Lowe’s Companies Inc.’s Financial Statement

Introduction

Lowe’s Companies, Inc. (Lowe’s) is a leading retail company specializing in home improvement and hardware products and services. It is a US-based company, and its stocks are listed on Fortune 50, NYSE (“Lowe’s Company Information,” 2017). The company’s last financial reporting period ended on February 3, 2017, and its annual report includes consolidated balance sheets for the last two years. In this research paper, the company’s consolidated balance sheets are analyzed to perform the trend analysis including horizontal and vertical analysis and also, the financial ratio analysis to evaluate its financial performance in the last two years. Furthermore, the paper discusses accounting policies and treatment methods adopted by the company for recording and reporting of its assets, liabilities, and equity.

We will write a custom Lowe’s Companies Inc.’s Financial Statement specifically for you
for only $14.00 $11,90/page
308 certified writers online
Learn More

Trend Analysis

The trend analysis provided in this section determines the yearly change (horizontal analysis) and proportion of each financial element (vertical analysis) included in the values of the company’s assets, liabilities, and equity.

Table 1: Common Size Balance Sheets.

Vertical Analysis Horizontal Analysis
February 3, 2017 % Total January 29, 2016 % Total % YoY Change
Assets
Current assets:
Cash and cash equivalents $558 1.6 $405 1.3 37.80%
Short-term investments 100 0.3 307 1 -67.40%
Merchandise inventory – net 10,458 30.4 9,458 30.3 10.60%
Other current assets 884 2.6 391 1.3 126.10%
Total current assets 12,000 34.9 10,561 33.9 13.60%
The property, less accumulated depreciation 19,949 58 19,577 62.6 1.90%
Long-term investments 366 1.1 222 0.7 64.90%
Deferred income taxes – net 222 0.6 241 0.8 -7.90%
Goodwill 1,082 3.1 154 0.5 602.60%
Other assets 789 2.3 511 1.5 54.40%
Total assets $34,408 100 $31,266 100 10.00%
Liabilities and shareholders’ equity
Current liabilities:
Short-term borrowings $510 1.5 $43 0.1 1086.00%
Current maturities of long-term debt 795 2.3 1,061 3.4 -25.10%
Accounts payable 6,651 19.3 5,633 18 18.10%
Accrued compensation and employee benefits 790 2.3 820 2.6 -3.70%
Deferred revenue 1,253 3.6 1,078 3.4 16.20%
Other current liabilities 1,975 5.7 1,857 6.1 6.40%
Total current liabilities 11,974 34.7 10,492 33.6 14.10%
Long-term debt, excluding current maturities 14,394 41.8 11,545 36.9 24.70%
Deferred revenue – extended protection 763 2.2 729 2.3 4.70%
plans
Other liabilities 843 2.6 846 2.7 -0.40%
Total liabilities 27,974 81.3 23,612 75.5 18.50%
Commitments and contingencies
Shareholders’ equity:
Preferred stock – $5 par value, none issued
Common stock – $.50 par value;
Shares issued and outstanding
February 3, 2017
January 29, 2016 433 1.3 455 1.5 -4.80%
Capital over par value
Retained earnings 6,241 18.1 7,593 24.3 -17.80%
Accumulated other comprehensive loss -240 -0.7 -394 -1.3 -39.10%
Total shareholders’ equity 6,434 18.7 7,654 24.5 -15.90%
Total liabilities and shareholders’ equity $34,408 100 $31,266 100 10.00%

Table 1 indicates that the major proportion of Lowe’s current assets was held as merchandise inventory. Although the company’s business requires it to have a large volume of inventory in its stores, it has certain drawbacks including inventory loss due to product damage, obsolete products, and change in price, etc. Therefore, the company faces risks of loss in the value of inventory that could affect its liquidity position.

Moreover, it could be noted that the company mainly owns and operates its stores. Furthermore, it is indicated that the company recorded a significant increase in the book value of goodwill that was associated with its acquisition of Orchard Supply Hardware. The horizontal analysis shows that the value of all assets except short-term investments and deferred income taxes increased in 2016. The analysis indicates that the company owed a significant amount to its suppliers and finance providers.

It could be stated that the company financed the acquisition of Orchard Supply Hardware and stores expansion through external borrowing both short-term and long-term. The company’s decision to borrow additional amounts rather than financing investments through equity could be due to the low-interest cost. One concern that could be raised is that despite increased borrowing in 2016, the company’s retained earnings decreased by almost 18%. It could imply that the company’s operating costs were high in the last year or it was not able to increase its profit margin.

Financial Ratio Analysis

The financial ratio analysis provided in the following includes results of different ratios including liquidity, efficiency, and solvency that are related to the analysis of Lowe’s balance sheets.

Get your
100% original paper on any topic done
in as little as 3 hours
Learn More

Table 2: Liquidity Ratios.

Liquidity Ratios 2016 2015
Current Ratio 1.00 1.01
Current Assets / Current Liabilities
Current Assets 12,000.00 10,561.00
Current Liabilities 11,974.00 10,492.00
Quick Ratio 0.13 0.11
(Current Assets – Inventory) / Current Liabilities
Current Assets 12,000.00 10,561.00
Inventory 10,458.00 9,458.00
Current Liabilities 11,974.00 10,492.00

Table 2 indicates that the current ratio value was 1 in both years. However, the value of the quick ratio was very low, which was due to high inventory low. It implies that the company had a weak liquidity position, but it reflected the common trend in the retailing industry. The company could experience a major turnaround in its financial position if the economic conditions change in its main market. The annual report indicates that the company clearly understood the issue of slow-moving inventory. Therefore, it is suggested that the company should rework its suppliers’ contracts for their payments to avoid any financial crunch.

Liquidity ratios.
Figure 1: Liquidity ratios.

Table 3: Efficiency Ratios.

Efficiency Ratios 2016 2015
Receivable Turnover N/A N/A
Sales / Accounts Receivable
Sales 65,017.00 38,504.00
Accounts Receivable
Payable Turnover 6.40 6.84
Cost of Sales / Accounts Payable
Cost of Sales 42,553.00 38,504.00
Accounts Payable 6,651.00 5,633.00
Inventory Turnover 4.07 4.07
Cost of Sales / Inventory
Cost of Sales 42,553.00 38,504.00
Inventory 10,458.00 9,458.00
Payable Outstanding Days 57.05 53.40
365 / Payable Turnover
Payable Turnover 6.40 6.84
Inventory Outstanding Days 89.70 89.66
365 / Inventory Turnover
Inventory Turnover 4.07 4.07

Table 3 indicates that Lowe’s did not have any accounts receivable in both years. It means that the company settled all its customer accounts and received cash for all credit sales before the year-end. Although the value of payables turnover decreased in 2016, the company managed to keep the value of inventory turnover constant in the last two years. However, it could be noted that the company held inventory for almost 90 days, but settled its accounts payable in 57 days. The delay could create financial difficulties for the company. If the company does not manage its inventory effectively, then the company can have cash flow problems related to its operations (Goel, 2015).

Efficiency ratios.
Figure 2: Efficiency ratios.

Table 4: Solvency Ratios.

Solvency Ratios 2016 2015
Debt to Equity 4.35 3.08
Total Debt / Total Equity
Total Debt 27,974.00 23,612.00
Total Equity 6,434.00 7,654.00
Debt to Assets 0.81 0.76
Total Debt / Total Assets
Total Debt 27,974.00 23,612.00
Total Assets 34,408.00 31,266.00
Interest Coverage Ratio 9.06 9.01
Operating Income / Interest Expense
Operating Income 5,846.00 4,971.00
Interest Expense 645.00 552.00

Table 4 indicates that the company had a weak solvency position in the last two years. Moreover, it deteriorated in 2016 because of high borrowing. The analysis also indicates that if the company experiences any major business problem, then it could face significant financial challenges (Rowe, 2017). Furthermore, the value of the interest coverage ratio indicates that the company generated sufficient operating income to fulfill its interest obligations.

Solvency ratios.
Figure 3: Solvency ratios.

Accounting Policies and Treatments

Lowe’s follows U.S. GAAP for the preparation of its financial statements. The company operates through different subsidiaries, which carry out various business activities to support the company’s main business of selling home improvement and hardware products and services. The company acquired a new business in 2016-17, and its assets and liabilities are also consolidated in the parent company’s accounts. Therefore, it could be identified that the company uses a consolidated basis for preparing its financial statements on a quarterly and yearly basis.

We will write a custom
Lowe’s Companies Inc.’s Financial Statement
specifically for you!
Get your first paper with 15% OFF
Learn More

It could also be noted that the company made non-GAAP adjustments related to goodwill and long-term asset impairment related to its acquisition of Orchard Supply Hardware in 2016. It is described in the company’s annual report that it evaluates goodwill for impairment on an annual basis. If there is any impairment loss, then the company records it against its earnings for the year. However, the management also highlights that such estimations are affected by accounting assumptions and judgments regarding the carrying value of goodwill.

The company records its non-current assets including buildings and building improvements and equipment at their net book value and calculates the depreciation amount by using the straight-line method. The cost of land and construction in progress is not depreciated. Furthermore, the company determines the fair value of its long-term investments and liabilities including mortgages for reporting purposes.

The company incurs various off-balance-sheet transactions that mainly comprise of operating leases. The total undiscounted value of operating leases was US$5,853 million in 2016. The present value of “future operating lease payments of the company is determined to be US$3,937 million based on the discount rate of 7.27%” (“Lowe’s Cos. Inc. (LOW),” 2017). Moreover, transactions between subsidiaries of Lowe’s are settled and eliminated for preparing consolidated balance sheets.

References

Goel, S. (2015). Financial ratios. New York, NY: Business Expert Press.

Lowe’s Company information. (2017). Web.

Lowe’s Cos. Inc. (LOW). (2017). Web.

Lowe’s SEC filing 2016. (2016). Web.

Not sure if you can write
Lowe’s Companies Inc.’s Financial Statement by yourself?
We can help you
for only $14.00 $11,90/page
Learn More

Lowe’s SEC filing 2017. (2017). Web.

Rowe, A. (2017). Is Lowe’s Companies Inc’s (LOW) balance sheet a threat to its future?. Web.

Check the price of your paper