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Company Performance Analysis
ORDER INSTRUCTIONS:
Please read the cases 10 and 12 and answer the following questions
Assignment of case 10
1) Review the two exhibits for Lowe’s & Home Depot (Exhibit 7 and 8). Examine ratios. See the excel file of case 10.
Prepare ratios for Lowe’s, using data from exhibit #5, which should be identical to those in exhibit 7 modeled by Home Depot. See below:
| Fiscal year | ||||
| 1997 | 1998 | 1999 | 2000 | 2001 |
| Working capital (CA-NIBCL*) |
| Fixed assets |
| Total capital |
| Tax rate |
| NOPAT (EBIT*(1-t)) |
| Return on capital (NOPAT/Total capital) |
| Return on equity (Net earnings/S. Equity) |
| Gross margin (Gross profit/Sales) |
| Cash operating expenses/Sales |
| Depreciation/Sales |
| Depreciation/P&E |
| Operating margin (EBIT/Sales) |
| NOPAT margin (NOPAT/Sales) |
| Total capital turnover (Sales/Total capital) |
| P&E turnover (Sales/P&E) |
| Working capital turnover (Sales/WC) |
| Receivable turnover (Sales/AR) |
| Inventory turnover (COGS/M. inventory) |
| Sales per store ($ millions) |
| Sales per sq foot ($) |
| Sales per transaction ($) |
| Total sales growth |
| Sales growth for existing stores |
| Growth in new stores |
| Growth in sq footage per store |
| Total Capital/Equity |
Which firm is the better performing one? On what basis do you conclude the better performance?
2) Who deserves the “Management of the Year” award in the retail building-supply industry? Compare based on 2001 firm performance.
- Conduct DuPont analysis for both two firms and analyze their return sources?ROE=(NI/sale)*(sale/total capital)*(total capital/total equity)
*Prepare a DuPont analysis to evaluate the differences in performance?
- Why the two firms have the same beta (exhibit 3), but the WACC are different?
- Compare the two firms’ return on capital in 2011.
- According to ROC, which one is better?
- Consider their WACC.
- Which firm’s stock performs better during 2001? Why?
- What is the bottom line to measure manager performance? Future or history?
- Compare the two firms’ return on capital in 2011.
3) How does the Home Depot forecasting model work? Why do we use ratios to forecast financial statements? Hint: walk through the mechanics of the model, focusing on the 2002 forecast (exhibit 8)?
Company Performance Analysis
Assignment of case 12
- What is the current situation?
- Why did the company run out of cash? Think of the source and use of cash.
- What are the consequences for the company?
- what is the effect of running out of cash to the company?
- What are Kumar’s alternatives for action? And the effect and feasibility of each possible action:
1: Slower growth:
2: Improving profitability
3: Cutting dividends
4: reduce investment
- What impact might the below two proposals have on the financial needs of the firm?
a): Proposal from the transportation manager to reduce raw material inventory.
b): Proposal from the operations manager to level production.
Below is a partial answer to the above homework questions by one of our writers. If you are interested in a custom non plagiarized top quality answer, click order now to place your order.
Company Performance Analysis Essay
Ratio analysis for Lowe’s
| VALUE LINE PUBLISHING, OCTOBER 2002 | |||||||
| Ratio Analysis for Lowes | |||||||
| Fiscal year | |||||||
| 1997 | 1998 | 1999 | 2000 | 2001 | |||
| Working capital (CA-NIBCL*) | 772 | 1,012 | 1,460 | 1,539 | 2,063 | ||
| Fixed assets | 3,110 | 3,759 | 5,319 | 7,201 | 8,816 | ||
| Total capital | 3,881 | 4,771 | 6,779 | 8,739 | 10,879 | ||
| Tax rate | 38.9% | 39.2% | 39.0% | 38.8% | 38.6% | ||
| NOPAT (EBIT*(1-t)) | 381 | 507 | 715 | 858 | 1,104 | ||
| PROFITABILITY | |||||||
| Return on capital (NOPAT/Total capital) | 9.8% | 10.6% | 10.5% | 9.8% | 10.1% | ||
| Return on equity (Net earnings/S. Equity) | 13.7% | 15.4% | 14.3% | 14.7% | 15.3% | ||
| MARGINS | |||||||
| Gross margin (Gross profit/Sales) | 26.5% | 26.9% | 27.5% | 28.2% | 28.8% | ||
| Cash operating expenses/Sales | 18.0% | 17.9% | 18.0% | 18.5% | 18.3% | ||
| Depreciation/Sales | 2.4% | 2.2% | 2.1% | 2.2% | 2.4% | ||
| Depreciation/P&E | 8.0% | 7.5% | 6.5% | 5.8% | 6.2% | ||
| Operating margin (EBIT/Sales) | 6.2% | 6.8% | 7.4% | 7.5% | 8.1% | ||
| NOPAT margin (NOPAT/Sales) | 3.8% | 4.1% | 4.5% | 4.6% | 5.0% | ||
| TURNOVER | |||||||
| Total capital turnover (Sales/Total capital) | 2.6 | 2.6 | 2.3 | 2.1 | 2.0 | ||
| P&E turnover (Sales/P&E) | 3.4 | 3.4 | 3.1 | 2.7 | 2.6 | ||
| Working capital turnover (Sales/WC) | 13.1 | 12.1 | 10.9 | 12.2 | 10.7 | ||
| Receivable turnover (Sales/AR) | 85.6 | 85.1 | 107.5 | 116.6 | 133.5 | ||
| Inventory turnover (COGS/M. inventory) | 4.3 | 4.3 | 4.1 | 4.1 | 4.4 | ||
| Sales per store ($ millions) | 21.3 | 23.5 | 27.6 | 28.9 | 29.7 | ||
| Sales per sq. foot ($) | 254.3 | 256.2 | 279.1 | 277.1 | 274.0 | ||
| Sales per transaction ($) | 43.9 | 45.7 | 53.2 | 54.9 | 56.0 | ||
| GROWTH | |||||||
| Total sales growth | 20.8% | 29.9% | 18.1% | 17.7% | |||
| Sales growth for existing stores | 10.8% | 17.3% | 4.6% | 2.9% | |||
| Growth in new stores | 9.0% | 10.8% | 12.8% | 14.5% | |||
| Growth in sq. footage per store | 10.0% | 7.6% | 5.4% | 4.0% | |||
| LEVERAGE | |||||||
| Total Capital/Equity | 1.49 | 1.52 | 1.44 | 1.59 | 1.63 | ||
| *Non-interest-bearing current liabilities |
Company Performance Analysis
Which firm is the better performing one? On what basis do you conclude the better performance?
The analysis indicates that Home Depot is performing better than Lowe’s. The basis of this conclusion is a number of performance metrics and ratios from the analysis above. For example, in terms of profitability, Home Depot has a consistently higher return on capital and as well as a return on equity compared to Lowe’s. In terms of margins, Home Depot also had a consistently higher gross margin, operating margin, and NOPAT margin during the period.
In terms of the turnover, Home Depot has a higher turnover result from their capital allocation, P&E, working capital, and inventory. In addition, average of the sales per store, sales per square foot, and sales per transaction is higher for Home Depot than Lowe’s.
In terms of growth, the average is higher in each metric for Home Depot than that of Lowe’s. In each case, the average of the period is higher for Home Depot than Lowe’s. This implies that the growth in total sales, the growth of sales in the existing stores, the growth in new stores, is higher for Home Depot than it is for Lowes during the same period. As such, the various metrics and financial ratios in the analysis above point towards better performance for Home Depot compared to Lowes.
Who deserves the “Management of the Year” award in the retail building-supply industry based on 2001 firm performance?
The DuPont analysis conducted below indicates the return sources for both Home Depot and Lowe’s. The analysis also indicates various differences in the performance between the two companies.
| DuPont analysis for Lowe’s | ||||||
| ROE | 13.7% | 15.4% | 14.3% | 14.7% | 15.3% | |
| NP Margin | 4% | 4% | 4% | 4% | 5% | |
| TATO | 1.94 | 1.93 | 1.76 | 1.65 | 1.61 | |
| FLM | 2.01 | 2.02 | 1.92 | 2.07 | 2.06 |
| DuPont analysis for Home Depot | |||||
| ROE | 16.3% | 18.5% | 18.8% | 17.2% | 16.8% |
| NP Margin | 4.8% | 5.3% | 6.0% | 5.6% | 5.7% |
| TATO | 2.15 | 2.24 | 2.25 | 2.14 | 2.03 |
| FLM | 1.58 | 1.54 | 1.38 | 1.43 | 1.46 |
Beta is a financial ratio that measures the level of risk the company has in relation to the market (Bodie, Kane, & Marcus, 2013, pp. 171 – 172). The reason behind the firms’ similar level of risk exposure as indicated by the same measure of beta is due to the fact that both Lowe’s and Home Depot operate in the same segment of the same industry.
As such, they are exposed to the same market forces which direct the same level of market risk in the way of the retail stores in the building-supply industry. In addition, the WACC is different for the firms because they have different levels of leverage, with Lowe’s being higher as shown by the higher FLM ratio as indicated in the analysis above…..
Company Performance Analysis
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