Trend analysis

Trend analysis of financial statements is a comparison that is done between different trading periods. The trend analysis measures changes and the performance of the companies. The trend analysis and the common size financial statement have similar calculations but in the case of the trend analysis all the values are normally converted using the sales, while in the common size statements the value are put as a percentage of profits. When calculating the trend analysis for just two years, the two values are subtracted then the value found is converted as a percentage of the base sales. In our case, we will do a trend analysis of the Lowe’s Company for a range of four years.

When calculating the trend analysis for more than two years, the trend percentage is calculated by the dividing the current year and the base year. In most cases, the base year is normally the last year of analysis in this case it is 2015. The percentage trend for operating income is calculated by dividing the operating income for the 2018 by the base year of 2015 then the solution is the percentage trend for operating income. The values will be useful in comparing the financial well-being of the company in the given four years.

Similarly, when calculating the percentage trend analysis of the net income for the Lowe’s Company the same process applies. The net income for 2015 is used as the base net income. The net incomes for the previous years are used to calculate the new percentage trends for the net income. The values will enable the company to determine the period where the finances were not available. All companies should make use of the trend analysis technique in order to come up with the financial status for their respective companies.

Financial analysis

Liquidity ratios

Years

2018

2017

2016

2015

Current ratios; Lowes

Home depot

1.06

1.17

1.1

1.25

1.01

1.32

1.05

1.36

Quick ratios; Lowes

Home depot

0.11

0.38

0.13

0.37

0.11

0.37

0.10

0.37

Cash ratios; Lowes

Home depot

0.06

0.22

0.05

0.18

0.07

0.18

0.06

0.15

Liquidity ratios are used to determine the ability of a company to meet its short term needs as they arise. To begin with, current ratios compare a company’s assets to its liabilities. The liabilities and the assets compared are the current ones. From the table above, the current ratios given indicate that the Lowe’s Company doesn’t have a stable current ratio since it keeps on fluctuating and decreasing. However, the important issue is that the current ratios are above one. The highest current ratio for Lowe’s company is 1.1 and the lowest is 1.01[footnoteRef:2]. Quick ratios and cash ratios are a bit similar since they compare cash and the investments available to the short term obligations of the company. [2: 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]

It is clear that quick and cash ratios of the Lowe’s Company are not also stable. Such, may lead to problems in the company in the future when the company will be having debts. Companies are normally governed in such a way that they should be able to meet their obligations without lending from outside. Failure to meet the short and long term obligations will make the company to be in debt and it will be hard for the company to clear those debts. In the case of The Home Depot Company, the ratios are not also stable but at least there is some improvement noted. When comparing the two companies, the Home Depot Company will not have a hard time in meeting both short term and long term obligations but the Lowe’s company will not have an easy time[footnoteRef:3]. [3: Erskine, A., Camillo, A. A., Bajada, A. J., & Holt, S. (2015). The Home Depot: A Competitor’s Strategic Audit, A Case Study. In Global Enterprise Management (pp. 171-189). Palgrave Macmillan, New York.]

Profitability ratios

Year

2018

2017

2016

2015

Gross margin; Lowes

Home depot

0.34

0.34

0.35

0.34

0.35

0.34

0.35

0.34

Operating margin: Lowes

Home depot

0.1

0.15

0.09

0.14

0.08

0.13

0.09

0.13

Net margin: Lowes

Home depot

0.05

0.09

0.05

0.08

0.04

0.08

0.05

0.08

Return on investment ratios

Return on assets; Lowes

Home Depot

9.89

19.73

9.42

18.74

8.08

17.11

8.37

15.77

Return on equity; Lowes

Home depot

55.84

298.25

43.47

149.44

28.76

89.64

24.58

58.09