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BU 5120 Financial Analysis Case 2

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Question;Value Line Publishing, October 200212/15/20131. What do the financial ratios in case Exhibit 7 tells you about the operating performanceof Home Depot? What additional information do the different ratios provide? Completeand compare a similar analysis for Lowe?s using the Excel Template provided ? Lowe?sFinancial Ratios.The financial ratios in exhibit 7 show Home Depot has an overall profitability given growth inthe market compared to sales and liabilities. Home Depot 5 year average ROC was 15.22%showing a positive company profit as a percentage of total company value and ownership. TheROE was 17.52% indicating a positive combined total worth of the company. The average forLowe?s was ROC of 6.95% and a ROE of 14.70%. Using these benchmarks, an investor wouldwant to go with the better average and invest in Home Depot. Home Depot also showed ahigher 5 year average gross margin of 30.52% compared to Lowes of 27.59%. The grossmargin represents the percent of total sales revenue that the companies retain after incurringdirect costs with producing the goods and services sold. The averages here show that HomeDepot retains more on each dollar of sales to other cost obligations which performs strongerthan Lowes. The operating margin which indicates how much a company makes (before taxesand interest) on sales is a good indicator of the quality of the company. Home Depot showedan increase from 1997 to 1999 then a decrease and stabilization in 2000 and 2001. Lowesshowed a steady increase indicating that Lowes was earning more dollars per sales across the5 year period and was performing better than Home Depot. The NOPAT margin fluctuated forHome Depot showing changes in the firm operating efficiencies. Lowes showed a steadyincrease indicating operating efficiencies were improving. Here Lowes shows more strengththan Home Depot as they were stronger in improving operating efficiencies.Who deserves the ?management of the year? award in the retail-building-supply industry?Provide a detailed explanation including support for your position.2.Home Depot demonstrated strong management practices in the industry by properly forecastingmarket needs and through acquisitions of specialty stores (Georgia lighting, N-E Thing SupplyCompany, plumbing, and wholesale distributors) they not only expanded their influence in themarket they set up a path to provide specialty services. This is important as Home Depot hadbeen seen in the industry as more of a large contractor services company. Therefore, I amconcluding that the Home Depot deserves the management of the year award in3. Assumptions drive the financial forecasting models like that of Home Depot in Exhibit 8. Byputting the assumptions all at the top of the model, the analyst can also easily alter theassumptions and measure the impact. What do you think of Galeotafiore?s forecast forHome Depot? Are there any ?red flags? in Galeotafiore?s work?4. Prepare a forecast for Lowe?s using the Excel Template provided ? Lowe?s forecast.Articulate and explain your choice of key assumptions within the memo. Draw upon thecase dialogue about future growth opportunities and financial forecast for Lowes, as well asoverall economic, demographic or sector/industry trends evidenced in the exhibits.In addition to the written memo, please provide your calculated historical 1997-2001 financial ratios for Lowe?s as well as a forecast for Lowe?s for 2002-2006.Within the written memo, be sure to well address the following questions:What do the financial ratios in case Exhibit 7 tells you about the operating performance of Home Depot? What additional information do the different ratios provide? Complete and compare a similar analysis for Lowe?s using the Excel Template provided ? Lowe?s Financial Ratios.2. Who deserves the ?management of the year? award in the retail-building-supply industry? Provide a detailed explanation including support for your position.3. Assumptions drive the financial forecasting models like that of Home Depot in Exhibit 8. By putting the assumptions all at the top of the model, the analyst can also easily alter the assumptions and measure the impact. What do you think of Galeotafiore?s forecast for Home Depot? Are there any ?red flags? in Galeotafiore?s work?4. Prepare a forecast for Lowe?s using the Excel Template provided ? Lowe?s forecast. Articulate and explain your choice of key assumptions within the memo. Draw upon the case dialogue about future growth opportunities and financial forecast for Lowes, as well as overall economic, demographic or sector/industry trends evidenced in the exhibits.

 

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