Financial analysis

Running head: FINANCIAL ANALYSIS OF LOWE’S COMPANY 1

FINANCIAL ANALYSIS OF LOWE’S COMPANY 11

Financial Analysis of Lowe’s Company

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Introduction

Lowes Company is a national store that was founded in the year 1948. The company was first opened in North Carolina and it was among the first retailer companies in America back then. The company mainly dealt with home equipment and appliances. Moreover, the company is said to have been generating huge revenues back then when it began. The company continued to thrive in its operations as it opened up approximately 2390 stores across the world. The company also promoted social responsibility in the society as it has so far employed around 310, 000 individuals in its stores worldwide. However, in the past years, the performance of the company began deteriorating and a financial analysis has to be carried out in order to know the problem.

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Common size income statement

year 2018 2017 2016 2015
Net sales 100 100 100 100
Cost of sales 65.89 65.45 65.18 65.21
Gross margin 34.11 34.55 34.82 34.79
Selling, general exp 22.41 23.27 23.88 23.61
Depreciation and amortization 2.11 2.29 2.53 2.66
Operating income 9.60 8.99 8.41 8.52
Interest expense 0.93 1.00 0.93 0.92
Amortization 0.02 0.02 0.01 0.01
Interest income 0.02 0.02 0.01 0.01
Interest net 0.92 0.99 0.93 0.92
Loss on extinguishment of debt 0.68
Pre-tax earnings 8.00 8.00 7.48 7.61
Income tax provisions 2.98 3.24 3.17 2.81
Net earnings 5.02 4.76 4.31 4.80

A common size financial statement is a document that is used in doing comparison of financial information. The values of the common size income statement are normally converted as a percentage of the returns. From the common size income statement it is clear that the cost of sales increases over the years. The cost of sales in 2015 was 65.21 and in 2018 the cost of sales was 65.89. However, the gross margin is decreasing over the years. A gross margin is the amount that is the revenue that is collected in each commodity that is sold. The decrease in the gross margin is an indicator that the company is not performing well financially. Companies should have a high gross margin so that they can be able to meet other financial obligations.

Moreover, from the common size financial statement of analysis, it can be seen that the pretax earnings decreased slightly in 2015 and 2016 and then remained stable for the next two years[footnoteRef:1]. In addition, the interest net, interest income and the amortization are a clear indication that the company is carrying out proper investments using the shareholders property and wealth. The extra investments will enable the company to have a high debt to equity ratio and eventually the return on equity will increase greatly. Firms that have a high return on equity also have a greater ability to meet the day to day expenses. Therefore, firms are encouraged to increase their financial reserves so as to be able to meet the short term obligations that they have. [1: Profitability and liquidity and financial ratios for Lowes companies Inc. (LOW) from nasdaq.com. (2018). Retrieved from https://www.nasdaq.com/symbol/low/financials?query=ratios]

In addition, the depreciation expense is a clear indication that the company has got assets that it uses during the day to day activities of the firm. Depreciation is an expense that is inevitable but can be avoided if the assets are well taken care of. Also, the operating income rises steadily over the years. Operating income measures the profits that the company incurs after deducting all the other expenses. The increase in the operating income indicates that the profits rise too. Similarly, the net income also rises over the years. The net income for the year 2015 was 4.80% while that of 2018 was 5.02%. Though the difference is a slight one it is an indicator that the companies expenses are less than the incomes.

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