Value Line Publishing October 2002 Case Solution

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.

The activities of Home Depot have developed progressively during the course of the company's fiscal years. According to this ratio, their return on equity in 1999, the year in which they achieved their highest return on equity, was 18.8 percent as a proportion of net income to shareholders' equity. An estimate of how much money the firm earned in the preceding fiscal year is given in this section. According to Home Depot's general profit margin, the company's operational profit margin has been steadily increasing from 1997 to the present. Although the operating margin has been stable for the last two years, the long-term outlook suggests exceptional performance as well as a financial playground from which growth and expansion are feasible. Lowe's financial operation and outlook may also see sales growth increase from 18 percent to 19 percent over the next two fiscal years, according to the company's estimates. Consequently, during the course of the year, their financial operation ratios have experienced a major improvement. Based on the firm's purpose and success in big cities such as Boston over the years, these development techniques have shown to be feasible for the company throughout the years. Lowe's profit margins have increased significantly over the course of the previous three fiscal years. The cash ratio, for example, indicates how probable it is that a corporation will be able to pay its immediate debtors out of its available cash reserves. By examining their cash ratios, businesses may establish whether or not they have the capacity to service their debt commitments without acquiring liabilities. Another way to assess a company's capacity to satisfy its short-term cash requirements and capitalise on any new business opportunities is to examine its working capital ratio (also known as the working capital to equity ratio).

2. How sensitive is return on capital to the forecast assumptions in case Exhibit 8? What independent changes in Carrie Galeotafiore's estimates are required to drive the 2002 return-capital estimate below Home Depot's cost-of-capital estimate of 12.3 percent? Look specifically at gross margin, cash operating expenses, receivable tumover, inventory turnover, and P&E tumover. What effect does sales growth have on return on capital? Explain your findings.