Ratio Analysis and Statement of Cash Flows

1248 WordsNov 5, 20075 Pages
Ratio Analysis and Statement of Cash Flows Financial ratios are "just a convenient way to summarize large quantities of financial data and to compare firms' performance" (Brealey & Myer & Marcus, 2003, p. 450). Financial ratios are very useful tools in order to determine the health of a company, help managers to make decision, and help to compare companies that belong to the same industry in order to know about their performance. Home Depot and Lowe's are two home improvement chains in the United States. Home Depot is the leading company in this industry followed by Lowe's as the second largest. This paper uses financial ratios to compare these companies regarding operating profitability, asset utilization, and risk management in the…show more content…
Leverage ratios measures how much financial leverage the companies have take on (Brealey & Myer & Marcus, 2003). Home Depot's and Lowe's risk management can be analyzed by calculating their leverage ratios. The long-term debt ratio measures the long-term debt to total long-term capital. Home Depot long-term debt ratio in 2005 was 0.9 and 0.32 in 2006. Lowe's long-term debt ratio was 0.20 in 2005 and 0.22 in 2006. It can be concluded that in Home Depot, 32 cents of every dollar of long-term capital is in the form of long- term debt in 2006 and in Lowe's, 22 cents of every dollar of long-term capital is in the form of long-term debt. • Home Depot Long-term debt ratio 2005 = • Home Depot Long-term debt ratio 2006 = • Lowe's Long-term debt ratio 2005 = • Lowe's Long-term debt ratio 2006 = Another useful leverage ratio is the total debt. Home Depot's total debt ratio in 2005 was 0.39 and 0.52 in 2006. Lowe's total debt ratio in 2005 was 0.41 and 0.43 in 2006. Home Depot is financed 52% with debt in 2006 and Lowe's is financed 43% with debt in 2006. Even though, Home Depot has a better profit than Lowe's, it can be also stated that Home Depot has more debt than Lowe's. • Home Depot total debt ratio 2005 = • Home Depot total debt ratio 2006= • Lowe's total debt ratio 2005 = • Lowe's total debt ratio 2006 =
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