17.

If you need to invest in either Lowes or Home Depot, which one would you
like to invest?
When deciding which companys stock to invest in, ones considerations should
include the stocks rate of return and the companys credit and liquidation risk.
The stocks rate of return denotes the profit one would receive upon buying a
stock, while the companys credit and liquidation risk denotes the probability that
one might lose some or all of the money they invest in the company.
The stocks rate of return can be evaluated by evaluating the companys
profitability and the trend in the stocks market price.
A companys profitability is indicated by earnings per share (EPS), price-earnings
ratio (PE ratio), return on total asset (ROA), return on total equity (ROE) and
dividend yield. As can be seen from Table 1, in the recent years, EPS, ROA, and
ROE of Home Depot are higher than those of Lowes, whereas PE Ratios of both
companies are comparable. This shows that Home Depot is able to generate
more profit from the capital/asset available. Moreover, Home Depot has higher
dividend yield, which means that investors receive more cash with a dollar
invested in Home Depot compared to a dollar invested in Lowes.
Moreover, Home Depots total return to shareholder relative to S&P indexes is
higher compared to that of Lowes (Table 3). Total return to shareholders
measures annual percentage change in the companys cumulative total
shareholders return on its common stock. Therefore, the higher total
shareholder return of Home Depots indicates that investing in its stock offer
more return compared to investing in Lowes. Furthermore, this tallies with the
fact that Home Depots shares has a generally more positive percentage changes
in stocks market value compared to it competitors (Table 2). A more positive
percentage change implies that investing a dollar today in Home Depots stock
will generate more dollars in the future, i.e. more return to shareholders.
A companys credit and liquidation risk can be evaluated from the companys
quality of earnings and its current ratio.
A companys quality of earnings can be evaluated from the growth of earning
throughout the years. As can be seen from Table 1, from 2008, Home Depots net
earning has been growing at a higher rate than that of Lowes. However, Home
Depots growth in net earnings has been more unstable compared to that of
Lowes. In this case, it can be said that the two companies have comparable
quality of earnings. This translates to similar liquidation risk of both companies
as the outlook of trend of income for both companies are similar.
Moreover, both companies have similar current ratio. Home Depot has higher
working capital, but this higher working capital is consistent with the larger total
asset size of Home Depot. Hence, it can be said that both companies have
similar credit risk, meaning both companies are equal in their ability to pay their
short term debts.

In summary, investing in Home Depot is preferred. As the risks of investing in

both companies are similar, one should choose the investment that provides
better return.

Net Sales

2.8%
3,338 $

2010
Home Depot
67,997 $

3.4%
2,010 $

-2.1%
1,783 $

-0.1%
2,195 $

2.9%
2,809

Lowe's
48,283

-2.1%
4,210 $

-9.5%
1,317
8,633
7,316
1.18:1

44,324 $

1.15:1

32,625 $

2,809
15,912
17.65%
0.28

29,271

16,098
1.86

30,816

-20.1%
1,968 $
$
$

2007
Home Depot
Lowe's
77,349 $
48,230 $

-7.8%
2,312 $

-21.9%
1,630 $
9,190
7,560
1.22:1

41,164 $

1.20:1

-45.1%
2,209 $
$
$

2008
Home Depot
Lowe's
71,288 $
47,220 $

-7.2%
2,620 $

-18.8%
2,377 $
9,732
7,355
1.32:1
33,005 $

1.34:1

13.3%
3,537 $
$
$

2009
Home Depot
Lowe's
66,176 $
48,815 $

12.7%
2,848 $
9,967
7,119
1.40:1
$

27.4%
3,357 $
$
$

40,877 $

1.33:1

33,699 $

Net Sales Increase (Decrease)

wrt previous year (%)
Net Earnings
Net Earnings Increase
(Decrease) wrt previous year
(%)
Working Capital
Total Current Assets
Total Current Liabilities
Current Ratio

40,125 $

Total Asset at the End of Year

17,714 $
2.27 $

4,210 $
21,372 $
19.70%
$

48,294 $

18,055 $
1.49 $

$
$

$
$

3,786
31,721 $
11.94%
2,195 $
17,077 $
12.85%
0.34

17,777 $
1.37 $

$
$
$
$
$

4,359
42,744
10.20%
2,312
17,746
13.03%
0.90

19,069 $
1.21 $
$
$
$
$
$
$
$
$

20.38
16.84
3,112
32,815
9.48%
1,783
18,562
9.61%
0.36
20.38
1.77%

19,393 $
1.55 $
$
$
$
$
$
$
$
$

25.07
16.17
4,803
41,021
11.71%
2,620
18,585
14.10%
0.90
25.07
3.59%

18,112 $
1.42 $
$
$
$
$
$
$
$
$

23.38
16.46
3,560
33,352
10.67%
2,010
18,591
10.81%
0.42
23.38
1.80%

18,889 $
2.01 $
$
$
$
$
$
$
$
$

31.87
15.86
5,839
40,501
14.42%
3,338
19,141
17.44%
0.95
31.87
2.97%

Total Equity at the End of Year $

$
Diluted Earning Per Share
Current Market Price of one
Stock
Price-Earning Ratio
Operating Income
Average Total Asset
Return on Total Asset
Net Income
Average Total Equity
Return on Total Equity
Dividend Per Share
Market Price Per Share
Dividend Yield

Table 1. Summary of Relevant Financial and Operating Results

Table 2. Cash Dividend in Dollars

Table 3. Average Market Price of Shares in Dollars

Table 4. Total Return to Shareholders Relative to S&P Indexes