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McGraw-Hill/Irwin Slide 1
Preliminary Press
Releases
Releasing Financial Information
Quarterlyand Annual
Reports
Securitiesand Exchange Commission (SEC) Filings
Investor Information
Websites
McGraw-Hill/Irwin Slide 2
Horizontal (Trend) Analysis
Horizontal analysis compares a company’s financial condition
and performance over time.
PercentChange
Current Year’s Total ̶ Prior Year’s Total
Prior Year’s Total
100%= ×
A year-over-year percentage change expresses the current year’s dollar change as a percentage
of the prior year’s total using this formula.
McGraw-Hill/Irwin Slide 3
Horizontal Analysis of Lowe’s Summarized Balance Sheets
LOWE'SComparative Balance Sheets (in millions)
2006 2005Dollar
ChangePercent Change*
AssetsCurrent assets: Cash 364$ 423$ (59)$ (13.9) Short-term investments 432 453 (21) (4.6) Accounts receivable - - - - Inventories 7,144 6,635 509 7.7 Other current assets 374 277 97 35.0
Total current assets 8,314 7,788 526 6.8 Property and equipment, net 18,971 16,354 2,617 16.0 Long-term investments 482 497 (15) (3.0)
Total assets 27,767$ 24,639$ 3,128$ 12.7
* Percent rounded to first decimal point.
McGraw-Hill/Irwin Slide 4
Horizontal Analysis of Lowe’s Summarized Balance Sheets
LOWE'SComparative Balance Sheets (in millions)
2006 2005Dollar
ChangePercent Change*
Liabilities and Stockholders' EquityCurrent liabilities 6,539$ 5,832$ 707$ 12.1
Long-term liabilities 5,503 4,511 992 22.0
Total liabilities 12,042 10,343 1,699 16.4 Stockholders' equity 15,725 14,296 1,429 10.0
Total liabilities and stockholders' equity 27,767$ 24,639$ 3,128$ 12.7
* Percent rounded to first decimal point.
McGraw-Hill/Irwin Slide 5
Horizontal Analysis of Lowe’s Summarized Income Statements
LOWE'SComparative Income Statements (in millions)
2006 2005Dollar
ChangePercent Change*
Net sales revenue 46,927$ 43,243$ 3,684$ 8.5 Cost of revenues 30,729 28,453 2,276 8.0
Gross profit 16,198 14,790 1,408 9.5 Operating and other expenses 11,046 10,136 910 9.0 Interest expense 154 158 (4) (2.5) Income tax expense 1,893 1,731 162 9.4
Net income 3,105$ 2,765$ 340$ 12.3
Earnings per share 2.02$ 1.78$ 0.24 13.5 * Percent rounded to first decimal point.
McGraw-Hill/Irwin Slide 6
Changes Revealed in Trend Analysis
Lowe’s grew significantly in 2006.
Total assets rose by
12.7 percent
Net sales revenues rose by
8.5 percent.
Gross profit
rose by 9.5
percent
Net income rose by
12.3 percent.
The growth in net sales revenues more than offset the growth in expenses resulting in net income growth in 2006
that was greater than the net sales revenues growth.
McGraw-Hill/Irwin Slide 7
Vertical (Common Size) Analysis
Common-size percentages for financialstatements are calculated using this formula.
Common-size Percent
Analysis AmountBase Amount
100%= ×
Vertical analysis focuses on important relationships within financial statements by expressing each financial statement amount as a percentage of
another amount on that statement.
The base amount is total assets for the balance sheetand sales revenue for the income statement.
McGraw-Hill/Irwin Slide 8
Vertical Analysis of Lowe’s Summarized Balance Sheets
LOWE'SComparative Balance Sheets (in millions)
Amount Percent* 2005 Percent*Assets
Current assets: Cash 364$ 1.3% 423$ 1.7% Short-term investments 432 1.6% 453 1.8% Inventories 7,144 25.7% 6,635 26.9% Other current assets 374 1.3% 277 1.1%Property and equipment, net 18,971 68.3% 16,354 66.4%Long-term investments 482 1.7% 497 2.0%
Total assets 27,767$ 100.0% 24,639$ 100.0%
Liabilities and Stockholders' EquityCurrent liabilities 6,539$ 23.5% 5,832$ 23.7%Long-term liailities 5,503 19.8% 4,511 18.3%Stockholders' equity 15,725 56.6% 14,296 58.0%
Total liabilities and stockholders' equity 27,767$ 100.0% 24,639$ 100.0%
* Percent rounded to first decimal point.
2006 2005
McGraw-Hill/Irwin Slide 9
Vertical Analysis of Lowe’s Summarized Income Statements
LOWE'SComparative Income Statements (in millions)
Amount Percent Amount PercentNet sales revenue 46,927$ 100.0% 43,243$ 100.0%Cost of revenues 30,729 65.5% 28,453 65.8%
Gross profit 16,198 34.5% 14,790 34.2%Operating and other expenses 11,046 23.5% 10,136 23.4%Interest expense 154 0.3% 158 0.4%Income tax expense 1,893 4.0% 1,731 4.0%
Net income 3,105$ 6.6% 2,765$ 6.4%
* Percent rounded to first decimal point.
2006 2005
McGraw-Hill/Irwin Slide 10
Interpreting Common Size Statements
Lowe’s total assets grew in 2006 by more than $3,000,000,000. Most of the growth was in
property and equipment which increased from 66.4 percent of total assets in 2005 to 68.3 of total
assets in 2006.
The growth in total assets was accompanied by increases in all major categories of liabilities and
equities. However, only long-term liabilities increased as a percent of total assets, from 18.3 percent of total assets in 2005 to 19.8 percent of
total assets in 2006.
McGraw-Hill/Irwin Slide 11
Interpreting Common Size Statements
Lowe’s was able to increase its net income as a percent of sales from 6.4 percent to 6.6 percent by reducing cost of goods sold as a percent of
sales by 0.3 percent.
The percentage decrease in cost of goods sold was partially offset by small increase in
operating and other expenses.
McGraw-Hill/Irwin Slide 12
Financial Ratios
Financial ratio analysis compares amounts for one or more financial statement items to amounts for other financial statement
items in the same year.
McGraw-Hill/Irwin Slide 13
Profitability Ratios
Net profit margin
Gross profit percentage
Asset turnover
Earnings per share (EPS)
Fixed asset turnover
Return on equity (ROE)
Profitability ratios provide us with measuresof a company’s ability to generate
income in the current period.
Return on assets (ROA)
Price/earnings(P/E)
McGraw-Hill/Irwin Slide 14
Profitability Ratios ̶ Net Profit Margin
Net profit margin represents the percentage of sales revenue that remains in net income after expenses
have been deducted.
Net profit
margin
Net income
Net sales revenue= × 100%
Lowe’s 2006: ($3,105 ÷ $46,927) × 100% = 6.6%
Lowe’s 2005: ($2,765 ÷ $43,243) × 100% = 6.4%
McGraw-Hill/Irwin Slide 15
Profitability Ratios ̶ Gross Profit Percentage
Gross profit percentage indicates how much profit was made, on average, on each dollar of sales, after
deduction of cost of goods sold.
Gross profit
percentage
Net sales ‒ Cost of goods sold
Net sales= × 100%
Lowe’s 2006: (($46,927 ‒ $30,729) ÷ $46,927) × 100% = 34.5%
Lowe’s 2005: (($43,243 ‒ $28,453) ÷ $43,243) × 100% = 34.2%
McGraw-Hill/Irwin Slide 16
Profitability Ratios ̶ Asset Turnover
The asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in assets.
Asset
turnover
Net sales revenue
Average total assets=
Lowe’s 2006: $46,927 ÷ (($27,767 + $24,639) ÷ 2) = 1.79
Lowe’s 2005: (Given) = 1.89
McGraw-Hill/Irwin Slide 17
Profitability Ratios ̶ Fixed Asset Turnover
The fixed asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in fixed assets
such as store buildings and land used in the business.
Fixed asset
turnover
Net sales revenue
Average net fixed assets=
Lowe’s 2006: $46,927 ÷ (($18,971 + $16,354) ÷ 2) = 2.66
Lowe’s 2005: (Given) = 2.86
McGraw-Hill/Irwin Slide 18
Profitability Ratios ̶ Return on Assets (ROA)
The return on assets ratio measures how much a company earns for each dollar of investment in assets.
ROANet income
Average total assets= × 100%
Lowe’s 2005: (Given) = 12.1%
$3,105 ÷ ($27,767 + $24,639) ÷ 2) × 100% = 11.8%Lowe’s 2006:
McGraw-Hill/Irwin Slide 19
Profitability Ratios ̶ Return on Equity (ROE)
The return on equity ratio measures the amount earned as a percentage of each dollar invested by stockholders.
ROENet income
Average stockholders’ equity= × 100%
Lowe’s 2006: $3,105 ÷ (($15,725 + $14,296) ÷ 2) × 100% = 20.7%
Lowe’s 2005: (Given) = 21.4%
McGraw-Hill/Irwin Slide 20
Profitability Ratios ̶ Earnings per Share (EPS)
Earnings per share indicates the amount of earningsfor each share of outstanding common stock.
EPSNet income
Average number of common shares=
EPS is reported in the income statement.
Lowe’s 2006: EPS = $2.02
Lowe’s 2005: EPS = $1.78
McGraw-Hill/Irwin Slide 21
Profitability Ratios ̶ Price/Earnings (P/E) Ratio
The P/E ratio measures the relationship between the current market price of the stock and its earnings per share.
P/E Ratio =Stock price
EPS
Lowe’s 2006: $31 ÷ $2.02 = 15.3
Lowe’s 2005: (Given) = 16.3
The stock price was $31 per share at thetime 2006 earnings were announced.
McGraw-Hill/Irwin Slide 22
Liquidity Ratios
Current ratio
Quick ratio
Receivables turnover
Inventory turnover
Liquidity ratios focus on a company’s abilityto convert its assets into cash in order topay current liabilities as they come due.
McGraw-Hill/Irwin Slide 23
Liquidity Ratios ̶ Receivables Turnover
The receivables turnover ratio is a measure ofhow fast a company collects its receivables.
Receivables
turnover
Net sales revenue
Average net receivables=
Lowe’s receivables balance from customers is insignificant
because most sales are cashor credit card sales.
Lowe’s receivables balance from customers is insignificant
because most sales are cashor credit card sales.
McGraw-Hill/Irwin Slide 24
Liquidity Ratios ̶ Inventory Turnover
The inventory turnover ratio indicates how many times inventory is bought and sold during the period.
Inventory
turnover
Cost of sales
Average inventory=
Lowe’s 2006: $30,729 ÷ (($7,144 + $6,635) ÷ 2) = 4.5
Lowe’s 2005: (Given) = 4.5
McGraw-Hill/Irwin Slide 25
Liquidity Ratios ̶ Days to Sell
The days to sell ratio converts inventory turnoverinto the number of days need to sell inventory.
Days to sell365
Inventory turnover ratio=
Lowe’s 2006: 365 ÷ 4.5 = 81.1 days
Lowe’s 2005: 365 ÷ 4.5 = 81.1 days
McGraw-Hill/Irwin Slide 26
Liquidity Ratios ̶ Current Ratio
Lowe’s 2006: $8,314 ÷ $6,539 = 1.27
Lowe’s 2005: $7,788 ÷ $5,832 = 1.34
Current
ratio
Current assets
Current liabilities=
The current ratio measures the ability of a company to pay its current debts as they become due.
McGraw-Hill/Irwin Slide 27
Liquidity Ratios ̶ Quick Ratio
Lowe’s 2006: $796 ÷ $6,539 = 0.12
Lowe’s 2005: $876 ÷ $5,832 = 0.15
The quick ratio is similar to the current ratio,but measures the company’s immediate
ability to pay it current debts.
Quick assets
Current liabilities=
Quick
ratio2006 2005
Cash 364$ 423$ Short-term Investments 432 453 Accounts receivable - - Quick Assets 796$ 876$
McGraw-Hill/Irwin Slide 28
Solvency Ratios
Debt-to-assets
Free cashflow
Times interest earned
Solvency ratios focus on a company’s ability torepay debt, pay interest, and finance replacement
and/or expansion of long-term assets.
McGraw-Hill/Irwin Slide 29
Solvency Ratios ̶ Debt-to-assets Ratio
Lowe’s 2006: $12,042 ÷ $27,767 = 0.43
Lowe’s 2005: $10,343 ÷ $24,639 = 0.42
The debt-to-assets ratio indicates the proportionof total assets that is financed by creditors.
Debt-to assetsTotal liabilities
Total assets=
McGraw-Hill/Irwin Slide 30
Solvency Ratios ̶ Times Interest Earned Ratio
Lowe’s 2006: ($3,105 + $154 + $1,893) ÷ $154 = 33.5
Lowe’s 2005: ($2,765 + $158 + $1,731) ÷ $158 = 29.5
The times interest earned ratio indicates the number of times a company’s interest expense
was covered by its operating results.
Net Interest Income tax
income expense expense
Interest expense
Times
interest
earned=
+ +