McGraw-Hill/Irwin Slide 1 Preliminary Press Releases Releasing Financial Information Quarterly and Annual Reports Securities and Exchange Commission (SEC) Filings Investor Information Websites

McGraw-Hill/Irwin Slide 2 Horizontal (Trend) Analysis Horizontal analysis compares a company’s financial condition and performance over time. Percent Change Current Year’s Total ̶ Prior Year’s Total Prior Year’s Total 100% = × A year-over-year percentage change expresses the current year’s dollar change as a percentage of the prior year’s total using this formula.

McGraw-Hill/Irwin Slide 3 Horizontal Analysis of Lowe’s Summarized Balance Sheets

McGraw-Hill/Irwin Slide 4 Horizontal Analysis of Lowe’s Summarized Balance Sheets

McGraw-Hill/Irwin Slide 5 Horizontal Analysis of Lowe’s Summarized Income Statements

McGraw-Hill/Irwin Slide 6 Changes Revealed in Trend Analysis Lowe’s grew significantly in Total assets rose by 12.7 percent Net sales revenues rose by 8.5 percent. Gross profit rose by 9.5 percent Net income rose by 12.3 percent. The growth in net sales revenues more than offset the growth in expenses resulting in net income growth in 2006 that was greater than the net sales revenues growth.

McGraw-Hill/Irwin Slide 7 Vertical (Common Size) Analysis Common-size percentages for financial statements are calculated using this formula. Common-size Percent Analysis Amount Base Amount 100% = × Vertical analysis focuses on important relationships within financial statements by expressing each financial statement amount as a percentage of another amount on that statement. The base amount is total assets for the balance sheet and sales revenue for the income statement.

McGraw-Hill/Irwin Slide 8 Vertical Analysis of Lowe’s Summarized Balance Sheets

McGraw-Hill/Irwin Slide 9 Vertical Analysis of Lowe’s Summarized Income Statements

McGraw-Hill/Irwin Slide 10 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 The growth in total assets was accompanied by increases in all major categories of liabilities and equities. However, only long-term liabilities increased as a percent of total assets, from 18.3 percent of total assets in 2005 to 19.8 percent of total assets in 2006.

McGraw-Hill/Irwin Slide 11 Interpreting Common Size Statements Lowe’s was able to increase its net income as a percent of sales from 6.4 percent to 6.6 percent by reducing cost of goods sold as a percent of sales by 0.3 percent. The percentage decrease in cost of goods sold was partially offset by small increase in operating and other expenses.

McGraw-Hill/Irwin Slide 12 Financial Ratios Financial ratio analysis compares amounts for one or more financial statement items to amounts for other financial statement items in the same year.

McGraw-Hill/Irwin Slide 13 Profitability Ratios Net profit margin Gross profit percentage Asset turnover Earnings per share (EPS) Fixed asset turnover Return on equity (ROE) Profitability ratios provide us with measures of a company’s ability to generate income in the current period. Return on assets (ROA) Price/earnings (P/E)

McGraw-Hill/Irwin Slide 14 Profitability Ratios ̶ Net Profit Margin Net profit margin represents the percentage of sales revenue that remains in net income after expenses have been deducted. Net profit margin Net income Net sales revenue = × 100% Lowe’s 2006: ($3,105 ÷ $46,927) × 100% = 6.6% Lowe’s 2005: ($2,765 ÷ $43,243) × 100% = 6.4%

McGraw-Hill/Irwin Slide 15 Profitability Ratios ̶ Gross Profit Percentage Gross profit percentage indicates how much profit was made, on average, on each dollar of sales, after deduction of cost of goods sold. Gross profit percentage Net sales ‒ Cost of goods sold Net sales = × 100% Lowe’s 2006: (($46,927 ‒ $30,729) ÷ $46,927) × 100% = 34.5% Lowe’s 2005: (($43,243 ‒ $28,453) ÷ $43,243) × 100% = 34.2%

McGraw-Hill/Irwin Slide 16 Profitability Ratios ̶ Asset Turnover The asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in assets. Asset turnover Net sales revenue Average total assets = Lowe’s 2006: $46,927 ÷ (($27,767 + $24,639) ÷ 2) = 1.79 Lowe’s 2005: (Given) = 1.89

McGraw-Hill/Irwin Slide 17 Profitability Ratios ̶ Fixed Asset Turnover The fixed asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in fixed assets such as store buildings and land used in the business. Fixed asset turnover Net sales revenue Average net fixed assets = Lowe’s 2006: $46,927 ÷ (($18,971 + $16,354) ÷ 2) = 2.66 Lowe’s 2005: (Given) = 2.86

McGraw-Hill/Irwin Slide 18 Profitability Ratios ̶ Return on Assets (ROA) The return on assets ratio measures how much a company earns for each dollar of investment in assets. ROA Net income Average total assets = × 100% Lowe’s 2005: (Given) = 12.1% $3,105 ÷ ($27,767 + $24,639) ÷ 2) × 100% = 11.8% Lowe’s 2006:

McGraw-Hill/Irwin Slide 19 Profitability Ratios ̶ Return on Equity (ROE) The return on equity ratio measures the amount earned as a percentage of each dollar invested by stockholders. ROE Net income Average stockholders’ equity = × 100% Lowe’s 2006: $3,105 ÷ (($15,725 + $14,296) ÷ 2) × 100% = 20.7% Lowe’s 2005: (Given) = 21.4%

McGraw-Hill/Irwin Slide 20 Profitability Ratios ̶ Earnings per Share (EPS) Earnings per share indicates the amount of earnings for each share of outstanding common stock. EPS Net income Average number of common shares = EPS is reported in the income statement. Lowe’s 2006: EPS = $2.02 Lowe’s 2005: EPS = $1.78

McGraw-Hill/Irwin Slide 21 Profitability Ratios ̶ Price/Earnings (P/E) Ratio The P/E ratio measures the relationship between the current market price of the stock and its earnings per share. P/E Ratio = Stock price EPS Lowe’s 2006: $31 ÷ $2.02 = 15.3 Lowe’s 2005: (Given) = 16.3 The stock price was $31 per share at the time 2006 earnings were announced.

McGraw-Hill/Irwin Slide 22 Liquidity Ratios Current ratio Quick ratio Receivables turnover Inventory turnover Liquidity ratios focus on a company’s ability to convert its assets into cash in order to pay current liabilities as they come due.

McGraw-Hill/Irwin Slide 23 Liquidity Ratios ̶ Receivables Turnover The receivables turnover ratio is a measure of how fast a company collects its receivables. Receivables turnover Net sales revenue Average net receivables = Lowe’s receivables balance from customers is insignificant because most sales are cash or credit card sales.

McGraw-Hill/Irwin Slide 24 Liquidity Ratios ̶ Inventory Turnover The inventory turnover ratio indicates how many times inventory is bought and sold during the period. Inventory turnover Cost of sales Average inventory = Lowe’s 2006: $30,729 ÷ (($7,144 + $6,635) ÷ 2) = 4.5 Lowe’s 2005: (Given)= 4.5

McGraw-Hill/Irwin Slide 25 Liquidity Ratios ̶ Days to Sell The days to sell ratio converts inventory turnover into the number of days need to sell inventory. Days to sell 365 Inventory turnover ratio = Lowe’s 2006: 365 ÷ 4.5 = 81.1 days Lowe’s 2005: 365 ÷ 4.5 = 81.1 days

McGraw-Hill/Irwin Slide 26 Liquidity Ratios ̶ Current Ratio Lowe’s 2006: $8,314 ÷ $6,539 = 1.27 Lowe’s 2005: $7,788 ÷ $5,832 = 1.34 Current ratio Current assets Current liabilities = The current ratio measures the ability of a company to pay its current debts as they become due.

McGraw-Hill/Irwin Slide 27 Liquidity Ratios ̶ Quick Ratio Lowe’s 2006: $796 ÷ $6,539 = 0.12 Lowe’s 2005: $876 ÷ $5,832 = 0.15 The quick ratio is similar to the current ratio, but measures the company’s immediate ability to pay it current debts. Quick assets Current liabilities = Quick ratio

McGraw-Hill/Irwin Slide 28 Solvency Ratios Debt-to- assets Free cash flow Times interest earned Solvency ratios focus on a company’s ability to repay debt, pay interest, and finance replacement and/or expansion of long-term assets.

McGraw-Hill/Irwin Slide 29 Solvency Ratios ̶ Debt-to-assets Ratio Lowe’s 2006: $12,042 ÷ $27,767 = 0.43 Lowe’s 2005: $10,343 ÷ $24,639 = 0.42 The debt-to-assets ratio indicates the proportion of total assets that is financed by creditors. Debt-to assets Total liabilities Total assets =

McGraw-Hill/Irwin Slide 30 Solvency Ratios ̶ Times Interest Earned Ratio Lowe’s 2006: ($3,105 + $154 + $1,893) ÷ $154 = 33.5 Lowe’s 2005: ($2,765 + $158 + $1,731) ÷ $158 = 29.5 The times interest earned ratio indicates the number of times a company’s interest expense was covered by its operating results. Net Interest Income tax income expense expense Interest expense Times interest earned = ++