3. Assumptions drive the financial forecasting models like that of Home Depot in Exhibit 8. By

putting the assumptions all at the top of the model, the analyst can also easily alter the
assumptions and measure the impact. What do you think of Galeotafiore’s forecast for
Home Depot? Are there any “red flags” in Galeotafiore’s work?

4. Prepare a forecast for Lowe’s using the Excel Template provided – Lowe’s forecast.
Articulate and explain your choice of key assumptions within the memo. Draw upon the
case dialogue about future growth opportunities and financial forecast for Lowes, as well as
overall economic, demographic or sector/industry trends evidenced in the exhibits.

In addition to the written memo, please provide your calculated historical 1997-2001 financial ratios for Lowe’s as well as a forecast for Lowe’s for 2002-2006.

Within the written memo, be sure to well address the following questions:

What do the financial ratios in case Exhibit 7 tells 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 using the Excel Template provided – Lowe’s Financial Ratios.

2. Who deserves the “management of the year” award in the retail-building-supply industry? Provide a detailed explanation including support for your position.

3. Assumptions drive the financial forecasting models like that of Home Depot in Exhibit 8. By putting the assumptions all at the top of the model, the analyst can also easily alter the assumptions and measure the impact. What do you think of Galeotafiore’s forecast for Home Depot? Are there any “red flags” in Galeotafiore’s work?

4. Prepare a forecast for Lowe’s using the Excel Template provided – Lowe’s forecast. Articulate and explain your choice of key assumptions within the memo. Draw upon the case dialogue about future growth opportunities and financial forecast for Lowes, as well as overall economic, demographic or sector/industry trends evidenced in the exhibits.