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Financial Statement Analysis
Financial Statement Analysis
Chapter 17
Percent × 100%
= Current Year’s Total ̶ Prior Year’s Total
Change
Prior Year’s Total
McGraw-Hill/Irwin Slide 2
Horizontal Analysis of Lowe’s
Summarized Balance Sheets
LOWE'S
Comparative Balance Sheets (in millions)
Dollar Percent
2006 2005 Change Change*
Assets
Current assets:
Cash $ 364 $ 423 $ (59) (13.9)
Short-term investments 432 453 (21) (4.6)
Accounts receivable - - - -
Inventories 7,144 6,635 509 7.7
Other current assets 374 277 97 35.0
Total current assets 8,314 7,788 526 6.8
Property and equipment, net 18,971 16,354 2,617 16.0
Long-term investments 482 497 (15) (3.0)
Total assets $ 27,767 $ 24,639 $ 3,128 12.7
* Percent rounded to first decimal point.
McGraw-Hill/Irwin Slide 3
Horizontal Analysis of Lowe’s
Summarized Balance Sheets
LOWE'S
Comparative Balance Sheets (in millions)
Dollar Percent
2006 2005 Change Change*
Liabilities and Stockholders' Equity
Current liabilities $ 6,539 $ 5,832 $ 707 12.1
Long-term liabilities 5,503 4,511 992 22.0
Total liabilities 12,042 10,343 1,699 16.4
Stockholders' equity 15,725 14,296 1,429 10.0
Total liabilities and stockholders' equity $ 27,767 $ 24,639 $ 3,128 12.7
* Percent rounded to first decimal point.
McGraw-Hill/Irwin Slide 4
Horizontal Analysis of Lowe’s
Summarized Income Statements
LOWE'S
Comparative Income Statements (in millions)
Dollar Percent
2006 2005 Change Change*
Net sales revenue $ 46,927 $ 43,243 $ 3,684 8.5
Cost of revenues 30,729 28,453 2,276 8.0
Gross profit 16,198 14,790 1,408 9.5
Operating and other expenses 11,046 10,136 910 9.0
Interest expense 154 158 (4) (2.5)
Income tax expense 1,893 1,731 162 9.4
Net income $ 3,105 $ 2,765 $ 340 12.3
McGraw-Hill/Irwin Slide 5
Changes Revealed in Trend Analysis
Lowe’s grew significantly in 2006.
McGraw-Hill/Irwin Slide 6
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.
LOWE'S
Comparative Income Statements (in millions)
2006 2005
Amount Percent Amount Percent
Net sales revenue $ 46,927 100.0% $ 43,243 100.0%
Cost of revenues 30,729 65.5% 28,453 65.8%
Gross profit 16,198 34.5% 14,790 34.2%
Operating and other expenses 11,046 23.5% 10,136 23.4%
Interest expense 154 0.3% 158 0.4%
Income tax expense 1,893 4.0% 1,731 4.0%
Net income $ 3,105 6.6% $ 2,765 6.4%
McGraw-Hill/Irwin Slide 9
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.
McGraw-Hill/Irwin Slide 10
Interpreting Common Size Statements
McGraw-Hill/Irwin Slide 11
Profitability Ratios
Profitability ratios provide us with measures
of a company’s ability to generate
income in the current period.
Net profit Gross profit Fixed asset
margin percentage turnover
Receivables Inventory
turnover turnover
Current Quick
ratio ratio
McGraw-Hill/Irwin Slide 13
Solvency Ratios
Solvency ratios focus on a company’s ability to
repay debt, pay interest, and finance replacement
and/or expansion of long-term assets.
Times
interest
earned
Builder's
Lowe's Home Depot FirstSource
Inventory FIFO FIFO Weighted Average
McGraw-Hill/Irwin Slide 16
End of Chapter 17