Question

Look up the statement of cash flows for both Home Depot and Lowes using​ Yahoo! Finance.

a.  Compute the quality of earnings ratio for both firms and all three years of data provided in the popup​ window:  

b.  Compare the quality of earnings ratio for the two firms. For which firm do you feel most comfortable about the reported earnings​ quality? Explain.

c.  Compute the capital acquisitions ratios for the latest three years for both firms.

d.  Compare Home​ Depot's and​ Lowes' abilities of using operating cash flow to finance their capital expenditures. Which firm has relied more on the capital​ markets?

*****POPUP WINDOW*****

Home Depot			Lowes
	2011	2012	2013	2011	2012		2013
Net Income	​$3,338,000	​$3,883,000	​$4,535,000	​$2,010,000	​$1,839,000		​$1,959,000
Cash Flow from Operations	​$4,585,000	​$6,651,000	​$6,975,000	​$3,852,000	​$4,349,000		​$3,762,000
Capital Expenditures​ (CAPEX)	​$1,096,000	​$1,221,000	​$1,312,000	​$1,329,000	​$1,829,000		​$1,211,000

Answer 1

	Particulars	Home Depot	Lowes
		Year 2011	Year 2012	Year 2013	Year 2011	Year 2012	Year 2013
a	Net Income	$             3,338,000	$               3,883,000	$        4,535,000	$               2,010,000	$            1,839,000	$           1,959,000
b	Cash Flow from Operations	$             4,585,000	$               6,651,000	$        6,975,000	$               3,852,000	$            4,349,000	$           3,762,000
c	Capital Expenditures	$             1,096,000	$               1,221,000	$        1,312,000	$               1,329,000	$            1,829,000	$           1,211,000

		Home Depot	Lowes
		Year 2011	Year 2012	Year 2013	Year 2011	Year 2012	Year 2013
Ans a.	Quality of Earning =Cash Flow from Operations/Net Income =b/a=	1.374	1.713	1.538	1.916	2.365	1.920

Ans b.	Comparing Quality of Earning of Two Companies
		Quality Of Earning
	Year	Home Depot	Lowes
	2011	1.374	1.916
	2012	1.713	2.365
	2013	1.538	1.920

Lowes have a better Quality of Earning across three years over Home Depot.

Ans c .		Home Depot	Lowes
	Ratio	Year 2011	Year 2012	Year 2013	Year 2011	Year 2012	Year 2013
	Capital Acquisitions Ratio=Cash flow from Operations/Capital Expenditure=b/c=	4.183	5.447	5.316	2.898	2.378	3.107

Ans d.	Comparing Capital Acquisitions ratio or the ability to use operating cash flow to finance the Capital Expenditure.
		Capital Acquisitions Ratio
	Year	Home Depot	Lowes
	2011	4.183	2.898
	2012	5.447	2.378
	2013	5.316	3.107
	Home Deport has better Capital Acquisitions ratio over Lowes across three years.
	That means Home Depot is in a better position to use its internal cash flow for
	funding the capital expenditure needs.
	Lowes has comparatively lower Capital Acquisitions ratio , so it has relied more
	on Capital Market to fund the Capital Expenditures.