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Chapter 28 Financial Analysis Principles of Corporate Finance
Tenth Edition Chapter 28 Financial Analysis Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 1 1 1 1 1 2
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Topics Covered Financial Statements Lowe’s Financial Statements
Measuring Lowe’s Performance Measuring Efficiency Analyzing the ROA: The DuPont System Measuring Leverage Measuring Liquidity Interpreting Financial Ratios 2 2 2 2 3 2
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Lowe’s Companies
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Lowe’s Companies
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Lowe’s Companies Other Data (end of 2008)
Net working capital = current assets - current liabilities = 9,251 – 8,022 = $1,229 million Total revenues - costs - depreciation = EBIT 48,230 – 42,887 – 1,539 = $3,804 million 1,470 million shares outstanding Stock price =$18.19 per share
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Lowe’s Companies
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Lowe’s Companies Measuring Performance: Market-to-Book Ratio
Ratio of market value of equity to book value of equity.
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Lowe’s Companies Market Capitalization Market Value Added
Total market value of equity, equal to share price times number of shares outstanding. Market Capitalization = $18.19 × 1,470 = $26,739 mil Market Value Added Market capitalization minus book value of equity. MVA = $26, $18,055 = $8,684 million
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Market Values Stock market measures of company performance, 2008 (dollar values in millions). Companies are ranked by market value added. 12
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Measuring Performance
Economic Value Added (EVA) Net income minus a charge for the cost of capital employed. Also called residual income. Residual Income Net Dollar return after deducting the cost of capital or
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Measuring Performance
Economic Value Added (EVA) of Lowe’s
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Measuring Performance
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Measuring Profitability
Lowe’s Profitability Measurements
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Measuring Efficiency OR For Lowe’s OR 7
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Measuring Efficiency OR OR 8
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The DuPont System A breakdown of ROE and ROA into component ratios 13
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The DuPont System asset turnover Operating profit margin 15
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The DuPont System Merging with suppliers or customers generally increases the profit margin, but this increase is offset by a reduction in asset turnover.
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Measuring Leverage 3
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Measuring Leverage 4
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Measuring Leverage leverage ratio asset turnover Operating profit
margin debt burden 17
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Liquidity Ratios 5
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Liquidity Ratios 6
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Common Size Balance Sheet
For S&P Composite Index Firms during 2008
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Common Size Income Statement
For S&P Composite Index Firms during 2008
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Financial Ratios 2008 Ratios for S&P 500 firms
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Comparing Performance
Lowe’s Home Depot Performance Measures Market value added ($ millions) 8,684 17,856 Market to book ratio 1.5 2 EVA ($ millions) 785 1,882 Return on capital (ROC) 11 9.3 Return on equity (ROE) 13.6 13.1 Return on assets (ROA) 7.7 6.1
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Comparing Performance
Lowe’s Home Depot Efficiency Measures Asset turnover 1.56 1.61 Inventory turnover 4.17 4.03 Days in inventory 87.6 90.5 Receivables turnover * 195.3 56.5 Average collection period (days) * 1.9 6.5 Profit margin 4.6 3.2 Operating profit margin 5.2 4.1
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Comparing Performance
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