# Ratio Analysis and Statement of Cash Flows Essay

1249 Words Oct 27th, 2007 5 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…
This measure shows that Home Depot had a better return on equity in 2005 while Lowe's had a better return on equity in 2006. Nevertheless, Home Depot reinvested earnings to generate additional earnings in a better way than Lowe's in 2006.
 Home Depot's Return on Equity 2005 =
 Home Depot's Return on Equity 2006 =
 Lowe's Return on Equity 2005 =
 Lowe' s Return on Equity 2006 =
Asset Utilization Efficiency ratios determine how efficiently companies are using assets. A high efficiency score shows a company is working close to capacity and is useful for comparing to companies in the same industry (Brealey & Myer& Marcus, 2003).
Efficiency Ratios The asset turnover ratio shows how well companies are using assets. The ratio is calculated by dividing sales by average total assets. This ratio shows that both companies were using their assets more efficiently in 2005 than in 2006. Home Depot's turnover ratio is higher than Lowe's in 2006 so Home Depot uses assets better.
 Home Depot's Turnover Ratio 2005 =
 Home Depot's Turnover Ratio 2006 =
 Lowe's Turnover Ratio 2005 =
 Lowe's Turnover Ratio 2006 =
The inventory turnover ratio helps managers to monitor "the rate at which the company is turning over its inventories" (Brealey & Myer & Marcus, 2003, p. 457). Inventory turnover = cost of goods sold / average inventory.
Home Depot's 2005 = 54191 / ((9076 + 10076) /2) = 3.84
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