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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Preliminary Press Releases
Quarterlyand Annual Reports
Securitiesand Exchange Commission (SEC) Filings
Investor Information Websites
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.
Current Year’s Total ̶ Prior Year’s Total
Prior Year’s Total
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 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.
The base amount is total assets for the balance sheetand sales revenue for the income statement.
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.
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 ratio analysis compares amounts for one or more financial statement items to amounts for other financial statement items in the same year.
Profitability ratios provide us with measuresof a company’s ability to generateincome in the current period.
Gross profit percentage
Fixed asset turnover
Earnings per share (EPS)
Return on equity (ROE)
Return on assets (ROA)
Net incomeNet sales revenue
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.
Net sales ‒ Cost of goods soldNet sales
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.
Net sales revenueAverage total assets
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.
Net sales revenueAverage net fixed assets
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.
Net incomeAverage total assets
$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.
Net income Average stockholders’ equity
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.
Net 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
Earnings per share indicates the amount of earningsfor each share of outstanding common stock.
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 focus on a company’s abilityto convert its assets into cash in order topay current liabilities as they come due.
Net sales revenueAverage net receivables
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.
Cost of salesAverage inventory
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.
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
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
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 focus on a company’s ability torepay debt, pay interest, and finance replacementand/or expansion of long-term assets.
Times interest earned
Total liabilitiesTotal 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.
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.