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Releasing Financial Information. Preliminary Press Releases. Quarterly and Annual Reports. Securities and Exchange Commission (SEC) Filings. Investor Information Websites. Horizontal (Trend) Analysis. Horizontal analysis compares a company’s financial condition and performance over time.

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Releasing financial information
Releasing Financial Information

Preliminary Press Releases

Quarterlyand Annual Reports

Securitiesand Exchange Commission (SEC) Filings

Investor Information Websites


Horizontal trend analysis
Horizontal (Trend) Analysis

Horizontal analysis compares a company’s financial conditionand performance over time.

A year-over-year percentage change expresses the current year’s dollar change as a percentageof the prior year’s total using this formula.

Percent

Change

Current Year’s Total ̶ Prior Year’s Total

Prior Year’s Total

×

100%

=





Changes revealed in trend analysis
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.


Vertical common size analysis
Vertical (Common Size) Analysis

Vertical analysis focuses on important relationships within financial statements by expressing each financial statement amount as a percentage of another amount on that statement.

Common-size percentages for financialstatements are calculated using this formula.

Common-size

Percent

Analysis Amount

Base Amount

×

=

100%

The base amount is total assets for the balance sheetand sales revenue for the income statement.




Interpreting common size statements
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.


Interpreting common size statements1
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.


Financial ratios
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.

Ratio Analysis


Profitability ratios
Profitability Ratios

Profitability ratios provide us with measuresof a company’s ability to generateincome in the current period.

Net profit

margin

Gross profit percentage

Fixed asset turnover

Asset turnover

Earnings per share (EPS)

Return on equity (ROE)

Return on assets (ROA)

Price/earnings(P/E)


Profitability ratios net profit margin
Profitability Ratios ̶ Net Profit Margin

Net incomeNet sales revenue

Net profit

margin

× 100%

=

Lowe’s 2006: ($3,105 ÷ $46,927) × 100% = 6.6%

Lowe’s 2005: ($2,765 ÷ $43,243) × 100% = 6.4%

Net profit margin represents the percentage of sales revenue that remains in net income after expenseshave been deducted.


Profitability ratios gross profit percentage
Profitability Ratios ̶ Gross Profit Percentage

Net sales ‒ Cost of goods soldNet sales

Gross profit

percentage

× 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%

Gross profit percentage indicates how much profit was made, on average, on each dollar of sales, after deduction of cost of goods sold.


Profitability ratios asset turnover
Profitability Ratios ̶ Asset Turnover

Net sales revenueAverage total assets

Asset

turnover

=

Lowe’s 2006: $46,927 ÷ (($27,767 + $24,639) ÷ 2) = 1.79

Lowe’s 2005: (Given) = 1.89

The asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in assets.


Profitability ratios fixed asset turnover
Profitability Ratios ̶ Fixed Asset Turnover

Net sales revenueAverage net fixed assets

Fixed asset

turnover

=

Lowe’s 2006: $46,927 ÷ (($18,971 + $16,354) ÷ 2) = 2.66

Lowe’s 2005: (Given) = 2.86

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.


Profitability ratios return on assets roa
Profitability Ratios ̶ Return on Assets (ROA)

Net incomeAverage total assets

× 100%

ROA

=

Lowe’s 2006:

$3,105 ÷ ($27,767 + $24,639) ÷ 2) × 100% = 11.8%

Lowe’s 2005: (Given) = 12.1%

The return on assets ratio measures how much a company earns for each dollar of investment in assets.


Profitability ratios return on equity roe
Profitability Ratios ̶ Return on Equity (ROE)

Net income Average stockholders’ equity

× 100%

ROE

=

Lowe’s 2006: $3,105 ÷ (($15,725 + $14,296) ÷ 2) × 100% = 20.7%

Lowe’s 2005: (Given) = 21.4%

The return on equity ratio measures the amount earned as a percentage of each dollar invested by stockholders.


Profitability ratios earnings per share eps
Profitability Ratios ̶ Earnings per Share (EPS)

Net income Average number of common shares

EPS

=

EPS is reported in the income statement.

Lowe’s 2006: EPS = $2.02

Lowe’s 2005: EPS = $1.78

Earnings per share indicates the amount of earningsfor each share of outstanding common stock.


Profitability ratios price earnings p e ratio
Profitability Ratios ̶ Price/Earnings (P/E) Ratio

Stock priceEPS

P/E Ratio =

The stock price was $31 per share at thetime 2006 earnings were announced.

Lowe’s 2006: $31 ÷ $2.02 = 15.3

Lowe’s 2005: (Given) = 16.3

The P/E ratio measures the relationship between the current market price of the stock and its earnings per share.


Liquidity ratios
Liquidity Ratios

Liquidity ratios focus on a company’s abilityto convert its assets into cash in order topay current liabilities as they come due.

Inventory turnover

Receivables turnover

Current

ratio

Quick

ratio


Liquidity ratios receivables turnover
Liquidity Ratios ̶ Receivables Turnover

Net sales revenueAverage net receivables

Receivables

turnover

=

Lowe’s receivables balance from customers is insignificant because most sales are cashor credit card sales.

The receivables turnover ratio is a measure of

how fast a company collects its receivables.


Liquidity ratios inventory turnover
Liquidity Ratios ̶ Inventory Turnover

Cost of salesAverage inventory

Inventory

turnover

=

Lowe’s 2006: $30,729 ÷ (($7,144 + $6,635) ÷ 2) = 4.5

Lowe’s 2005: (Given) = 4.5

The inventory turnover ratio indicates how many times inventory is bought and sold during the period.


Liquidity ratios days to sell
Liquidity Ratios ̶ Days to Sell

365Inventory turnover ratio

Days to sell

=

Lowe’s 2006: 365 ÷ 4.5 = 81.1 days

Lowe’s 2005: 365 ÷ 4.5 = 81.1 days

The days to sell ratio converts inventory turnoverinto the number of days need to sell inventory.


Liquidity ratios current ratio

Current

ratio

Current assets

Current liabilities

=

Liquidity Ratios ̶ Current Ratio

Lowe’s 2006: $8,314 ÷ $6,539 = 1.27

Lowe’s 2005: $7,788 ÷ $5,832 = 1.34

The current ratio measures the ability of a company to pay its current debts as they become due.


Liquidity ratios quick ratio

Quick

ratio

Quick assets

Current liabilities

=

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 immediateability to pay it current debts.


Solvency ratios
Solvency Ratios

Solvency ratios focus on a company’s ability torepay debt, pay interest, and finance replacementand/or expansion of long-term assets.

Times interest earned

Debt-to-

assets

Free cashflow


Solvency ratios debt to assets ratio
Solvency Ratios ̶ Debt-to-assets Ratio

Total liabilitiesTotal assets

Debt-to assets

=

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.


Solvency ratios times interest earned ratio

Times interest earned

Net Interest Income tax income expense expense Interest expense

+

+

=

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 expensewas covered by its operating results.


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