Bu 5120 – financial analysis case 2
The financial ratios in Exhibit 7 of the Home Depot case provide insight into the company’s operating performance. The current ratio and quick ratio measure a company’s ability to pay short-term liabilities, and both are higher for Home Depot (1.76 & 1.26) than those of its competitor Lowes (1.40 & 0.91). Home Depot has a higher current ratio, and a lower quick ratio than its rival Lowes.
Home Depot is also ahead of Lowes on the asset turnover rate, which measures how well assets are being used to create sales. Home Depot’s ratio stands at 2.19, while Lowes’ ratio is 1.76. Home Depot has a higher ratio of assets to revenue.
The return on equity (ROE) ratio takes into account all aspects of the company’s operations when measuring profitability and it shows that Home Depot has a much stronger ROE (20%) relative to Lowes (14%). Home Depot has a higher return than Lowes.
Home Depot’s profit margin, which tells how much is left in the bank after costs have been paid for all items purchased and services rendered. This margin favors Home Depot at 8% as opposed to 6% by Lowes. It shows that Home Depot manages its expenses better as well as generates more revenue through their operations.
These four ratios can provide valuable information on the performance of Home Depot or Lowes. They do this by looking at different factors such as profitability, shareholder return, asset efficiency and liquidity. Investors can make more informed choices when it comes to choosing stocks based solely on these metrics or when comparing the same company against its competitors.