Analysis of Financial Annual Reports

Analysis of Financial Annual Reports The Home Depot and Lowe’s Companies are major American home improvement retailers, keen rivals with Home Improvement leading both in sales and in profits. This assignment aims to analyse their operational and financial results in detail for a period of five years, namely 2002 to 2006 on the basis of the following Annual Reports filed by the companies with the Securities Exchange Commission (SEC) Company Year Ending Year Ending Year Ending Year Ending Year Ending Home Depot January 28, 2007 January 29, 2006 January 30, 2005 February 1, 2004 February 2, 2003 Lowe’s February 2, 2007 February 3, 2006 January 28, 2005 January 30, 2004 January 31, 2003 The working details and financial calculations used for the analysis are available in the appendices at the end of the assignment. Whilst the two companies operate in the same market and are keen rivals, with Lowe’s’ being the nearest competitor to The Home Depot, the actual distance between these two is prima facie substantial with The Home Depot being practically two times the size of Lowe’s, both in sales and in profits. The analysis of the financial statements of the two companies for the five years 2002 to 2006 covers issues like the percentage increase in sales and profits during this period, as well as the analysis of a number of ratios that indicate (a) year on year increase of turnover and profits, (b) profitability, (c) use of long term assets, capital employed and working capital, and (d) capital gearing. An analysis and comparison of various financial and operational ratios over a period of a number of years helps in validating the authenticity of presented figures by enabling analysts to compare related figures, for example year on year increases in sales and profits, and the relationships between sales and profits, sales and capital employed, and current assets and current liabilities, and locate and investigate anomalies that arise from year to year. â€Å"While it is useful to understand the absolute quantum of each asset, liability and revenue item in isolation, far greater understanding of its implication with respect to the trend and performance of the company can be achieved by a `relationship study. For instance, if one studies profits in relation to sales for the current year and compares it with the same relationship for a series of years, a greater understanding of the trend and performance can be had. The `relationship study referred has two facets: i) the relationship of one item to another for the current or previous years, but in respect of the same company, and ii) the relationship of these parameters with industry figures or representative figures of competitors or of firms of similar size and operations. The first set enables one to understand the performance of the company in isolation, while the second gives an insight as to where the company stands vis-à  -vis the industry or competition.†Ã‚   (Osteryoung Others, 1992, p72) The following inferences can be drawn on the basis of information culled from the audited financial accounts and filed with the SEC. Whilst The Home Depot has been growing at a steady pace of around 10 to 11 % during the specified five year period, Lowe’s, which recorded a much higher pace of growth (of around 18 %) during the first four years found its year on year increase slowing to 8 % in the fifth (last) year. Both companies have comfortable Gross and Operating profit margins. Whilst GP margins have consistently been in the region of 30 %, Operating profit margins have remained at around 10 to 11 percent. Although both companies maintained their profitability margins during the five years, the profit before tax for The Home Depot was eroded significantly in 2006 because of substantial increase in finance charges, consequent to significant increase in debt. This increase in debt has increased the capital gearing ratio of the company from a low 0.08 to a more comfortable 0.30. An analysis of various operational ratios for both the companies over the five year period, by and large, indicates substantial s tability in their operations. Practically all ratios, ( and that too for both the companies), be they return on capital employed, asset utilisation, profitability, liquidity, working capital, or capital gearing, are remarkably stable from year to year for all five years, a fact that counters, (even if it does not negate) the possibility of manipulation of figures. The single large scale departure from the norm occurs in the case of capital gearing ratios for The Home Depot but that is explained by the increase in debt from 2672 million USD for the company in 2006 to 11643 million USD in 2007, a fact that also explains the change in interest cover and profit before tax for 2007. A detailed ratio analysis of the figures made available in the financial statements filed by the two companies with the SEC would thus tend to indicate (a) that both companies are progressing well, both in sales and in operational results, and (b) that the figures presented can be taken to be fair and representative of the working of the companies. Gauging the fairness and reliability of information available in the financial statements is however a far more complex exercise, the validity of the presented figures also depending upon other factors like (a) the value of plant, property and equipment, which may be depreciated on historical cost and thus be recorded at values much below current market rates, (b) securities reported at lower of cost or market, which usually means a recorded value below the current market rate, (c) recording of inventories at LIFO, whereas replacement costs are usually higher, (d) recording of debts or leases at favourable rates, (which amount to unrecorded assets because the company’s effective liability becomes lower than normal), (e) uncollected receivables bearing little or no interest, (e) obsolete or slow moving inventories, (f) under or overstatement of contingent liabilities such as threatened or imminent lawsuits, employee settlements like dismissal recompense, service and incentive c ontracts, obligations for goods returns and discounts, merchandise warranties, and guarantees of third-party borrowing. (Radebaugh Others, 2006) An analysis of the accounting policies and procedures of Lowe’s reveals that the company (a) operates a reserve for losses on obsolete inventory, inventory shrinkage, and sales returns, which is adjusted and charged to earnings every year, (b) records receivables that may change depending upon the performance of the company’s products, (c) does not have off balance sheet financing, apart from executing operating leases (d) monitors risks that could arise out of change in interest in long term debt, (e) has entered into an arrangement with GE in 2004 for sale of existing accounts receivables and those that would arise subsequently (f) has entered into an agreement with GG whereby GE funds the company’s proprietary credit card purchases (g) values assets at cost and depreciates them over their useful lives (h) undertakes self insurance for certain liabilities relating to workmen’s compensation, automobile, property and general and product liability claims. ( Annual Reports of Lowe’s Companies, 2003 to 2007) Whilst The Home Depot also by and large follows similar principles, the company (a) offers credit purchase programmes through third party credit providers, (b) depends substantially for sales achievement on offering extensive credit to customers (c) continually patents its intellectual property, (d) is involved in a large number of legal proceedings that could lead to payment of substantial amounts of money, (e) values inventories at lower of cost or market, a practice that could lead to off balance sheet assets (f) uses a number of estimates for reporting assets, liabilities, contingent liabilities, revenues and expenses, (g) has reasonably high receivables, which it needs to collect and whose accuracy is largely a matter of surmise (h) records assets at cost and depreciates them over their estimated useful lives (i) checks goodwill every year for impairment purposes (j) committed errors in stock option practices that led to an erosion of retained earnings to the tune of 227 million in 2006 (Annual Reports of The Home Depot, 2003 to 2007) Off balance sheet assets for both of these companies could arise from undervalued plant, property, and equipment, as well as inventories that may be worth more than their recorded value. On the other hand both companies do not have systems strong enough for effective recording of obsolescence, a fact that could lead to certain slow moving inventory items being shown at values higher than what could be realised in the market. With the companies having receivables that could change on the basis of the post sales performance of products, adverse changes in this area could lead to negative effect upon earnings. However it also needs to be considered at this stage that The Home Depot and Lowe’s have large operations and changes arising from behaviour of off balance sheet items could well be negligible in comparison to actual recorded figures. In value terms much of the difference in the evaluation of balance sheet items could arise from value of plant, property and equipment. With both retailers having extensive prime quality real estate by way of shop space in well frequented locations, the actual value of property may be far in excess of that stated in the financial statements. Whilst an actual quantification of value would have to be preceded by an elaborate exercise, it would be fair to surmise that such a valuation would lead to a substantial enhancement in the market values of both firms. Both companies recognise revenues when customers take possession of goods, whilst goods that have been paid for but not delivered to customers are shown as deferred revenue. This method is open to criticism because it does not sufficiently provide either for return of goods taken by customers or the possibility of customers not picking up goods for which they have made advance payments. Whilst large sales volume turnovers effectively mask the impact of such basic anomalies in accounting procedures, the adoption of conservative accounting practices for revenue recognition, where sales are confirmed only after customers accept goods as purchased could impact sales volumes significantly. Such a practice would obviously have a strong impact on ratios that concern sales, operations, and profitability. Whilst an analysis of ratios over a five year period for both companies does indicate long term stability of accounting practices, the accounting practices followed by The Home Depot indicate an excessive preponderance to use estimates and approximations for arriving at revenue figures. Although such practices could be based on past practice as well as eminently reasonable assumptions, the fact that serious errors have occurred in the past, especially in the practice and disclosure of stock options, indicate that the company should implement much stronger systems and adopt more conservative accounting policies. Another issue of concern with The Home Depot is the substantial amount of litigation in which it is currently involved. With the company admitting the possibility of the results of these lawsuits going against the company, the chances of substantial future outflows with adverse effects upon the company’s earnings does exist. As such, whilst The Home Depot is a far larger company, both by way of sales and by way of profits, than Lowe’s, an impartial evaluation of accounting policies and procedures indicates Lowe’s to be more carefully run. Whilst the current depression in the housing market is keeping investors away from home improvement companies, Lowe’s could well prove to be better equipped to riding out the current crisis and therefore a safer investment. Appendices All figures in Million US Dollars (unless otherwise stated) 1. Appendix A Balance Sheet of the Home Depot Description 2007 2006 2005 2004 2003 Long Term Assets 34263 29136 24747 21111 18094 Current Assets Inventories 12822 11401 10076 9076 8388 Accounts Receivables 3223 2396 1494 1097 1072 Others 1955 1472 2703 3155 2507 Total Current Assets 18000 15269 14273 13328 11917 Total Assets 52263 44405 39020 34437 30011 Current Liabilities Accounts Payables 7356 6032 5766 5159 4560 Others 5575 6674 4689 4395 3475 Total 12931 12706 10455 9554 8035 Debt 11643 2672 2148 856 1321 Others 2659 2118 2259 1620 853 Equity 25030 26909 24158 22407 19802 Total Liabilities 52263 44405 39020 34437 30011 2. Appendix B Profit and Loss Account of the Home Depot Description 2007 2006 2005 2004 2003 Net Sales 90387 81511 73094 64816 58247 Percentage Change 10.89 11.51 12.77 11.28 Cost of Sales 61054 54191 48664 44236 40139 Gross Profit 29783 27320 24430 20580 18108 Operating Expenses 20110 17957 16504 13734 12278 Operating Profits (before Interest and Tax) 9673 9363 7926 6846 5830 Finance Charges 365 81 14 3 (42) Profit before Tax 9308 9282 7912 6843 5872 Percentage Change 17 16 17 Tax 3547 3444 2911 2539 2208 Profits after Tax 5761 5838 5001 4304 3664 Basis Earnings per share 2.80 2.73 2.27 1.88 1.56 3. Appendix C Ratio Analysis of Home Depot Financial and Operational Results A. Profitability Ratios 1. Return on Capital Employed = Operating Profits (before Interest and Tax)/ Capital Employed Details 2007 2006 2005 2004 2003 Capital Employed is equal to Total Assets less Current Liabilities 39332 31699 28575 24483 22076 Operating Profits (before Interest and Tax) 9673 9363 7926 6846 5830 Return on Capital Employed (%) 24.59 29.53 27.73 27.96 26.41 2. Asset Turnover Ratio = Sales/ Capital Employed Details 2007 2006 2005 2004 2003 Capital Employed is equal to Total assets less Current Liabilities 39332 31699 28575 24483 22076 Sales 90387 81511 73094 64816 58247 Asset Turnover Ratio 2.29 2.57 2.56 2.65 2.64 3. Gross Profit Margin = Gross Profit/ Sales * 100 Details 2007 2006 2005 2004 2003 Gross Profit 29783 27320 24430 20580 18108 Sales 90387 81511 73094 64816 58247 Gross Profit Margin (%) 32.95 33.57 33.42 31.75 31.09 4. Operating Profit Margin = Operating Profit (Profit before Interest and Tax) / Sales * 100 Details 2007 2006 2005 2004 2003 Operating Profits (before Interest and Tax) 9673 9363 7926 6846 5830 Sales 90387 81511 73094 64816 58247 Operating Profit Margin (%) 10.70 11.44 10.84 10.56 10.01 B. Asset Turnover Ratios 5. Long Term Assets Turnover = Sales/ Long Term Assets Details 2007 2006 2005 2004 2003 Long Term Assets 34263 29136 24747 21111 18094 Sales 90387 81511 73094 64816 58247 Long Term Assets Turnover 2.63 2.80 2.95 3.07 3.22 C. Liquidity Ratios 6. Current Ratio = Current Assets / Current Liabilities Details 2007 2006 2005 2004 2003 Current Assets 18000 15269 14273 13328 11917 Current Liabilities 12931 12706 10455 9554 8035 Current Ratio 1.39 1.20 1.37 1.40 1.48 7. Accounts Payable Cover = Current Assets / Accounts Payables Details 2007 2006 2005 2004 2003 Current Assets 18000 15269 14273 13328 11917 Accounts Payables 7356 6032 5766 5159 4560 Accounts Payable Cover 2.45 2.53 2.48 2.58 2.61 D. Capital Structure, Gearing and Risk Ratios 8. Gearing Ratio = Long Term Debt/ Capital Employed Details 2007 2006 2005 2004 2003 Long Term Debt 11643 2672 2148 856 1321 Capital Employed = Total Assets less Current Liabilities 39332 31699 28575 24483 22076 Gearing Ratio 0.30 0.08 0.08 0.04 0.06 9. Shareholder’s Ratio = Shareholder’s Funds/ Capital Employed Details 2007 2006 2005 2004 2003 Shareholders Funds 25030 26909 24158 22407 19802 Capital Employed 39332 31699 28575 24483 22076 Shareholder’s Ratio 0.64 0.85 0.85 0.92 0.90 10. Interest Cover = Profit before Interest and Tax/ Interest Details 2007 2006 2005 2004 2003 Operating Profits (before Interest and Tax) 9673 9363 7926 6846 5830 Finance Charges 365 81 14 3 (42) Interest Cover 26.5 115 566 2282 NA 4. Appendix D Balance Sheet of Lowe’s Companies All figures in Million US Dollars (unless otherwise stated) Description 2007 2006 2005 2004 2003 Long Term Assets 19447 16851 14235 12229 10541 Current Assets Inventories 7144 6635 5850 4584 3968 Accounts Receivables (Included in Others) Others 1170 1153 1016 1938 1600 Total Current Assets 8314 7788 6866 6522 5568 Total Assets 27761 24639 21101

Mobile telecommunication

Mobile phones are now seen as necessities rather than luxuries and market penetration (the percentage of the population owning mobile phones) Is very high and growing. A recent report put market penetration In the western E as a whole at 90 per cent In 2004 and predicted that this will rise to 100 per cent by 2007. In some European countries (including the ELK) penetration is in excess of 100 per cent as individuals have more than one mobile phone.This high level of market penetration in the developed world does not mean that the racket is saturated as the advent of 36 technology has opened up the market and will lead to people trading up to more expensive phones. In addition there is an explosion of demand In the developing world. Current competition It Is necessary to look at two aspects of the market as they are Inextricably linked together – the market for mobile handsets and the market for network operators. In both cases the market is oligopolies, as Tables 13. 13 and 13 . 4 show. The market leader for handsets is Monika. However, its position is under threat -its market share in the UK in 2002 was 52 per cent. Ionians main problem was the failure to recognize and meet the increased demand for camera flip-phones. It responded to this criticism by launching a new range of seven handsets in April 2005. The percentages shares of the other manufacturers remained fairly constant between 2002 and 2004, although LOG is a new entrant and the ‘others' group increased Its market share from 10 per cent to 18 per cent.The market for mobile phone handsets in the UK Manufacturer Monika Siemens Sony Ericson Samsung Motorola Others % share of the I-J market, 2004 36 10 18 Table 13. 3 The market for network operators in the UK Network Avoidance Orange 02 T-Mobile Virgin Mobile 3 Tests % share of the UK market, 2004 25 17 01 source: Minute, 2004 There are three large providers of mobile networks in the I-J, with very little between them in terms of market share . In 2002 Orange was the market leader with 27 per cent of the market while Avoidance accounted for 26 per cent of the market; 3 and Tests are new entrants to the market.The market for pay-as-you-go mobile phones is approximately twice the size of the contract market. Power of buyers Mobile phones are mainly for personal use (by 65. 2 per cent of adults) rather than business use (4. 8 per cent of adults). Statistically, the user of a mobile phone is most likely to be single, young and female. Figure 13. 3 shows the ownership of mobile phones in the I-J by age. Ownership is lowest in the 55 years and over age group and the handset manufacturers and network operators recognize this. 2 is working with Saga (the insurance group for the over ass) to launch a deal for the over-ass and Avoidance launched a new handset called Simply in May 2005 which is aimed at the older racket – it has an easy-to-read screen and larger buttons and does not carry many of the more complex features. F igure 13. 3 Source: Keynote, 2005 Although buyers cannot exert a great deal of market power, the high level of competition and easy availability of information on handset prices and network operators means that it is easy to shop around for the best deal.Threat of new entry The barriers to entry in this industry were very high and included access to networks, the cost of license purchase and the cost of brand building. In recent years these barriers have fallen dramatically. The advent of virtual networks has reduced the necessity for access to a network. Virgin is a mobile virtual network operator (NOVO) as it buys spare capacity from T-Mobile and sells it on to consumers. Tests and 02 have a similar relationship.At one time the handset manufacturers also had to manufacture the base stations (used to provide mobile phone coverage) which were very expensive to produce. This was a very effective cost barrier to entry for smaller handset producers. This is no longer necessary as radio chips and other software can increasingly be bought ‘off the shelf. Manufacture of handsets is being subcontracted by some of the larger handset manufacturers and these subcontractors themselves are starting to sell handsets under their own name.Been is an example of such a company. If this starts to happen on a large scale, there will be a threat to the position and market share of the incumbent market leaders. In Table 13. 13 the category of ‘others' grew from 10 per cent in 2002 to the 18 per cent shown in the table for 2004. A further threat to the position of handset manufacturers is the manufacture of handsets by the mobile operators themselves – Orange, for example, sells own brand handsets. This has the effect of tying the handset user into the operating network.In the ELK, there is evidence that there is room for new entrants – Sends for example, claims a 5 per cent market share in the I-J in 2005. Sends was founded in the UK in 1999 and initially supplied handsets to the network operators. It now supplies handsets under its own name through Internet sales and also through the giant retail supermarket Tests. Another barrier to entry which has fallen in recent years is the ‘switching cost' uncured by users when they change between networks.Although users of pay-as you- go still have to pay a fee for ‘unlocking the phone which can amount to as much as EYE. O, operators will provide handsets free to customers who take out a contract for 12 months. In addition, a major obstacle to changing networks – having to change your telephone number – now no longer exists. Although there are no obvious substitutes for the mobile phone, there a number of developments in this area. The advent of 36 technology which was launched in 2004 mainly for business customers will be extended to personal users by the end of 2005.This will offer better features like AD effects and faster access to the Internet and games. New pr oducts will offer the ability to watch films and sporting events as they happen. BIT has developed a hybrid phone – called BIT Fusion – which was launched in June 2005. Fusion operates as a mobile phone when outside the home but switches to the cheaper broadband line when the phone is inside the home. This reduces the cost of usage. Mobile email is seen as a growth area as Microsoft launched a new version of theWindows operating system designed specifically for mobile phones in May 2005. This is mainly used by business but could easily be extended into personal use. Power of suppliers The large manufacturers now subcontract much of their manufacturing to smaller subcontractors like Sends (mentioned above). On the one hand, this gives them increased flexibility in production but, on the other, it allows the subcontractors to enter the market and eventually to compete in their own right – what is there to stop the operators bypassing the handset manufacturers comp letely?It is likely that this development will change the power relations between the handset manufacturers and their suppliers and could possibly result in co-production and co-marketing of the handsets in the longer term. In the race for market share, manufacturers and operators have to offer maximum quality and range of services. The content becomes crucial. The exploitation of the G market requires the best range of content and handset manufacturers are negotiating deals with content suppliers; Avoidance has teamed up with Disney and Sony to provide content for their phones.These large organizations will undoubtedly have some degree of market power over the handset manufacturers simply because of their size and already established market power. From this analysis it can be seen that, although this market is one with very high market penetration, it is not a saturated market. There is scope for new entry to the market and for the development of new products and new markets. The m arket conditions which gave rise to domination by the large vertically integrated giants like Monika and Motorola have largely disappeared and smaller manufacturers are entering the market.

Cormac Mccarthys the Road- Theme of Hope - 1230 Words

The Road Cormac McCarthy’s The Road is set sometime in the future after a global catastrophe. The Road follows the story of a nameless father and son, possibly the last of the â€Å"good guys†, as they travel along an abandoned stretch of highway populated with occasional marauders and cannibals. The post-apocalyptic setting plays upon the public’s fear of terrorism, pandemics, genocide, and weapons of mass destruction. Since the cause of the destruction remains unanswered, it is left open to the mind to make assumptions. The Roadi is set somewhere in the south eastern United States. There is mention of distant mountains, several rivers and creeks, and a coastline. The landscape and the air are soaked in thick, gray ash. Vegetation has been†¦show more content†¦The blind man then says, â€Å"There is no god and we are his prophets† (170). This shows that the old man has lost all faith in god. He believes that they have been left there to fend for themselves. The father says nothing to oppose the statement and seems to push it in to the back of his mind. The old man later mention, â€Å"Where men can’t live gods fare no better† (172). Referring to how it is near impossible to keep your faith in such hard times. Later in the novel when they find a flare gun, the father shoots it off as a celebration. His son asks if anyone could see it, to which the father asks â€Å"Like god?† (246). The flare is symbolic in the sense that they shot it in to nothing but smog and pollution but could still make it out, even though no one from any further away would be able to. This make the father realize that god can work in the same way, and even though you can’t see him, he could still be present. Over time, the boy’s optimism starts to work on the fathers hope in the future. He starts to trust in his son and understands that he is able to make the right decisions. He also regains some of his hope for the future through it all. â€Å"We’re still here. Alot of bad things Abraham 3 have happened but we’re still here† (269) His love for his son continues to make him strong and he braves each day even though he knows he will die soon from sickness. At one point the boy asks him what the bravestShow MoreRelatedCormac McCarthy: Explorer of Humanity’s Core Essay1718 Words   |  7 Pagesthe human soul and how society is easily susceptible to ruin, both spiritually and physically. As today’s most important Southern Gothic writer, Cormac McCarthy crafts works and themes which delve into the nature of humanity, explore the depravity, futility, and, ultimately, reveal the hope that exists inside each individual. A common sight within McCarthy’s novels is a human committing some sort of violent or depraved act against another human being. 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Guide For Discussion Leaders The Role Of Literature Groups

Jasmine Quan Mrs. Velasco American Lit./Block G 8 December 2015 Guide for Discussion Leader Role in Literature Groups NOTE: These must be completed at home, before coming to class. Those highlighted in blue are not for HW. We will rotate within groups for this role. Job Instructions: For this assignment, you will, first, need to find one passage from the short story you’ve selected that can speak to the focus and concerns of one specific literary theory of your choice (e.g. Marxism). Your job is to fuel discussion, make connections, and analyze. Then, complete the following for one passage of your choosing. 1. Passage: a. Reproduce the passage including the page number and paragraph: o Passage: â€Å"‘Not hear it? --yes, I hear it,†¦show more content†¦Is she not hurrying to upbraid me for my haste? Have I not heard her footstep on the stair? Do I not distinguish that heavy and horrible beating of her heart? MADMAN!’ here he sprang furiously to his feet, and shrieked out his syllables, as if in the effort he were giving up his soul –‘MADMAN! I TELL YOU THAT SHE NOW STANDS WITHOUT THE DOOR!’† Page 17 Paragraph 4 2. Passage Selection: a. Read the passage aloud to the group. Explain to why you picked this passage for the specific literary theory. o Think about your thinking. Use your metacognition skills! o I picked this passage because †¦ o The section depicts terror, bleakness and emotional stress. It does not conform to any social morals or follow typical characters, but instead it conveys psychological imbalance in the characters that heightens the uneasiness and unexpected actions of the characters. 3. Vocabulary word: a. Choose at least one word from the passage in regards to your chosen specific literary theory. Share this with your group. o This should be a word that is important to the understanding of the text through the specific literary â€Å"lens.† o Word: madman___ b. Write your own definition of the word. o Apply past knowledge to this new situation! o Your definition: someone who is not mentally stable c. Then write the dictionary definition. o Dictionary definition: man who is mentally ill 4. Discussion Director Question: a. Develop 1 rich question relating to the passage