14-1 Financial Statement Analysis Chapter 14 Electronic Presentation by Douglas Cloud Pepperdine University

Construct and interpret horizontal and vertical analyses. 2.Calculate and interpret the rate earned on stockholders’ equity and the rate earned on total assets. 3. Analyze the rate earned on total assets by evaluating the profit margin and the asset efficiency of a business.Anal Learning Goals After studying this chapter, you should be able to: ContinuedContinued

Determine and interpret leverage. 5.Calculate and interpret shareholder ratios: earnings per share, price-earnings ratio, and dividend yield. 6.Summarize the uses and limitations of analytical measures. 7.Describe the contents of corporate annual reports. Learning Goals

14-4 Your Need to Know  Value investing is an attempt to discover stocks with an intrinsic value that are greater than the stock prices.  In growth investing, the investor tries to identify companies that are growing sales and earnings through new products, markets, or opportunities.  Income investing is where investors purchase common stocks for their dividend stream.  Technical investing involves investors using technical analysis to find clues about future performance from past performance.

Learning Goal Construct and interpret horizontal and vertical analyses.

14-6 Horizontal Analysis What is horizontal analysis? It’s an analysis of the percentage increases and decreases of related items in comparative financial statements.

14-7 HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Assets Current assets$10,361$ 7,777$2, % Property and equipment, net15,37513,0682, Other assets Total assets$26,394$21,385$5, Liabilities Current liabilities$ 6,501$ 4,385$2, Long-term debt, excluding current installment1,2501,545(295)(19.1) Other long-term liabilities Deferred income taxes (6)(3.1) Total long-term liabilities$ 1,811$ 1,996$ (185)(9.3) Total liabilities$ 8,312$ 6,381$1, Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent 14-7 Condensed The stockholders’ equity section is not displayed.

14-8 HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Assets Current assets$10,361$ 7,777$2, % Property and equipment, net15,37513,0682, Other assets Total assets$26,394$21,385$5, Liabilities Current liabilities$ 6,501$ 4,385$2, Long-term debt, excluding current installment1,2501,545(295)(19.1) Other long-term liabilities Deferred income taxes (6)(3.1) Total long-term liabilities$ 1,811$ 1,996$ (185)(9.3) Total liabilities$ 8,312$ 6,381$1, Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent 14-8 Condensed Horizontal Analysis: Horizontal Analysis: Difference$2,584 Base year$7,777 = 33.2% 33.2%

14-9 HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent 14-9 Condensed 33.2% Assets Current assets$10,361$ 7,777$2, % Property and equipment, net15,37513,0682, Other assets Total assets$26,394$21,385$5, Liabilities Current liabilities$ 6,501$ 4,385$2, Long-term debt, excluding current installment1,2501,545(295)(19.1) Other long-term liabilities Deferred income taxes (6)(3.1) Total long-term liabilities$ 1,811$ 1,996$ (185)(9.3) Total liabilities$ 8,312$ 6,381$1, % Horizontal Analysis: Horizontal Analysis: Difference$2,307 Base year$13,068 = 17.7%

14-10 HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent Condensed Assets Current assets$10,361$ 7,777$2, % Property and equipment, net15,37513,0682, Other assets Total assets$26,394$21,385$5, Liabilities Current liabilities$ 6,501$ 4,385$2, Long-term debt, excluding current installment1,2501,545(295)(19.1) Other long-term liabilities Deferred income taxes (6)(3.1) Total long-term liabilities$ 1,811$ 1,996$ (185)(9.3) Total liabilities$ 8,312$ 6,381$1,

14-11 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53,553$45,738$7,815 Cost of merchandise sold 37,406 32,057 5,349 Gross profit $16,147$13,681$2,466 Selling and store operating exp.10,2808,6551,625 General and administrative exp Total operating expenses$11,215$ 9,490$1,725 Income from operations$ 4,932$ 4,191$ 741 Other income and expenses: Interest and investment inc Interest expense (28) (21) (7) Income before income tax$ 4,957$ 4,217$ 740 Income taxes 1,913 1, Net income$ 3,044$ 2,581$ 463 Horizontal Analysis: Horizontal Analysis: Difference$7,815 Base year $45,738 = 17.1% 17.1% Increase (Decrease) Amount Percent

14-12 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53,553$45,738$7,815 Cost of merchandise sold 37,406 32,057 5,349 Gross profit $16,147$13,681$2,466 Selling and store operating exp.10,2808,6551,625 General and administrative exp Total operating expenses$11,215$ 9,490$1,725 Income from operations$ 4,932$ 4,191$ 741 Other income and expenses: Interest and investment inc Interest expense (28) (21) (7) Income before income tax$ 4,957$ 4,217$ 740 Income taxes 1,913 1, Net income$ 3,044$ 2,581$ 463 Horizontal Analysis: Horizontal Analysis: Difference$5,349 Base year $32,057 = % Increase (Decrease) Amount Percent

14-13 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53,553$45,738$7,815 Cost of merchandise sold 37,406 32,057 5,349 Gross profit $16,147$13,681$2,466 Selling and store operating exp.10,2808,6551,625 General and administrative exp Total operating expenses$11,215$ 9,490$1,725 Income from operations$ 4,932$ 4,191$ 741 Other income and expenses: Interest and investment inc Interest expense (28) (21) (7) Income before income tax$ 4,957$ 4,217$ 740 Income taxes 1,913 1, Net income$ 3,044$ 2,581$ 463 Increase (Decrease) Amount Percent 17.1%

14-14 HOME DEPOT INC. Comparative Retained Earnings Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Retained earnings, beginning $10,151$ 7,941$2,210 Net income for the year 3,044 2, Total$13,195$10,522$2,673 Dividends: On common stock Retained earnings, ending $12,799$10,151$2,648 Increase (Decrease) Amount Percent Horizontal Analysis: Horizontal Analysis: Difference$2,210 Base year $7,941 = 27.8% 27.8%

14-15 HOME DEPOT INC. Comparative Retained Earnings Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Retained earnings, beginning $10,151$ 7,941$2,210 Net income for the year 3,044 2, Total$13,195$10,522$2,673 Dividends: On common stock Retained earnings, ending $12,799$10,151$2,648 Increase (Decrease) Amount Percent %

14-16 Vertical Analysis A percentage analysis can be used to show the relationship of each component to a total within a single statement.

14-17 The total, or 100% item, on the balance sheet is “total assets.” Vertical Analysis

14-18 Assets Current assets$10,361$ 7,777 Property and equipment, net15,37513,068 Other assets Total assets$26,394$21,385 Liabilities Current liabilities$ 6,501$ 4,385 Long-term liabilities 1,811 1,996 Total liabilities$ 8,312$ 6,381 Stockholders’ Equity Common stock/paid-in capital$ 5,529$ 4,926 RE & accumulated comp. loss 12,553 10,078 Total stockholders’ equity$18,082$15,004 Total liabilities and SE$26,394$21,385 Total assets is 100.0% 100.0% HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent Condensed

14-19 HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent Condensed Assets Current assets$10,361$ 7,777 Property and equipment, net15,37513,068 Other assets Total assets$26,394$21,385 Liabilities Current liabilities$ 6,501$ 4,385 Long-term liabilities 1,811 1,996 Total liabilities$ 8,312$ 6,381 Stockholders’ Equity Common stock/paid-in capital$ 5,529$ 4,926 RE & accumulated comp. loss 12,553 10,078 Total stockholders’ equity$18,082$15,004 Total liabilities and SE$26,394$21, % 100.0% Vertical Analysis: Vertical Analysis: Current assets $10,361 Total assets $26,394 = 39.3%

14-20 HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent Condensed Assets Current assets$10,361$ 7,777 Property and equipment, net15,37513,068 Other assets Total assets$26,394$21,385 Liabilities Current liabilities$ 6,501$ 4,385 Long-term liabilities 1,811 1,996 Total liabilities$ 8,312$ 6,381 Stockholders’ Equity Common stock/paid-in capital$ 5,529$ 4,926 RE & accumulated comp. loss 12,553 10,078 Total stockholders’ equity$18,082$15,004 Total liabilities and SE$26,394$21, % % 24.6% % 20.9% % 100.0%

14-21 HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, 2001 Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent Condensed 39.3% % 24.6% % 20.9% % 100.0% Assets Current assets$10,361$ 7,777 Property and equipment, net15,37513,068 Other assets Total assets$26,394$21,385 Liabilities Current liabilities$ 6,501$ 4,385 Long-term liabilities 1,811 1,996 Total liabilities$ 8,312$ 6,381 Stockholders’ Equity Common stock/paid-in capital$ 5,529$ 4,926 RE & accumulated comp. loss 12,553 10,078 Total stockholders’ equity$18,082$15,004 Total liabilities and SE$26,394$21,385 Total assets is 100.0%

14-22 Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent Condensed Assets Current assets$10,361$ 7,777 Property and equipment, net15,37513,068 Other assets Total assets$26,394$21,385 Liabilities Current liabilities$ 6,501$ 4,385 Long-term liabilities 1,811 1,996 Total liabilities$ 8,312$ 6,381 Stockholders’ Equity Common stock/paid-in capital$ 5,529$ 4,926 RE & accumulated comp. loss 12,553 10,078 Total stockholders’ equity$18,082$15,004 Total liabilities and SE$26,394$21, % % 24.6% % 20.9% % 100.0% 36.4% Vertical Analysis: Vertical Analysis: Current assets $7,777 Total assets $21,385 = 36.4% HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28,

14-23 Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent Condensed Assets Current assets$10,361$ 7,777 Property and equipment, net15,37513,068 Other assets Total assets$26,394$21,385 Liabilities Current liabilities$ 6,501$ 4,385 Long-term liabilities 1,811 1,996 Total liabilities$ 8,312$ 6,381 Stockholders’ Equity Common stock/paid-in capital$ 5,529$ 4,926 RE & accumulated comp. loss 12,553 10,078 Total stockholders’ equity$18,082$15,004 Total liabilities and SE$26,394$21, % % 24.6% % 20.9% % 100.0% 36.4% HOME DEPOT Comparative Balance Sheets (in Millions) February 3, 2002 and January 28, % % 23.0% % 100.0%

14-24 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53, %$45, % Cost of merchandise sold 37,406 32,057 Gross profit $16,147$13,681 Selling and store operating exp.10,2808,655 General and administrative exp Total operating expenses$11,215$ 9,490 Income from operations$ 4,932$ 4,191 Other income and expenses: Interest and investment inc.5347 Interest expense (28) (21) Income before income tax$ 4,957$ 4,217 Income taxes 1,913 1,636 Net income$ 3,044$ 2, Amount Percent Amount Percent Net sales is 100.0%

14-25 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53, %$45, % Cost of merchandise sold 37,406 32,057 Gross profit $16,147$13,681 Selling and store operating exp.10,2808,655 General and administrative exp Total operating expenses$11,215$ 9,490 Income from operations$ 4,932$ 4,191 Other income and expenses: Interest and investment inc.5347 Interest expense (28) (21) Income before income tax$ 4,957$ 4,217 Income taxes 1,913 1,636 Net income$ 3,044$ 2, Amount Percent Amount Percent Vertical Analysis: Vertical Analysis: Cost of Merchandise Sold $32,057 Net Sales $45,738 = 70.1%

14-26 Sales (net)$53, %$45, % Cost of merchandise sold 37,406 32,057 Gross profit $16,147$13,681 Selling and store operating exp.10,2808,655 General and administrative exp Total operating expenses$11,215$ 9,490 Income from operations$ 4,932$ 4,191 Other income and expenses: Interest and investment inc.5347 Interest expense (28) (21) Income before income tax$ 4,957$ 4,217 Income taxes 1,913 1,636 Net income$ 3,044$ 2,581 Vertical Analysis: Vertical Analysis: Cost of Merchandise Sold $37,406 Net Sales $53,553 = 69.9% 2002 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, Amount Percent Amount Percent

14-27 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53, %$45, % Cost of merchandise sold 37,406 32,057 Gross profit $16,147$13,681 Selling and store operating exp.10,2808,655 General and administrative exp Total operating expenses$11,215$ 9,490 Income from operations$ 4,932$ 4,191 Other income and expenses: Interest and investment inc.5347 Interest expense (28) (21) Income before income tax$ 4,957$ 4,217 Income taxes 1,913 1,636 Net income$ 3,044$ 2, Amount Percent Amount Percent % 18.9% % 9.2% 0.1 (0.1) 9.2% % 70.1

14-28 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53, %$45, % Cost of merchandise sold 37,406 32,057 Gross profit $16,147$13,681 Selling and store operating exp.10,2808,655 General and administrative exp Total operating expenses$11,215$ 9,490 Income from operations$ 4,932$ 4,191 Other income and expenses: Interest and investment inc.5347 Interest expense (28) (21) Income before income tax$ 4,957$ 4,217 Income taxes 1,913 1,636 Net income$ 3,044$ 2, Amount Percent Amount Percent % 19.2% % 9.2% 0.1 (0.0) 9.3% % 29.9% 18.9% % 9.2% 0.1 (0.1) 9.2% % 69.9

14-29 HOME DEPOT INC. Income Statement (in millions) For Periods Ended February 3, 2002 and January 28, 2001 Sales (net)$53, %$45, % Cost of merchandise sold 37,406 32,057 Gross profit $16,147$13,681 Selling and store operating exp.10,2808,655 General and administrative exp Total operating expenses$11,215$ 9,490 Income from operations$ 4,932$ 4,191 Other income and expenses: Interest and investment inc.5347 Interest expense (28) (21) Income before income tax$ 4,957$ 4,217 Income taxes 1,913 1,636 Net income$ 3,044$ 2, Amount Percent Amount Percent % 19.2% % 9.2% 0.1 (0.0) 9.3% % 29.9% 18.9% % 9.2% 0.1 (0.1) 9.2% %

14-30 Calculate and interpret the rate earned on stockholders’ equity and the rate earned on total assets. 2 Learning Goal

14-31 Rate Earned on Stockholders’ Equity The stockholder desires a return on his or her investment. One measure of this return is the rate earned on stockholders’ equity.

14-32 Rate Earned on Stockholders’ Equity Net income Average stockholders’ equity $3,044,000,000 ($15,004,000,000 + $18,082,000,000)/2 = 18.4%

14-33 Rate Earned on Stockholders’ Equity Net income Average stockholders’ equity $1,023,000,000 ($5,494,000,000 + $6,674,000,000)/2 = 16.8%

14-34 Another ratio to measure the relative profitability of a firm is rate earned on total assets. Rate Earned on Total Assets

14-35 Rate Earned on Total Assets Net income Average total assets $3,044,000,000 ($21,385,000,000 + $26,394,000,000)/2 = 12.8%

14-36 Rate Earned on Total Assets Net income Average total assets $1,023,000,000 ($11,358,000,000 + $13,736,000,000)/2 = 8.1%

14-37 Comprehensive Profitability Analysis The exhibit on the next slide diagrams the comprehensive ratio relationship that can be used to analyze the rate earned on stockholders’ equity.

14-38

14-39 Comprehensive Profitability Analysis The rate earned on stockholders’ equity is normally higher than the rate earned on total assets when a company uses debt, or leverage.

14-40 Comprehensive Profitability Analysis Leverage Formula Rate earned on stockholders’ equity = Rate earned on total assets × leverage Net income Average Stockholders’ Equity = Net income Average Total Assets × Average Stockholders’ Equity

14-41 Analyze the rate earned on total assets by evaluating the profit margin and the asset efficiency of a business. 3 Learning Goal

14-42 Rate Earned on Total Assets Profit Margin × Asset Turnover Net Income Net Sales Average Total Assets ×

14-43

14-44 Margin Analysis Why is the profit margin of Home Depot over one percentage point stronger than Lowe’s?

14-45 Home Depot and Lowe’s Condensed Common-Size Income Statement For the Year Ended February 3 and February 1, 2002 Sales (net)100.0%100.0% Cost of merchandise sold Gross profit 30.1% 28.8% Selling expenses19.2%18.3% Administrative expenses Total operating expenses 20.9% 20.7% Income from operations9.2%8.1% Other income Interest expense (0.0) (0.8) Income before income taxes9.3%7.3% Income tax expense Net income5.7%4.6% Home Depot Lowe’s Home Depot has a higher gross profit percentage than Lowe’s. Although Home Depot pays more income taxes (percentage-wise), the overall profit percentage is higher than Lowe’s. Home Depot’s higher selling expenses are somewhat offset by lower administrative expenses.

14-46 Asset Efficiency

14-47 Accounts Receivable Turnover Net sales $53,553$22,111 Accounts receivable (net): Beginning of year$ 835$ 161 End of year Total$ 1,755$ 327 Average$ 878$ 164 Home Depot Lowe’s Accounts Receivable Analysis Net sales on account Average accounts receivable Net sales on account Average accounts receivable (all dollar amounts in millions)

14-48 Accounts Receivable Turnover Net sales $53,553$22,111 Accounts receivable (net): Beginning of year$ 835$ 161 End of year Total$ 1,755$ 327 Average$ 878$ 164 Home Depot Lowe’s Accounts Receivable Analysis Net sales on account Average accounts receivable Net sales on account Average accounts receivable Use:To assess the efficiency in collecting receivables and in the management of credit. (all amounts except ratios in millions)

14-49 Number of Days’ Sales in Receivables Accounts receivable (net) end of year$920$166 Net sales on account$53,553$22,111 Average daily sales on on account (net sales ÷ 365)$147$61 Accounts Receivable Analysis Accounts receivable, end of year Average daily sales on account Accounts receivable, end of year Average daily sales on account Home Depot Lowe’s (all dollar amounts in millions)

14-50 Number of Days’ Sales in Receivables Accounts receivable (net) end of year$920$166 Net sales on account$53,553$22,111 Average daily sales on on account (net sales ÷ 365)$147$61 Accounts Receivable Analysis Accounts receivable, end of year Average daily sales on account Accounts receivable, end of year Average daily sales on account (all amounts except ratios in millions) Use:To assess the efficiency in collecting receivables and in the management of credit. Home Depot Lowe’s

14-51 Inventory Turnover Cost of merchandise sold$37,406$15,743 Inventories: Beginning of year$ 6,556$ 3,285 End of year 6,725 3,611 Total$13,281$ 6,896 Average$ 6,641$ 3,448 Inventory Analysis Cost of merchandise sold Average inventory Cost of merchandise sold Average inventory Home Depot Lowe’s (all dollar amounts in millions)

14-52 Inventory Turnover Cost of merchandise sold$37,406$15,743 Inventories: Beginning of year$ 6,556$ 3,285 End of year 6,725 3,611 Total$13,281$ 6,896 Average$ 6,641$ 3,448 Inventory Analysis Cost of merchandise sold Average inventory Cost of merchandise sold Average inventory Home Depot Lowe’s Use:To assess the efficiency in the management of inventory. (all dollar amounts in millions)

14-53 Number of Days’ Sales in Inventory Inventories, end of year$6,725$3,611 Cost of merchandise sold$37,406$15,743 Average daily cost of merchandise sold (COGS ÷ 365)$102$43 Inventory Analysis Inventories, end of year Average daily cost of goods sold Inventories, end of year Average daily cost of goods sold Home Depot Lowe’s (all dollar amounts in millions)

14-54 Number of Days’ Sales in Inventory Inventories, end of year$6,725$3,611 Cost of merchandise sold$37,406$15,743 Average daily cost of merchandise sold (COGS ÷ 365)$102$43 Inventory Analysis Inventories, end of year Average daily cost of goods sold Inventories, end of year Average daily cost of goods sold Home Depot Lowe’s Use:To assess the efficiency in the management of inventory. (all dollar amounts in millions)

14-55 Fixed Asset Turnover Net sales$53,553$22,111 Fixed assets (net): Beginning of year$13,068$ 7,035 End of year 15,375 8,663 Total$28,443$15,688 Average$14,222$ 7,844 Fixed Asset Analysis Net sales Average net fixed assets Net sales Average net fixed assets Home Depot Lowe’s (all dollar amounts in millions)

14-56 Fixed Asset Turnover Net sales$53,553$22,111 Fixed assets (net): Beginning of year$13,068$ 7,035 End of year 15,375 8,663 Total$28,443$15,688 Average$14,222$ 7,844 Fixed Asset Analysis Net sales Average net fixed assets Net sales Average net fixed assets Home Depot Lowe’s (all dollar amounts in millions) Use:To measure how many dollars of sales are being made from investments in stores and fixtures.

14-57 Determine and interpret leverage. 4 Learning Goal

14-58 Leverage × Leverage Rate earned on total assets = Rate earned on stockholders’ equity

14-59 Leverage 20% 10% 0% Rate earned on total assets Rate earned on stockholders’ equity 12.8% Leverage Home Depot 8.1% 16.7% Leverage Lowe’s 18.4%

14-60 (All dollar amounts in millions) Current Balance Sheet Relationships Current assets $550,000$533,000 Current liabilities 210, ,000 Working capital$340,000$290,000 Current ratio Working Capital and Current Ratio Use:To indicate the ability to meet currently maturing obligations. Lincoln Co. Jefferson Corp. Divide current assets by current liabilities

14-61 Quick Ratio Use:To indicate instant debt-paying ability. Home Depot Lowe’s Quick assets: Cash$ 2,477$ 799 Temporary investments 6954 Accounts receivable (net) Total quick assets$ 3,466$ 1,019 Current liabilities ÷6,501 ÷3,017 Quick ratio Current Balance Sheet Relationships (All dollar amounts in millions)

14-62 Use:To indicate the margin of safety to long-term creditors. Home Depot Lowe’s Fixed assets (net)$15,375$ 8,653 Long-term liabilities ÷ 1,811÷ 3,734 Ratio of fixed assets to long-term liabilities Ratio of Fixed Assets to Long-Term Liabilities Long-Term Balance Sheet Relationships (All dollar amounts in millions)

14-63 Ratio of Liabilities to Stockholders’ Equity Use:To indicate the margin of safety to creditors. Total liabilities$ 8,312$ 7,062 Total stockholders’ equity÷18,082÷ 6,674 Ratio of liabilities to stockholders’ equity Long-Term Balance Sheet Relationships Home Depot Lowe’s (All dollar amounts in millions)

14-64 Number of Times Interest Charges Earned Net income$3,044$1,023 Add income tax1, Add interest expense Amount available for interest$4,985$1,798 Number of times interest charges earned Long-Term Balance Sheet Relationships (All dollar amounts in millions) Home Depot Lowe’s Use:To measure the relative risk of debtholders.

Learning Goal Calculate and interpret shareholder ratios: earnings per share, price-earnings ratio, and dividend yield.

14-66 Net income$3,044$1,023 Shares of common stock÷2,335÷ 769 Earnings per share on common stock$1.30$1.33 Use:To assess the profitability of the investment by common stockholders. Earning per Share Home Depot Lowe’s (All amounts except EPS in millions)

14-67 Use:To indicate future earnings prospects, based on the relationship between market value of common stock and earnings. Market price per share of common$50.00$46.15 Earnings per share on common÷ 1.30÷ 1.33 Price-earnings ratio on common stock3835 Price-Earnings Ratio Home Depot Lowe’s

14-68 Use:To indicate the rate of return to common stockholders in terms of dividends. Dividends per share of common$ 0.20$ 0.08 Market price per share of common÷ ÷ Dividend yield on common stock0.4%0.2% Dividend Yield Home Depot Lowe’s

14-69 Summarize the uses and limitations of analytical measures. 6 Learning Goal

14-70 Use Exhibit 9 of this chapter as a handy reference tool. Keep in mind that these measures are not a substitute for sound judgment.

14-71 Describe the contents of corporate annual reports. 7 Learning Goal

14-72 Financial Highlights The financial highlights section summarizes the operating results for the last year or two. It’s usually on the first few pages of the annual report.

14-73 President’s Letter to Stockholders This letter usually discusses reasons for actions taken by the company during the year.

14-74 Management Discussion and Analysis (MDA)  A required disclosure in the annual report  Includes an analysis of the results of operations  Discusses management’s opinion about future performance  An analysis of the company’s financial condition

14-75 Independent Auditor’s Report Before issuing annual statements, all publicly held corporations are required to have an independent audit of their financial statements. The CPAs who conduct the audit render an opinion on the fairness of the statement.

14-76 Historical Summary This summary reports selected financial and operating data of past periods, usually for five or ten years.

14-77 The End Chapter 14

14-78