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# Free Example of Ratio Analysis Essay

In order to perform the inter-firm analysis of ratios, it is fair to indicate that only relevant ratios are calculated and their respective values compared to those of preceding years. Tables below depict relevant ratios for two companies within a two-year financial period.

Home Depot Ratio Analysis for Period: 2010-2011

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 Ratio Formula Financial Year:2010 Financial Year: 2011 Return on Capital Employed(R.O.C.E) (Profit before Interest & Tax/ Capital Employed) * 100 (4,803/19,393)*100 = 24.77 % (5,839/18,889)*100 = 30.9 % Asset Turnover (Sales/ Capital Employed) *100 (66,176/19,393)*100 = 341.23 % (67,997/18,889)*100 = 360 % Gross Profit Percentage (Gross Profit/Sales) * 100 (22,412/66,176)*100 = 33.87 % (23,412/67,997)*100 = 34.43 % Net Profit Percentage (Net Profit/Sales)* 100 (2,661/66,176)*100 = 4.02 % (3,338/67,997)*100 =  4.9 % Current Ratio Current Assets/ Current Liabilities 13,900/10,363 = 1.34 : 1 13,479/10,122 1.33: 1 Quick Ratio Current Assets Less Stock/Current Liabilities (13,900-0)/10,363 1.34 : 1 (13,479-0)/10,122 = 1.33 : 1

Lowes Ratio analysis for Financial Period: 2010-2011 (Lowes, 2010).

 Ratio Formula Financial Year:2010 Financial Year: 2011 Return on Capital Employed(R.O.C.E) (Profit before Interest & Tax/ Capital Employed) * 100 (3,112/19,069) * 100 = 16.32 % (3,580/18,112)*100 = 19.77 % Asset Turnover (Sales/ Capital Employed) *100 (47,220/19,069)*100 = 247.62 % (48,815/18,112)* 100 = 269.52 % Gross Profit Percentage (Gross Profit/Sales) * 100 (16,463/47,220)*100 = 34.86 % (17,152/48,815)*100 = 35.13 % Net Profit Percentage (Net Profit/Sales)* 100 (1,783/47,220)*100 = 3.78 % (2,010/48,815)*100 = 4.12 % Current Ratio Current Assets/ Current Liabilities 9,732/7,355 = 1.32 : 1 9,967/7,119 1.41 : 1 Quick Ratio Current Assets Less Stock/Current Liabilities (9,732-8,249)/7,355 0.2: 1 (9,967-8,321)/7,119 = 0.23 : 1

Stock Price Analysis: Gordon Model

Home Depot: Gordon Model Formula, Current Price = Current Annual Dividends (1+g)/ k-g

= 86(1+0.045)/90.57-0.045

Project stock price = \$ 0.993

Lowes, Gordon Model formula, Current Price = Current Annual Dividends (1+g)/k-g

= 677(1+0.5)/100.21-0.5

= \$ 10.55

Home Depot, P/E ratio Analysis:

Price/ Earnings                            2010                                      2011

0.05/ 1.58                               0.05 / 2.03

= 0.032: 1                                 = 0.025: 1

Lowes, P/E ratio analysis:

Price/ Earnings            2010                                     2011

0.5/1.21                    0.5 /1.42

0.41: 1                                  0.35:1

Performance Analysis

Home Depot:  according to calculated accounting ratios, it is safe to assume that the company’s trend analysis is positive in 2011, as compared to 2010 (Home Depot, 2010). This indicates a positive growth in the company’s profitability index. It also means that trading activities within the company have increased in a direct proportion to the amount of working capital. However, stock analysis depicts a negative growth on the part of stock prices indicating a probable drop in future earnings per share held (Miller, 2009). The same is true for Lowes Ltd Co., since there is a tremendous improvement in the profitability index of the company. This is evidently clear by accounting ratios which portray positive results in 2011, as compared to the financial position of the firm in 2011. The P/E ratio is also higher, and it is a probable assumption that the stock price will increase in the future. Therefore, the latter company is the most preferred in terms of investments (Keller, 2007).

Internal Policies and Procedures for Sound Corporate Governance:

Both Companies possess similar governance structures in that the chairman in the board of directors double-ups as the Chief Executive Officer. This means that it is completely impossible to affect management structure of the company, as most crucial decisions rest with the CEO.

However, Home Depot depicts the strength in terms of its financial assets, since it has access to tremendous support from a volunteer-associate program: Team Depot. The Company also receives funds from donors, hence, adding up to its working capital.

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