Financial Statement Analysis Project Group 4

Financial Statement Analysis
Report
Amy Nguyen: 23420048
Lara Baggio: 23574084
Neel Patel: 23307447
Nils Wouters: 22761138
5/7/15
UGBA 102A
(All numbers in US dollars and in millions except for ratios)
Lowe’s: LOW. Home Depot: HD

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1. What are the year ends for your selected companies?
LOW: January 30th 2015 HD: February 1st 2015
2. In what industry are your selected companies?
Both companies are in the home improvement industry.
3. Where in the world are your companies located? Headquarters and significant subsidiaries?
LOW: The corporation was incorporated in North Carolina and on pg1 we can see that LOW is headquartered in
Mooresville in North Carolina with its primary presence in North America. It also has a presence in Mexico and
Canada. Exhibit number: 21.1 shows no subsidiaries besides LOW Home Centers, LLC.
HD: The corporation was originally incorporated in Delaware but has since moved to Georgia. The 10-K it states, “as
of 2014, HD has stores located throughout the US, including Puerto Rico and the territories of the US Virgin Islands,
Guam, Canada, and Mexico” (pg. 3). Exhibit number: 21: Located in Delaware: HD Int. Inc., HD Development
Holdings Inc., Homer TLC, Inc. HD Store Support LLC. Located in Maryland: HD Development of Maryland Inc.
Located in Canada: HD of Canada, Inc.
4. What are the companies’ reportable segments, if any?
LOW: The company’s home improvement retail operations represent a single reportable segment
HD: Operates within a single reportable segment primarily within North America.
5. What do you believe are the 3 most significant business risks facing your companies? How did you determine these
risks?
LOW: 1) We have many competitors who could take sales and market share from us if we fail to execute our
merchandising, marketing and distribution strategies effectively, or if they develop a substantially more effective or
lower cost means of meeting customer needs.
2) We may not be able to realize the benefits of our strategic initiatives focused on omni-channel sales and marketing
presence if we fail to deliver the capabilities required to execute on them.
3) We may be unable to adapt our business concept in a rapidly changing retailing environment to address the
changing shopping habits and demands and demographics of our customers.
I determined these risks as the most significant based on the industry and how that impacts the business results of the
company. In LOW' case, strategy, and customers are the main strengths of the company. If the company is not able to
realize the benefits of their strategic initiatives they lose customers and lose to the competition, which is a huge
business risk. Competition in the industry is huge, as big companies such as HD and ACE Hardware all compete for
the same customers, so any wrong move on part of LOW or any effective move from the competition can decrease
LOW market share and negatively impact business.
HD: 1) We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft,
subject us to potential liability and potentially disrupt our business.
2) We are involved in a number of legal proceedings, and while we cannot predict the outcomes of those proceedings
and other contingencies with certainty, some of these outcomes may adversely affect our operations or increase our
costs.
3) Strong competition could adversely affect prices and demand for our products and services and could decrease our
market share.
I determined these risks as the most significant based on the industry as well as the current events that impacted the
business results of the company. Similarly to LOW, competition presents a looming danger, as it can greatly impact
the retention of customers and thus business results. Given the data-breech that affected customers, sales, and legal
proceedings, the company currently faces big risk from the impact of this theft. This not only led to a contingent
liability listed in the financial statements, but also affected brand reputation, which further impacts the business.
6. What types of inventory do your companies have and what inventory accounting methods do they use? Are they
consistent with each other?
LOW: Merchandise inventories stated at the lower of cost or market using the first-in, first-out method of inventory
accounting. The cost of inventory also includes certain costs associated with the preparation of inventory for resale,
including distribution center costs, and is net of vendor funds. Obsolete inventory reserve is recorded for the
anticipated loss associated with selling inventories below cost. This reserve is based on LOW current knowledge with
respect to inventory levels, sales trends and historical experience. The company also records an inventory reserve for
the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrinkage results from

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previous physical inventories. LOW applies judgment in the determination of levels of obsolete inventory and
assumptions about net realizable value. Both companies use very similar accounting methods (FIFO, Lower of Cost
or Market) to report their Merchandise Inventories.
HD: Merchandise inventories are stated at the lower of cost (first-in, first-out) or market, with approximately 74%
valued under the retail inventory method and the remainder under a cost method. Because of low unit cost and large
number of transactions, retail inventory method is frequently used. Merchandise inventories are stated at cost, which
is determined by applying a cost-to-retail ratio to the ending retail values of inventories. Inventory values are adjusted
regularly to reflect market conditions, and valued under a cost method at the end of each quarter to ensure that it is
carried at the lower of cost or market.
7. What PP&E assets do they have? What are the various lives of the assets? Were any of these assets acquired in the
last two years? What is the approximate age of the PP&E assets in total?
LOW: Total PPE: $35,443. Net PPE: $20,034. Property consists of land, buildings and building improvements,
equipment and construction in progress. Buildings and building improvements includes owned buildings, as well as
buildings under capital lease and leasehold improvements. Equipment primarily includes store racking and displays,
computer hardware and software, forklifts, vehicles and other store equipment.
Life of assets
• Buildings and building improvements: 5-40 years; Equipment: 3-15 years
Acquired in the last two years:
Capital expenditure 2013: $94. Capital expenditure 2014: $880
• Because the company doesn’t differentiate between its expenditure on PPE from its capital expenditure in its
cash flow statement, we can use its capital expenditure for the given year as a proxy for its PPE expenditure
for that year
Approximate age of PPE total
Approximate age of PPE total=accumulated depreciation/annual depreciation
Accumulated depreciation: $15,409
Annual depreciation: $1,586
Approximate age=9.72 years
HD: Total PPE: $38,513. Net PPE: $22,720.Property consists of land; buildings; furniture, fixtures, and equipment,
leasehold improvements, construction in progress, and capital leases. The Company leases certain retail locations,
office space, warehouse and distribution space, equipment and vehicles.
Life of assets
• Buildings 5-45 years
• Furniture, Fixtures, and Equipment: 2-20 years
• Leasehold Improvements: 5-45 years
Acquired in the last two years:
Capital expenditure 2013: $1,142. Capital expenditure 2014: $1,389
• Because the company doesn’t differentiate between its expenditure on PPE from its capital expenditure in its
cash flow statement, we can use its capital expenditure for the given year as a proxy for its PPE expenditure
for that year
Approximate age of PPE total
Accumulated depreciation: $15,793
Annual depreciation expense: $1,786
Approximate age=8.84 years
8. What intangible assets do they have? What are the various lives of the assets? Were any of these assets acquired in
the last two years?
LOW: No Goodwill/Intangible assets
HD: Goodwill (indefinite Life but checked for impairment each year). Other intangible assets (range up to ten years,
unless indefinite). There were no impairment charges related to our remaining goodwill for fiscal 2014, 2013 or 2012
9. How have total assets changed? Why?
LOW: Total assets have decreased by 2.8% from $32,732 in 2013 to $ 31,827 in 2014. This occurred because nearly
all assets have decreased (including short-term investment, net merchandise inventory, net deferred income taxes, and

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PPE) except for a few that increased including cash, other current assets, long-term investments, and other assets. The
percent decrease outweighed the percent increase as the highest weightage of assets of PPE and Net Merchandise
decreased 3.8% and 2.4% respectively, causing overall total assets to decrease.
HD: Total assets have decreased 1.44% from $40,518 in 2013 to $39,936 in 2014. The distribution of assets from
2014 to 2015 has not changed significantly, with Merchandise Inventory and Net PPE holding the highest weightage.
Cash decreased by 10.7%, other assets decreased by 5.15%, and net PPE showed the greatest decrease by 2.7% due to
its high proportional impact. Net PPE is thus the main driving factor of the decrease in total assets. Net receivables,
merchandise inventory, other current assets, and goodwill all increased. Similarly to LOW, the percent decrease in
assets from 2013 to 2014 was greater than the percent increase in total assets.
10. How have total revenues changed? Why?
LOW: Revenues increased 5.3% from $53,417 to $56,223 between 2013 and 2014. The increase in total sales was
driven primarily by the comparable sales increase of 4.3%, the acquisition of Orchard, and new stores. The
comparable sales increase of 4.3% in 2014 was driven by a 2.4% increase in comparable average ticket and a 1.8%
increase in comparable customer transactions. Comparable sales increased during each quarter of the fiscal year. All
product categories experienced comparable sales increases for the year. During 2014, comparable sales were above the
company average in the following product categories: Millwork, Kitchens & Appliances, Tools & Hardware, and
Fashion Fixtures. Targeted promotions coupled with the expansion of Project Specialist programs drove comparable
sales increases, especially within Millwork, Kitchens & Appliances, and Fashion Fixtures, reflecting growing market
interest for home improvements. Within Tools & Hardware, enhanced Sales & Operations Planning process helped
drive stronger performance in power and pneumatic tools. Geographically, 13 of the 14 U.S. regions experienced
increases in comparable store sales.
HD: Revenues increase 5.5% from $78,812 to $83,176 between 2013 and 2014. The increase in Net Sales for fiscal
2014 reflects the impact of positive comparable store sales driven by increased customer transactions and average
ticket growth. Total comparable store sales increased 5.3% for fiscal 2014. The positive comparable store sales for
fiscal 2014 reflect a number of factors, including the execution of key initiatives, continued strength in maintenance
and repair categories, and an improved U.S. home improvement market. All departments posted positive comparable
store sales for fiscal 2014. Comparable store sales for Tools, Millwork, Kitchen, Bath, Décor, Plumbing, Electrical,
Lighting and Hardware product categories were above or at the Company average for fiscal 2014. Further, comparable
store customer transactions increased 3.5% for fiscal 2014 and comparable store average ticket increased 1.8% for
fiscal 2014, due in part to strong sales in big ticket purchases, such as appliances and water heaters, and sales growth
in services business.
11. How has net income changed? Why?
LOW: Net income has increased 18.0% from $2,286 in 2013 to $2,698 during 2014. This occurred because though
both gross margin and total expenses increased, gross margin increased by 5.8% while total expenses increased 3.24%.
The company says that the increase in gross margin was primarily driven by cost reductions in a Value Improvement
initiative aimed at meeting customers' needs and improving inventory productivity (pg. 21-22). The three largest
changes in proportion to sales have been a 0.46% point decrease in SGA to net sales, leading to a 0.53% point
decrease in total expenses to sales, and a 0.73% point increase in pre tax earnings. The company further explained that
SG&A expenses were driven by an increase in operating salaries, advertising expense, incentive compensation,
property taxes, and utilities. These changes drove gross margins to increase by 5.86%, total expenditure to only
increase by 3.24%, and finally pre tax income to increase by 16.42%. Overall, the higher percentage growth for the
positive led to a higher net income amount for 2014.
HD: In 2014, Net earnings increased 17.8% from $5,385 in 2014 to $6,345 in 2014. The three largest changes in
proportions have been a 0.82% point decrease in SGA to net sales, leading to a 0.90% point decrease in total
operating expenses to sales, and a 1.25% point increase in pre tax earnings. Net sales increased by 5.54%, and these
changes drove gross margins to increase by 5.71%, total operating expenditure to only increase by 1.43%, and pre tax
income to increase by 17.82%. The company mentioned positive sales from increased customer transaction and
average ticket growth (pg. 22). Operating expenses also increased due to an increase in pretax expenses from the data
breach (pg. 18). Cost of sales increased but overall gross profit was higher in 2014. The interest and investment
income also increased by 2708.33% from 2014 to 2015, which drastically decreased the net interest and other expense
by 29.33%. In the end, increase in gross profit of 5.7% surpassed the increase in total operating expenses of 1.4%.
Similarly, to LOW, the increase was due to the higher percentage growth for the positive that led to a higher net
income amount.

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12. Are the reportable segments’ net income results consistent with the company as a whole? What does this indicate?
Both companies operate within a single reportable segment. As a result these respective segments represent the
businesses' overall performance.
13. How has earnings per share changed? Why? How do they compare to each other? What does this indicate?
LOW: LOW EPS and diluted EPS are the same. Earnings per share has increased 26.6% from $2.14 in 2013 to $2.71
in 2014. This occurred because of the increase in net earnings followed by the decrease in weighted-average common
shares outstanding, and the lack of change in net earnings allocated to participating securities. LOW has undergone a
share repurchase program that is executed through the purchases made from time to time either in the open market or
through private market transactions (pg. 14). This indicates that LOW has increased their operating performance as
they increased their net income and decreased their average common shares outstanding. This increases earnings per
share and thus their return on investment.
HD: Earnings per share has increased 25% from $3.78 in 2013 to $4.74 in 2014. Its diluted EPS increased by 25.27%
from 3.76 in 2013 to 4.71 in 2014. Its shares outstanding have increased from $1,761 in 2013 to $1,768 in 2014. Its net
earnings increased while its weighted average common shares decreased, causing the earnings per share to increase. As
explained in the statement, “diluted Earnings per Share for fiscal 2014 reflect $0.15 of benefit from the gain related to
the sale of a portion of our equity ownership in HD Supply and a negative impact of $0.02 for expenses incurred in
connection with the Data Breach.” (pg. 22). This indicates that HD has increased their operating performance and
profitability.
HD's EPS is about twice as much as LOW, however they have been growing at a similar rate. The EPS figure is very
important for actual and potential common stockholders because the payment of dividend and increase in the value of
stock in future largely depends on the earnings of the company. The higher the EPS figure, the better it is. Thus HD's
higher EPS is the sign of their higher earnings, strong financial position and more earnings per share outstanding.
14. How have the gross profit percentages changed? Why? How do they compare to each other? What does this
indicate?
Gross profit percentage = (Sales - COGS)/ Sales
LOW
Gross profit percentage 2013 = ($53,417- $34,941)/$53,417= .3459 = 34.59%
Gross profit percentage 2014 = ($56,223- $36,665)/$56,223 = .3479= 34.79%
Gross profit Percentage changed from 34.59% for fiscal year 2013 to 34.79% for fiscal year 2014, a 20 basis point
increase from 2013 that was primarily driven by cost reductions associated with LOW Value Improvement initiative,
which consisted of improved line review and product reset processes to be better positioned to meet customers'
product needs and drive better inventory productivity. In 2014 and 2013 LOW had a slightly higher Gross Profit
Percentage than HD. Both companies gross profit percentage increased, suggesting that LOW and HD were
generating revenues and/or controlling expenses just as effectively during fiscal year 2014 and 2013.
HD
Gross profit percentage 2013 = ($74,754 - $48,912)/ $74,754= .3456= 34.56%
Gross profit percentage 2014=($78,812 - $51,422)/$78,812= .3475=34.75%
Gross Profit Percentage was 34.56% in 2013 and 34.75% in 2014 due to benefits from changes in the mix of products
sold and productivity in supply chain, partially offset by higher shrink.
15. What are the return on assets percentages? What does this indicate?
Return on assets= net income/total assets
LOW
Net income: $2,286
Total Assets 2012: $32,666
= [2,286/(32,666+32,732)/2]
=. 068
Return on assets 2013: 6.8%
Net income: $2,698
= [2,698/(32,732+31,827)/2]
=. 081
The return on assets measures how much a firm earned for each dollar of investment. With this increase LOW has
been able to collect more with each dollar that is invested. This increase follows how net income has increased while

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total assets have decreased, leading to a higher final percentage. This means management has been more efficient at
converting assets into earnings and is thus more profitable in relation to its total assets.
HD
Net income: $5,385
= [5,385/(41,084+40,518)/2]
=. 132
Net income: $6,345
= [6,345 /(40,518+39,946)/2]
=. 157
HD has faced a very similar situation to that of LOW’, as their return on assets from 2013 to 2014 as increased
following the increase in net income and decrease in total assets. Though the two companies show a similar pattern of
growth, HD has a much higher return of assets that is nearly double that of LOW. This means HD is more efficient
in generating profit from their assets, as they can earn 15.7% from each dollar of investment rather than the 8.1% that
LOW can.
16. What are the return on common equity percentages? What does this indicate?
ROE = Net Income / Average Shareholders' Equity:
LOW
ROE 2013 = $2,286/(($11,853 +$13,857)/2) =17.78%
ROE 2014 = $2,698/(($9,968 + $11,853)/2) =24.73%
HD
ROE 2013 = $5,385/(($12,522+$17,777)/2) =35.55%
ROE 2014 = $6,345/(($9,322+$12,522)/2) =58.09%
ROE measures a corporation's profitability by revealing how much profit a company generates with the money
shareholders have invested. The HD had a higher ROE for both 2013 and 2014.
17. What are the financial leverage percentages? What does this indicate?
Financial leverage percentage=return on equity/return on assets
LOW
Return on Equity 2013=17.7%
Net income= $2,286
Average stockholders’
equity=(13,857+11,853)/2=$12,855
Financial Leverage Percentage 2013=(17.7%-
6.8%)=10.9%
Net income= $2,698
Average stockholders’ equity=
(11,853+9,968)/2=$10,910.5
8.1%)=16.6%
Financial leverage percentage measures the proportion of assets acquired with funds supplied by owners. Leverage is
positive when the rate of return on a company’s assets exceeds the average after-tax interest rate on its borrowed
funds. LOW ratio has increased from 2013 to 2014, meaning they increased equity financing.
HD
Net income= $5,385
equity=(17,777+12,522)/2=$15,149.5
13.2%)=22.3%
Return on Equity 2014=58%
Net income= $6,345
equity=(12,522+9,322)/2=$10,922
Financial Leverage Percentage 2014=(58%-
15.7%)=42.3%
Similarly to LOW, HD has faced a significant increase in its financial leverage percentage, as it essentially doubled.
When comparing the two companies, HD has a much higher return on the money it borrows as well as return on its
assets, causing it to have a higher financial leverage percentage. LOW also utilizes less debt than HD, which further
lowers their ratio.
18. What are the companies’ current ratios? What does this indicate?
Current Ratio = Current Assets/Current Liabilities

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LOW
Current Ratio 2013 = $10,296/$8,876 =1.16 Current Ratio 2014 = $10,080/$9,349 =1.08
HD
Current Ratio 2013 = $15,279/$10,749 =1.42 Current Ratio 2014 = $15,302/$11,269 =1.36
Both companies have ratio greater than 1, which indicates sufficient current assets to meet obligations when they
come due. We also conclude that The HD has a higher ability to pay its short-term obligations with currents assets
because it has a higher ratio than LOW both in 2013 and 2014
19. What are the companies’ working capital amounts? What does this indicate?
Working capital=current assets-current liabilities
LOW
Current assets 2013= $10,296
Current liabilities 2013= $8,876
Working capital 2013=$1,420
Working capital 2014=$732
Working capital is a financial measure to assess a company’s liquidity, as it shows the dollar amount that the company
has available to use on demand at the moment. LOW working capital has decreased 48% from 2013 to 2014,
meaning that they have less liquid assets available to use. From the company’s notes on cash flows it appears as
though cash provided by operating activities has increased by $.8 billion, net cash used in investing activities has
decreased by $.2 billion, and net cash used in financing activities increased by $.8 billion. The company focused its net
cash on financing short-term borrowings while decreased its net cash used in investing activities to account for the
acquisition of an orchard and reduction in capital expenditures. The fact that cash generated from operating activities
matches the decrease in cash from financial activities explains the decrease in working capital. This lowers the margin
of safety the company has to meet short-term obligations and emergencies.
HD
HD, similarly to LOW, has seen a decrease in working capital from 2013 to 2014. Their working capital has only
decreased by 10.9%, which is a significantly smaller decrease than the 48% faced by LOW. Being that HD works in
seasonal market in relation to demand (as most of their sales occur in the spring), the slight difference is
understandable. From their note on liquidity and capital resources HD explain how CFO increased by $.6 billion, CFI
decreased by $.2 billion, and CFF increased by $.4 billion. Overall the increase in CFO and decrease in CFI outweighs
the difference from the increase in CFF. The slight decrease means that HD still has a cushion available to pay of
short-term obligation or to account for possible emergencies. Even though both companies have had declining WC
amounts from 2014 to 2015, HD has higher absolute amounts and has had a much lower decrease of 10.97%
compared to LOW decrease of 48.45%. Thus LOW now has a lower capacity to pay off immediate liabilities.
20. What are the companies’ days in accounts receivable outstanding? How do they compare?
Receivables Turnover = Net Sales/Average Net Trade Accounts Receivable
Average Collection Period = 365/Receivables Turnover:
LOW
Cannot be calculated because LOW did not report any account receivable in its 10k. As stated in the Credit Programs
section of the 10-K, "The majority of the Company’s accounts receivable arise from sales of goods and services to
commercial business customers. The Company has an agreement with Synchrony Bank (Synchrony), formerly GE
Capital Retail, under which Synchrony purchases at face value commercial business accounts receivable originated by
the Company and services these accounts.”
HD
Receivables Turnover 2013 = 78,812/((1,398+ 1,395) /2) = 28.218
Average Collection Period 2013 = 365/ 28.218 = 12.95 days
Receivables Turnover 2014 = 83,176/((1,484+1,398)/2) = 57.72
Average Collection Period 2014 = 365/57.72 = 6.32 days
This ratio shows how many days The HD takes to collect money. In 2013, they collect money every 6.32 days and
12.95 days in 2014.

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21. What are the companies’ days in inventory outstanding? How do they compare?
Days in inventory outstanding= (365/Inventory turnover ratio)
Inventory turnover ratio= COGS/Average inventory
LOW
COGS 2013= $ 34941
Average inventory= $8,863.5
Inventory turnover=3.94
Days in inventory outstanding
2013=(365/3.94)=92.6
COGS 2014= $36,665
Average inventory=9,019
Days in inventory outstanding 2014=(365/4.07)=89.
HD
COGS 2013= $51,422
Average inventory= $10,883.5
2013=(365/4.72)=77.3
COGS 2014= $54,222
Average inventory=11,068
2014=(365/4.90)=74.5
Inventory turnover ratio reflects how many times average inventory was produced and sold during the period. A
higher ratio in inventory turnover means that inventory moved more quickly through the production process to the
customer, which reduces storage and obsolete costs. Days in inventory outstanding indicated the average time it takes
a company to produce and deliver inventory to customers. The bigger the inventory turnover, and thus the more
quickly they deliver inventory to customers, the lower the days in inventory outstanding as goods are delivered in less
days. LOW has a higher days in inventory outstanding of 92.59 in 2013 and 89.78 at 2014, compared to HD 77.5 in
2013 and 74.51 in 2014. HD also has a higher rate of decline in days in inventory outstanding of 3.56% compared to
LOW decrease of 3.03%. In the current year, HD has a lower days in inventory outstanding by 15.4 days, meaning
they can deliver their inventory 17.7% faster than LOW. HD has less money tied in inventory that they can use to
earn interest income or to reduce interest expense.
22. What are the companies’ days in accounts payable outstanding? How do they compare?
Accounts Payable Turnover = COGS/Average Accounts Payable
Average Age of Payables = 365/Accounts Payable Turnover:
LOW
Accounts Payable Turnover 2013= $53,417/(($5,008+
$4,657)/2) = 11.05
Average Age of Payables 2013 =365/11.05 = 33.02
days
Accounts Payable Turnover 2014=
$36,665/(($5,124+$5,008)/2) = 7.24
Average Age of Payables 2014 = 365/7.24 =
50.41 days
In 2014, LOW has higher days in accounts payable outstanding than HD, which means that it takes the company
longer to pay back its creditors compared to The HD.
HD
Accounts Payable Turnover 2013=
$51,422//($5,797+ $5,376)/2) = 9.20
39.65 day
Accounts Payable Turnover 2014 = $54,222/(($5,807
+$5,797)/2) = 9.35
39.04 days
In 2013, HD has higher days in accounts payable outstanding than LOW, which means that it takes the company
longer to pay its creditors compared to LOW.
23. What does the combination of the above 5 tell you about the companies’ cash flow management?
• LOW has a current ratio greater than 1, which indicates sufficient current assets to meet obligations when
they come due. However, the current ratio has decreased by 6.90% from 2013 to 2014, meaning the company
has decreased its ability to pay current obligations with current assets. HD has a higher ability to pay its short-
term obligations with currents assets because it has a 19.72% higher ratio than LOW in 2014.
• LOW' working capital has decreased 48% from 2013 to 2014, meaning that they have less liquid assets
available to use. HD's only decreased by 10.97%, ending in an amount that is 72.87% higher than LOW 2014
working capital. As we've found by analyzing the current ratio, HD shows better management of liquid assets
to pay off obligations than LOW.

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• Because LOW did not record any accounts receivable, it is not possible to compare its days accounts
receivable with that of HD. HD's days accounts receivable outstanding has decreased by 51.20%, meaning
the company can collect liquid cash from its credit sales at a faster rate than previously. This puts HD at an
advantage, as they have more liquid cash to use on obligations or investments.
• LOW' days in inventory outstanding has decreased by 3.13%, similarly to HD's whose decreased by 3.62%. In
2014 HD's days in inventory outstanding is 19.66% lower than LOW, meaning HD is more effective at
getting inventory to its customers in less time.
• LOW days in accounts payable inventory outstanding has increased 52.67% from 2013 to 2014 while HD's
has decreased 1.54%. Overall, in 2014, HD's accounts payable inventory is 28.68% lower than LOW,
meaning HD takes less time to pay its creditors. Because HD's days in accounts payable inventory
outstanding is 39.04, it means the company takes a normal amount of time to pay its creditors. The fact that
LOW' increased from a normal payment rate of every 33.02 days to 50.41 days might indicate that LOW
needs a longer time to pay off its creditors due to a possibly worsening cash flow position.
Taking into consideration the current ratio, working capital, days average receivable outstanding, days inventory
outstanding, and days accounts payable outstanding for 2013 and 2014 it appears as though HD is more efficient at
managing its cash flow. LOW' numbers also show a decent management of cash flows, meaning the company is
proceeding steadily when it comes to its liquidity. HD shows an advantage in managing its liquidity to ensure a strong
safety margin in relation to obligations and enables it to invest in bettering the company.
24. What do the elements of the cash flow statement tell you about the companies’ businesses?
LOW
Overall the company experienced positive cash inflows of $466 million in fiscal year 2014 and 391 million in fiscal
year 2013.
• Positive cash inflow from operating activities ($4,929 M in 2014 and $4,111 M in 2013), mainly from net
earnings, which demonstrates that the company is healthy and making a profit that generates cash inflow to
support the business and help meet debt requirements.
• Negative cash outflow from investing activities (-$1,088 million in 2014 and -$1,286 million in 2013): mostly
from purchases of investments to get a high future return and from capital expenditures to help company
growth.
• Negative cash outflow from financing activities (-$3,761 million in 2014 and -$2,969 million in 2013): mainly
from repurchase of common stock to regain equity.
HD
Overall the company experienced positive cash inflows of $1,723 million in 2014 and $1,929 million in 2013.
• Positive cash inflow from operations ($8,242 million in 2014 and $7,628 million in 2013): suggests a healthy
business that generates cash inflow. The company is making money that can be used to support operations,
paying debt or shareholders.
• Negative cash outflow from investing activities (-$1,271 million in 2014 and -$1,507 million in 2013): the
company invested heavily in capital expenditures and through businesses acquisition, seeking future potential
growth and returns.
• Negative cash outflow from financing activities (-$7,071 million in 2014 and -$1,929 million in 2013): mainly
due to the fact that the company repurchased common stocks, which could mean that it is trying to regain
possession of its own equity. Cash dividends paid to stockholders also had a large negative impact on cash
flows.
25. Is there any change in the companies’ debt? Why?
LOW: In 2013, LOW had a net change (increase) in short term borrowing of $386, which was then retired the next
year. In 2013, its net proceeds from the issuance of long term debt was $985, and for 2014 was $1239. It repaid $47 of
long-term debt in 2013 and $48 in 2014.
HD: In 2014, HD had a net change (increase) in short term borrowing of $290. In 2013, its net proceeds from the
issuance of long term debt was $5,222, and for 2014 was $1981. It repaid $1289 of long-term debt in 2013 and $39 in
2014.
26. What are the companies’ times interest earned ratios? What does this indicate?
Using Times Interest Earned = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense

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LOW
Times Interest Earned 2013= ($2,286 + $476 + $1,387)/$476= 8.72
Times Interest Earned 2014= ($2,698+$516+$1,578)/$516 = 9.29
HD
Times Interest Earned 2013 = ($5,385+$711+$3,802)/$711 = 10.52
Times Interest Earned 2014 = ($6,345+$830+$3,631)/$830 = 13.02
The times interest ratio indicates the amount of resources generated for each dollar of interest expense, and a high
ratio translates into an extra margin of protection in case profitability deteriorates. This is important because in the
case that a company is unable to meet its required interest payments it has do declare bankruptcy. In 2014, The HD
has a higher ratio than LOW, which makes it more appealing to financial analysts because it generated $13.02 for each
dollar of interest compared to $9.29 for LOW. In 2013, The HD has a higher ratio than LOW, which makes it more
appealing to financial analysts because it generated $10.52 for each dollar of interest compared to $8.72 for LOW.
27. Is there any change in the companies’ equity? Why?
LOW: Equity has been reducing from $1,030 in 2013 to $960 in 2014. Retained earnings decreased. Accumulated
other comprehensive loss increased. Shares and amount of common stock decreased. Cash dividends declared
increased, which also increased from $.70 per share to $.87 per share. Issuance of common stock under share-based
payment plans for common stock and capital in excess decreased. The company has a share repurchase program that
is executed through purchases made from time to time either in the open market or through private market
transactions. Shares purchased under the repurchase program are retired and returned to authorized and unissued
status. Any excess of cost over par value is charged to additional paid in capital. Total shareholder’s equity thus
decreased by 16%.
HD: HD has had an increasing number of shares outstanding from $1,761 in 2013 to $1,768 in 2014. HD had $1.31
billion shares outstanding on February 1, 2015 and $1.38 billion shares outstanding on February 2, 2014. Paid-in
capital decreases. Retained earnings decreased. Accumulated comprehensive loss decreased from a gain of $46 in 2013
to a loss of $452 in 2014, a near 883% decrease. Treasury Stock increased in cost by 36% and also increased by the
number of shares. Cash dividends increased cost per share from $1.56 to $1.88. Total stockholder’s equity overall
decreased by 26%.
28. Did the companies pay dividends? In cash or stock?
LOW
2013: Paid $733 dividends in cash. 2014: Paid $822 dividends in cash
HD
2013: Paid $2,243 dividends in cash. 2014: Paid $2,530 dividends in cash.
29. What are the companies’ dividend yield ratios? What does this indicate?
Dividend yield ratio=Dividends per share/Market price per share
LOW
Dividends per share 2013: $0.70
Market price per share 1/31/2014=$46.29
Dividend yield ratio 2013= (.70/46.29)= 1.51%
Dividend yield ratio 2014= (.87/67.76)= 1.28%
HD
Dividend yield ratio 2013= (1.56/75.09)=2.08%
Dividend yield ratio 2014= (1.88/104.43)= 1.80%
The dividend yield ratio measures the relationship between the dividends per share paid to stockholders and the
current market price of the stock. Investors use this information to gauge the paying performance of different
investment opportunities. Using the data, we see that HD has a higher dividend yield and therefore would be a better
investment on the basis of dividend payouts compared to investment in equity of the company.
30. What are the companies’ debt to equity ratios? What does this indicate?
Debt-to-Equity = Total Liabilities / Stockholders' Equity
LOW
Debt-to-Equity 2013 = $20,879 /$11,853
= 1.76
Debt-to-Equity 2014 = $21,859 /$9,968
= 2.20

10

HD
Debt-to-Equity 2014 = $30,624/$9,322
= 3.29
Debt-to-Equity 2013 = $27,996/$12,552
= 2.23
In 2013, for each $1 of stockholders' equity, The HD had $2.23 worth of liabilities. By comparison, LOW debt-to-
equity ratio was 1.76. This indicates that The HD might be a riskier company to invest in because its debt-to-equity
ratio is higher than LOW (note: despite the risk associated with debt, a company can gain from debt financing
through deductible interest expense on the corporate income tax return, as well as the advantages of financial leverage
and balancing the higher debt return with its higher risk).
The Debt-to-Equity ratio measures the balance between debt and equity. Debt funds are viewed as being riskier than
equity funds because interest payments must be made even if the company has not earned sufficient income to pay
them. On the other hand, dividends are not required to be paid to stockholders, which makes equity financing
inherently riskier. In 2014, for each $1 of stockholders' equity, The HD had $3.29 worth of liabilities. By comparison,
LOW debt-to-equity ratio was 2.20. This indicates that The HD might be a riskier company to invest in because its
debt-to-equity ratio is higher than LOW (note: despite the risk associated with debt, a company can gain from debt
financing through deductible interest expense on the corporate income tax return, as well as the advantages of
financial leverage and balancing the higher debt return with its higher risk).
31. Are there contingent liabilities that could negatively impact the companies’ future profits?
LOW: No. The company did not disclose any particularly impactful contingent liabilities other than a few that were
deemed “normal”. As stated from the Commitment and Contingencies note, “the Company is a defendant in legal
proceedings considered to be in the normal course of business, none of which, individually or collectively, are
expected to be material to the Company’s financial statements.”
HD: Yes. Due to data breach that affected the payment data of the customers who used payment cards at self-
checkout system in the third quarter of 2014, there is a probable chance that the company will have to pay following
claims made against them from the payment card networks. At the moment at least 57 actions have been filed against
the company on behalf of customers, payment card brands, payment card issuing banks, shareholders or others due to
the data breach.
32. What are the companies’ quality of income ratios? How do they compare and why?
Quality of Income = Cash Flows from Operating Activities / Net Income:
LOW
Quality of Income 2013= $4,111/$2,286
= 1.80
Quality of Income 2014 = $4,929/$2,698
= 1.83
HD
= 1.42
= 1.30
High quality earnings should reflect the cash flows from operations of the organization. In other words, if each dollar
of income is supported by one dollar or more of cash flow from operations, then such income has high quality, and
vice versa. Since both LOW and The HD have quality of income ratios greater than one, both reported high-quality
earnings for 2014. Since LOW had a higher ratio than the HD, LOW quality of income was even higher. In 2013,
LOW quality of Income was higher than HD, meaning that each dollar is supported by one dollar or more of cash
flows from operations.
33. What are the companies’ capital acquisition ratios? How do they compare and why?
Capital acquisition ratio: Cash flow from operating activities/Cash paid for PPE
LOW
Cash flow from operating activities 2013= $4,111
Cash paid for PPE 2013= $940
Capital acquisition ratio 2013=(4,111/940)=4.37
Cash paid for PPE 2014= $880
Capital acquisition ratio 2014=(4,929/880)=5.60
HD
Cash paid for PPE 2013= $1,389
Capital acquisition ratio 2013=(7,628/1,389)=5.49
Cash paid for PPE 2014= $1,442
Capital acquisition ratio 2014=(8,242/1,442)=5.72
The Capital Acquisition Ratio (CAR) outlines the portion of purchases of property, plant, and equipment financed
from operating activities (without the need for outside debt or equity financing or the sale of other investments or
fixed assets). A high ratio indicates less need for outside financing for current and future expansion. Because both

11

LOW and HD have a ratio above 1, it indicates that the companies have sufficient cash to meet their investing needs
and do not need to rely on outside financing to expand. For both companies, their CAR is increasing, although LOW
has increased more than HD. In 2014, HD has a higher ratio of 5.72 compared to LOW 5.60, meaning they can more
safely rely on their cash from operations to finance their investments than LOW can.
34. What are the companies’ free cash flows? How do they compare and why?
Free Cash Flows = Cash Flow from Operating Activities - Dividends - Capital Expenditures
LOW
Free Cash Flows 2013= $4,111- $733 M - $940= $2,438
Free Cash Flows 2014= $4,929 - $822 M - $880 = $3,227
HD
Free Cash Flows 2013 = $7,628 - $2,243- $1,389 = $3,996
Free Cash Flows 2014 = $8,242- $2,530- $1,442 = $4,270
In 2013, The HD has greater free cash flows ($1,558 M more), even though it has almost twice as much cash flow
from operations compared to LOW ($7,628 M/$4,111M=1.85). This is due to the fact that The HD pays a lot more
dividends than LOW ($2,243 m/$733 m=3.06) relative to its cash flow from operating activities. The HD's capital
expenditures are almost twice as large as LOW ($1,389 m/$940 m=1.47).
In 2014, The HD has slightly greater free cash flows ($274 M more), even though it has almost twice as much cash
flow from operations compared to LOW ($8,242/$4,929=1.6). This is due to the fact that The HD pays a lot more
dividends than LOW ($2,530 m/$880 m=2.875) relative to its cash flow from operating activities. The HD's capital
expenditures are almost twice as large as LOW so this ratio is consistent ($1,442 m/$880 m=1.6).
35. What types of audit opinions do the companies have over the financial statements and over internal controls over
financial reporting?
In page 32 of the 10-K for LOW and 31 for HD, it states, “we conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion."
36. How have the companies’ stock prices changed over the past two years? How do you think it links with the above
factors?
According to Yahoo Finance:
LOW Stock Price as of 01/31/2014: $46.29
LOW Stock Price as of 01/30/2015: $67.76
HD Stock Price as of 02/03/2014: $75.09
HD Stock Price as of 02/02/2015: $104.43
LOW Percentage Change from 2013 to 2014: 46.38%
HD Percentage Change from 2013 to 2014: 39.07%
LOW stock had a higher stock price increase than The HD for the following reasons:
• LOW had no contingent liabilities that negatively impacted the company's financial statements. HD had a
data breach that affected the payment data of the customers who used payment cards at self-checkout system
in the third quarter of 2014, there is a probable chance that the company will have to pay following claims
made against them from the payment card networks. An increase in contingent liabilities will likely have a
slower growth in stock prices.
• Both HD and LOW quality of income are greater than one, signifying that cash flows are coming from
operating activities and not investing/financing activities. This suggests a healthy business because they are
earning cash from the business itself. Since LOW has a higher quality of income ratio, this is another reason
why LOW stock price increase is greater than HD.
• Both HD and LOW Capital Ratio are greater than one, indicating that the companies have sufficient cash to
meet their investing needs and do not need to rely on outside financing to expand. This a sign of healthy
business because the company can invest in PPE using money earned from operating activities. Both
companies have increasing capital acquisition ratio for the fiscal year 2013 to 2014. LOW capital acquisition

12

ratio increased by 28.14% from the fiscal year to 2013 and 2014. The HD capital acquisition ratio increased
by 4.19% from the fiscal year to 2013 and 2014. Because LOW acquisition ratio growth was greater than HD,
another reason for LOW's greater increase in stock price.
• Both companies have positive cash flows, meaning that excess cash after all expenses. LOW had a 32.6%
increase in cash flows compared with HD’s 6.86% increase in cash flow. Greater change in cash flows
signifies that the company an emergency cushion to sit on.
In conclusion, LOW greater growth in stock price from the fiscal year 2013 to 2014 can be explained by their greater
increase in quality of income, capital ratio, and cash flow. They also have no contingent liabilities.
37. What are the companies’ price/earnings ratios?
Price/earning ratio=Market price per share/Earnings per share
LOW
Earnings per share=$2.14
Price/earnings ratio 2013=(46.29/2.14)=21.63
HD
Price/earnings ratio 2014=(103.89/4.71)=22.
38. In which company would you invest your money? How does your above analysis contribute to your
decision.
Even though HD is a well-established company showing strong performance measures, investing in LOW will give us
a higher return on our investment in a shorter horizon due to its higher potential for growth.
HD
• HD is better established (2,266 locations vs. 1,836 for LOW), resulting in more market shares and better
economies of scale. This gives HD a safety margin in case of economic downturn in the housing market, but
it is important to note that HD also has a lot more long-term debt than LOW.
• HD is a more stable investment: pays higher dividends with a higher dividend yield overall.
Better option for conservative investors (e.g. mutual funds, pension funds, insurance funds etc.)
LOW
For more aggressive investing (room for growth), for a higher return on investing
• Cash Flow Measure/Analysis:
o Both LOW and HD have healthy cash flows. LOW has a current ratio greater than 1, however, the
current ratio has decreased by 6.90% from 2013 to 2014. HD has a higher ability to pay its short-
term obligations with currents assets because it has a 19.72% higher ratio than LOW in 2014.
o Taking into consideration the current ratio, working capital, days average receivable outstanding, days
inventory outstanding, and days accounts payable outstanding for 2013 and 2014 it appears as HD is
more efficient at managing its cash flow. HD therefore. LOW' numbers also show a healthy
management of cash flows, meaning the company is proceeding steadily when it comes to its
liquidity.
• Less risky:
o Capital acquisition ratio grows faster for LOW: LOW is expanding opening new stores, using its
resources from operating activities and relying less on debt and equity financing.
o Lower Debt to Equity ratio: less risky
• Higher stock price increase in the past 2 years --> signifies higher potential for growth
o No contingent Liability (HD had a significant data breach that affected the payment data of the
customers who used payment cards at self-checkout system)
o LOW has a higher quality of income ratio, signifying that cash flows are coming from operating
activities and not investing/financing activities.
o LOW capital acquisition ratio increased by 28.14% from the fiscal year to 2013 and 2014, while HD
capital acquisition ratio only increased by 4.19%. LOW earns enough cash from operating activities
to pay for future investments.

Financial Statement Analysis Project Group 4

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