# Acct6320 Week 3 Essay

Submitted By purplerek
Words: 831
Pages: 4

Integrated Case Analysis 1
Rachel Villalovoz
ACCT 6320

P5-38
a. ROE = net income/avg stockholders’ equity
ROE (Home Depot) = 3883/(17898+18889/2)
ROE (HD) = 3883/18393.5
ROE (HD) = 21.1%

ROE (Lowes) = 1839/(16533+18112/2)
ROE (Lowes) = 1839/17322.5
ROE (Lowes) = 10.6%

ROA =earnings w/o interest expense/average total assets
ROA (HD) = 3883 + (606 x (1 - .35)/(40125+40518)/2
ROA (HD) = 3883 + (606 x .65)/40321.5
ROA (HD) = 3883 + 393.9/40321.5
ROA (HD) = 10.6%

ROA (Lowes) = 1839 + (379 x .65)/(33559+33699)/2
ROA (Lowes) = 1839 + 246.35/33629
ROA (Lowes) = 2085.35/33629
ROA (Lowes) = 6.2%

ROFL= ROE – ROA
ROFL (HD) = 21.1 – 10.6
ROFL (HD) = 10.5%

ROFL (Lowes) = 10.6 – 6.2
ROFL (Lowes) = 4.4%

b. PM = earnings w/o interest expense/sales revenue
PM (HD) = 4276.9/70395
PM (HD) = 6.1%

AT = sales revenue/average total assets
AT (HD) = 70395/40321.5
AT (HD) = 1.75

PM (Lowes) = 2085.35/50208
PM (Lowes) = 4.2%
AT (Lowes) = 50208/33629
AT (Lowes) = 1.49

The profit margin measures the profit, without interest expense, that is generated from each dollar of sales revenue. The asset turnover indicates the amount in sales revenue generated from each dollar of assets. ROA can actually be restated as the product of profit margin and asset turnover

c. GPM = sales revenue – cost of goods sold/sales revenue
GPM (HD) = 70395 – 46133/70395
GPM (HD) = 34.5%

GPM (Lowes) = 50208 - 32858/50208
GPM (Lowes) = 34.6%

Operating ETS = operating expenses/net revenue
Operating ETS (HD) = 17601/70395
Operating ETS (HD) = 25%

Operating ETS (Lowes) = 14073/50208
Operating ETS (Lowes) = 28%

Both companies have almost identical GPM, approximately 35% of every sales dollar is gross profit and the other 65% is to cover the cost of goods sold. Both companies also have a similar operating ETS. For Home Depot, 25% of every sales dollar goes to pay operating costs and for Lowes, 28% of every sales dollar goes to pay operating costs.

d. ART = sales revenue/avg accounts receivable
ART (HD) = 70395/(1245 + 1085)2
ART (HD) = 70395/1165
ART (HD) = 60.4

INVT = cost of goods sold/avg inventory
INVT (HD) = 46133/(10325 + 10625)/2
INVT (HD) = 46133/10475
INVT (HD) = 4.4

INVT (Lowes) = 32858/(8355 +8321)/2
INVT (Lowes) = 32858/ 8338
INVT (Lowes) = 3.9

PPET = sales revenue/avg PP&E
PPET (HD) = 70395/(24448 + 25060)/2
PPET (HD) = 70395/24754
PPET (HD) = 2.8

PPET (Lowes)= 50208/(21970 + 22089)/2
PPET (Lowes) = 50208/22029.5
PPET (Lowes) = 2.3

The accounts receivable turnover for Home Depot is 60.4, indicating that receivables have been collected 60.4 times during the period. Lowes does not indicate any accounts receivables on their balance sheet so the ART cannot be calculated for Lowes.
The inventory turnover indicates the number of times that total inventory is sold. Home Depot’s INVT is at 4.4 times and Lowes INVT is at 3.9 times for the period. The figures are somewhat comparable, with Home Depot’s being only slightly higher. For retail stores, the higher the INVT, the better.
Property, plant, and equipment turnover measures the sales revenue generated for each dollar of investment in PP&E. Home Depot’s PPET is 2.8 times and Lowes’ is 2.3 times. Both, again are somewhat comparable, with Home Depot’s PPET being only slightly higher