Introduction
This paper seeks to analyze and discuss the financial statements of a publicly-traded company. The company chosen is Lowe’s Home Improvement Store.
Brief Company background
Founded in 1952 and having its base in Mooresville, North Carolina, the company is registered under the name Lowe’s Companies, Inc., and its subsidiaries functions as home improvement retailers, which may be found both in the United States and Canada. As the company is engaged in a wide range of products and services for home decoration, maintenance, repair, remodeling, and property maintenance, customers could found Lowe’s home improvement products to include appliances, lumber, flooring, millwork, paint, and building materials.1 Other products include fashion plumbing, lighting, tools, seasonal living, lawn and landscape, cabinets, countertops, rough electrical, nursery, hardware, and other home environments, and building materials products. The Company is noted for serving homeowners and renters on a do-it-yourself and do-it-for-me provision. Its other customers buy for personal and family use; and still, other customers include those in the commercial business, which include repair and remodeling contractors, painters, plumbers, electricians, landscapers.23 Such customers also include commercial and residential property maintenance professionals. To reach its customers more, the company also makes its products available both through retail stores and online. As of this writing, the company is already operating not less than a thousand home-improvement stores that are found in almost all of the United States.
Profitability
Some profitability ratios4 of the company for the last three years ending.
February of each year are shown below:
Profits measurement is one way to gauge management effort to increase the value of the stocks as a higher increase would have the greater probability of providing stockholders with dividends and assured higher values of stocks. In terms of profitability5, the company exhibited a slightly increased profitability for the years under review with net profit margins that were reflected at 0.07, 0.06, and 0.06 for the years 2007, 2006, and 2005 respectively. Profitability ratios in terms of return of assets confirm the same with the ratios of 0.11, 0.11, and 0.10 for the years 2007, 2006, and 2005 respectively. As for the return on equity, it was almost there same for three years except that the increase in ratio was felt only in 2007 as compared with the two ratios when the increases were noted in 2006. It may be inferred that the company is doing well with a net profit margin of about 6% or more, which would indicate that the company can earn about six dollars for one hundred dollar revenues. If these net profit margins were related with the gross profit margin of 0.35, 0.34, and 0.34 for the years 2007, 2006, and 2005 respectively, one could see that the company must be operating efficiently in terms of controlling its operating expenses with not so big gross profit margin. In other words, the company manages well its gross profit by not spending so much on gross margin.
A company’s profitability may also be viewed in terms of comparing the return on equity with the risk-free investment which may be approximated by the rate of return from a US treasury bill which is assumed to be between 4% to 5%. Since the return on equity represents the net income divided by the total stockholder’s equity, the same rate could be practically compared with the treasury bill rate as an alternative investment by a would-be investor. Since the company’s return to equity is almost 20% for the last three years, it would mean the investors who became stockholders of the company have all the reasons to be thankful to have made their investment in the company since the rate is about four times the rate that they would have earned had they placed their money to US treasury bills.
Liquidity
Liquidity measures the capacity of management to pay currently maturing obligations. Good liquidity6 for the company assured short-term creditors that they are paid on time and therefore prevents working capital problems for the company. Such a sign of effective management has more chances of bringing up the stock prices of the company. The increase in the stock price of the company is one of the best pieces of evidence of a well-performing company since the stockholders would be increasing their wealth as a result. This standard of measuring the company management effort in reaching success in creating shareholder wealth could be seen in the current ratio of the company which got reflected at 1.27,1.34 and 1.22 for the years 2007, 20067, and 2005 respectively. The ratio of more than 1.00 is sufficient to guarantee liquidity yet the company has exhibited more than 1.00, hence it could be considered as highly liquid. Since the company has greater than 1.00 current ratios for the last three years, it may be argued that the company may not have the problem of settling its currently maturing obligations empirically and therefore a good reason to assure the same creditors in the future.
To understand further the company’s liquidity, as measured by current ratio, which is computed by dividing current assets with current liabilities, it would be interesting to look at what consists most of its current assets. The following data shows the very high portion of inventory to current assets:
It may be pointed out that the company’s inventory constitutes about an average of 85% of the currents for the past three years. This would indicate the company’s liquidity must be viewed in terms of making first the sale to convert inventory to accounts receivable and then to cash. Although this could be a qualification as to the type of liquidity that the company has, it must also be pointed out that almost 50% of its currents liabilities are accounts payable but their absolute amounts are less than the absolute amount for inventory, hence, it may still be argued that company’s liquidity is still above the normal level.
Financial Leverage
If liquidity assures short-term solvency, good financial leverage also assures long-term stability of the company as against possible solvency in the long run. Said financial leverage is measured in terms of debt to equity7. Lowe’s Home Improvement Store has shown also a sustained strong financial leverage for the past three years given the debt to equity ratios of 0.77, 0.72, and 0.74 for the years 2007, 2006, and 2005 respectively. A less than 1.0 debt to equity is normally an indication of a stable company.
Conclusion
Based on the premises analyzed as far as the company’s profitability, liquidity, and financial leverage of the company are concerned, it may conclude that the Lowe’s Improvement Store is a good company to invest in. When viewed in terms of whether its present stockholders should keep their stocks, the response will be in the affirmative. On the other hand, if the decision-maker is contemplating buying the stocks of the company, such prospective investor is encouraged considering that the chance for earning profits from investing in the company is higher than keeping the money in the bank.
Work Cited
Bernstein (1993) Financial Statement Analysis, IRWIN, Sydney, Australia.
Brigham and Houston (2002) Fundamentals of Financial Management, Thomson South-Western, USA.
Lowe’s Companies, Inc. (2007), Company Website. Web.
Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, London, UK.
Yahoo Finance (2007) , Financial Statements, 2007. Web.