141

1
Chapter 14
Financial Statement Analysis
Electronic Presentation by Douglas Cloud
Pepperdine University
2
Learning Goals
1. Construct and interpret horizontal and
vertical analyses. 2. Calculate and interpret the
rate earned on stockholders equity and the rate
earned on total assets. 3. Analyze the rate
earned on total assets by evaluating the profit
margin and the asset efficiency of a business.Anal
After studying this chapter, you should be able
to
Continued
3
Learning Goals
4. Determine and interpret leverage. 5. Calculate
and interpret shareholder ratios earnings per
share, price-earnings ratio, and dividend
yield. 6. Summarize the uses and limitations of
analytical measures. 7. Describe the contents of
corporate annual reports.
4
Your Need to Know

• Value investing is an attempt to discover stocks
  with an intrinsic value that are greater than the
  stock prices.
• In growth investing, the investor tries to
  identify companies that are growing sales and
  earnings through new products, markets, or
  opportunities.
• Income investing is where investors purchase
  common stocks for their dividend stream.
• Technical investing involves investors using
  technical analysis to find clues about future
  performance from past performance.

5
Learning Goal
1
Construct and interpret horizontal and vertical
analyses.
6
Horizontal Analysis
Its an analysis of the percentage increases and
decreases of related items in comparative
financial statements.
What is horizontal analysis?
7
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
14-7
Condensed
Increase
(Decrease) Feb. 3, 2002 Jan. 28, 2001
Amount Percent

• Assets
• Current assets 10,361 7,777 2,584 33.2
• Property and equipment, net 15,375 13,068 2,307 17
  .7
• Other assets 658 540 118 21.9
• Total assets 26,394 21,385 5,009 23.4
• Liabilities
• Current liabilities 6,501 4,385 2,116
  48.3
• Long-term debt, excluding
• current installment 1,250 1,545 (295) (19.1)
• Other long-term liabilities 372 256 116 45.3
• Deferred income taxes 189 195
  (6) (3.1)
• Total long-term liabilities 1,811 1,996
  (185) (9.3)
• Total liabilities 8,312 6,381 1,931 30.3

The stockholders equity section is not displayed.
8
14-8
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Increase
(Decrease) Feb. 3, 2002 Jan. 28, 2001
Amount Percent
Assets Current
assets 10,361 7,777 2,584 33.2 Property
and equipment, net 15,375 13,068 2,307 17.7 Other
assets 658 540 118 21.9 Total
assets 26,394 21,385 5,009 23.4
Liabilities Current liabilities 6,501
4,385 2,116 48.3 Long-term debt, excluding
current installment 1,250 1,545 (295) (19.1) Other
long-term liabilities 372 256 116 45.3 Deferred
income taxes 189 195
(6) (3.1) Total long-term liabilities 1,811
1,996 (185) (9.3) Total liabilities 8,312
6,381 1,931 30.3
33.2
9
14-9
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Increase
(Decrease) Feb. 3, 2002 Jan. 28, 2001
Amount Percent
Assets Current
assets 10,361 7,777 2,584 33.2 Property
and equipment, net 15,375 13,068 2,307 17.7 Other
assets 658 540 118 21.9 Total
assets 26,394 21,385 5,009 23.4
Liabilities Current liabilities 6,501
4,385 2,116 48.3 Long-term debt, excluding
current installment 1,250 1,545 (295) (19.1) Other
long-term liabilities 372 256 116 45.3 Deferred
income taxes 189 195
(6) (3.1) Total long-term liabilities 1,811
1,996 (185) (9.3) Total liabilities 8,312
6,381 1,931 30.3
33.2
33.2
17.7
10
14-10
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Increase
(Decrease) Feb. 3, 2002 Jan. 28, 2001
Amount Percent
Assets Current
assets 10,361 7,777 2,584 33.2 Property
and equipment, net 15,375 13,068 2,307 17.7 Other
assets 658 540 118 21.9 Total
assets 26,394 21,385 5,009 23.4
Liabilities Current liabilities 6,501
4,385 2,116 48.3 Long-term debt, excluding
current installment 1,250 1,545 (295) (19.1) Other
long-term liabilities 372 256 116 45.3 Deferred
income taxes 189 195
(6) (3.1) Total long-term liabilities 1,811
1,996 (185) (9.3) Total liabilities 8,312
6,381 1,931 30.3
11
14-11
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
Increase
(Decrease) 2002 2001 Amount
Percent
17.1
Sales (net) 53,553 45,738 7,815 Cost of
merchandise sold 37,406 32,057 5,349
Gross profit 16,147 13,681 2,466 Selling
and store operating exp. 10,280 8,655 1,625 Genera
l and administrative exp. 935 835
100 Total operating expenses 11,215
9,490 1,725 Income from operations 4,932
4,191 741 Other income and
expenses Interest and investment inc. 53 47 6
Interest expense (28) (21)
(7) Income before income tax 4,957
4,217 740 Income taxes 1,913
1,636 277 Net income 3,044 2,581
463
12
14-12
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
Increase
(Decrease) 2002 2001 Amount
Percent
17.1
Sales (net) 53,553 45,738 7,815 Cost of
merchandise sold 37,406 32,057 5,349
Gross profit 16,147 13,681 2,466 Selling
and store operating exp. 10,280 8,655 1,625 Genera
l and administrative exp. 935 835
100 Total operating expenses 11,215
9,490 1,725 Income from operations 4,932
4,191 741 Other income and
expenses Interest and investment inc. 53 47 6
Interest expense (28) (21)
(7) Income before income tax 4,957
4,217 740 Income taxes 1,913
1,636 277 Net income 3,044 2,581
463
16.7
13
14-13
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
Increase
(Decrease) 2002 2001 Amount
Percent
Sales (net) 53,553 45,738 7,815 Cost of
merchandise sold 37,406 32,057 5,349
Gross profit 16,147 13,681 2,466 Selling
and store operating exp. 10,280 8,655 1,625 Genera
l and administrative exp. 935 835
100 Total operating expenses 11,215
9,490 1,725 Income from operations 4,932
4,191 741 Other income and
expenses Interest and investment inc. 53 47 6
Interest expense (28) (21)
(7) Income before income tax 4,957
4,217 740 Income taxes 1,913
1,636 277 Net income 3,044 2,581
463
18.0 18.8 12.0 18.2 17.7 12.8 33.3 17.5 16.9 17.9
14
14-14
HOME DEPOT INC. Comparative Retained Earnings
Statement (in millions)For Periods Ended
February 3, 2002 and January 28, 2001
Increase
(Decrease) 2002 2001 Amount
Percent
Retained earnings, beginning 10,151
7,941 2,210 Net income for the year 3,044
2,581 463 Total 13,195 10,522 2,673 Divi
dends On common stock 396 371
25 Retained earnings, ending
12,799 10,151 2,648
27.8
15
14-14
HOME DEPOT INC. Comparative Retained Earnings
Statement (in millions)For Periods Ended
February 3, 2002 and January 28, 2001
Increase
(Decrease) 2002 2001 Amount
Percent
Retained earnings, beginning 10,151
7,941 2,210 Net income for the year 3,044
2,581 463 Total 13,195 10,522 2,673 Divi
dends On common stock 396 371
25 Retained earnings, ending
12,799 10,151 2,648
27.8
17.9 25.4 6.7 26.1
16
Vertical Analysis
A percentage analysis can be used to show the
relationship of each component to a total within
a single statement.
17
Vertical Analysis
The total, or 100 item, on the balance sheet is
total assets.
18
14-18
14-18
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Feb. 3, 2002
Jan. 28, 2001 Amount
Percent Amount Percent
Assets Current
assets 10,361 7,777 Property and equipment,
net 15,375 13,068 Other assets 58
540 Total assets 26,394 21,385
Liabilities Current liabilities 6,501
4,385 Long-term liabilities 1,811
1,996 Total liabilities 8,312 6,381
Stockholders Equity Common stock/paid-in
capital 5,529 4,926 RE accumulated comp.
loss 12,553 10,078 Total stockholders
equity 18,082 15,004 Total liabilities and
SE 26,394 21,385
100.0
Total assets is 100.0
19
14-19
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Feb. 3, 2002
Jan. 28, 2001 Amount
Percent Amount Percent
Assets Current
assets 10,361 7,777 Property and equipment,
net 15,375 13,068 Other assets 58
540 Total assets 26,394 21,385
Liabilities Current liabilities 6,501
4,385 Long-term liabilities 1,811
1,996 Total liabilities 8,312 6,381
Stockholders Equity Common stock/paid-in
capital 5,529 4,926 RE accumulated comp.
loss 12,553 10,078 Total stockholders
equity 18,082 15,004 Total liabilities and
SE 26,394 21,385
39.3
100.0
20
14-20
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Feb. 3, 2002
Jan. 28, 2001 Amount
Percent Amount Percent
Assets Current
assets 10,361 7,777 Property and equipment,
net 15,375 13,068 Other assets 58
540 Total assets 26,394 21,385
Liabilities Current liabilities 6,501
4,385 Long-term liabilities 1,811
1,996 Total liabilities 8,312 6,381
Stockholders Equity Common stock/paid-in
capital 5,529 4,926 RE accumulated comp.
loss 12,553 10,078 Total stockholders
equity 18,082 15,004 Total liabilities and
SE 26,394 21,385
39.3 58.2 2.5
100.0
24.6 6.9 31.5 20.9 47.6
68.5 100.0
21
14-21
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Feb. 3, 2002
Jan. 28, 2001 Amount
Percent Amount Percent
Assets Current
assets 10,361 7,777 Property and equipment,
net 15,375 13,068 Other assets 58
540 Total assets 26,394 21,385
Liabilities Current liabilities 6,501
4,385 Long-term liabilities 1,811
1,996 Total liabilities 8,312 6,381
Stockholders Equity Common stock/paid-in
capital 5,529 4,926 RE accumulated comp.
loss 12,553 10,078 Total stockholders
equity 18,082 15,004 Total liabilities and
SE 26,394 21,385
100.0
Total assets is 100.0
22
14-22
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Feb. 3, 2002
Jan. 28, 2001 Amount
Percent Amount Percent
Assets Current
assets 10,361 7,777 Property and equipment,
net 15,375 13,068 Other assets 58
540 Total assets 26,394 21,385
Liabilities Current liabilities 6,501
4,385 Long-term liabilities 1,811
1,996 Total liabilities 8,312 6,381
Stockholders Equity Common stock/paid-in
capital 5,529 4,926 RE accumulated comp.
loss 12,553 10,078 Total stockholders
equity 18,082 15,004 Total liabilities and
SE 26,394 21,385
36.4
100.0
23
14-23
HOME DEPOTComparative Balance Sheets (in
Millions)February 3, 2002 and January 28, 2001
Condensed
Feb. 3, 2002
Jan. 28, 2001 Amount
Percent Amount Percent
Assets Current
assets 10,361 7,777 Property and equipment,
net 15,375 13,068 Other assets 58
540 Total assets 26,394 21,385
Liabilities Current liabilities 6,501
4,385 Long-term liabilities 1,811
1,996 Total liabilities 8,312 6,381
Stockholders Equity Common stock/paid-in
capital 5,529 4,926 RE accumulated comp.
loss 12,553 10,078 Total stockholders
equity 18,082 15,004 Total liabilities and
SE 26,394 21,385
36.4 61.1 2.5
100.0
20.5 9.3 29.8 23.0 47.1
70.2 100.0
24
14-24
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
2002
2001
Amount Percent Amount
Percent
Sales (net) 53,553 100.0 45,738 100.0 Cost of
merchandise sold 37,406 32,057 Gross
profit 16,147 13,681 Selling and store
operating exp. 10,280 8,655 General and
administrative exp. 935 835 Total
operating expenses 11,215 9,490 Income from
operations 4,932 4,191 Other income and
expenses Interest and investment inc. 53 47
Interest expense (28) (21)
Income before income tax 4,957
4,217 Income taxes 1,913 1,636 Net
income 3,044 2,581
Net sales is 100.0
Net sales is 100.0
25
14-25
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
2002
2001
Amount Percent Amount
Percent
Sales (net) 53,553 100.0 45,738 100.0 Cost of
merchandise sold 37,406 32,057 Gross
profit 16,147 13,681 Selling and store
operating exp. 10,280 8,655 General and
administrative exp. 935 835 Total
operating expenses 11,215 9,490 Income from
operations 4,932 4,191 Other income and
expenses Interest and investment inc. 53 47
Interest expense (28) (21)
Income before income tax 4,957
4,217 Income taxes 1,913 1,636 Net
income 3,044 2,581
70.1
26
14-26
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
2002
2001
Amount Percent Amount
Percent
Sales (net) 53,553 100.0 45,738 100.0 Cost of
merchandise sold 37,406 32,057 Gross
profit 16,147 13,681 Selling and store
operating exp. 10,280 8,655 General and
administrative exp. 935 835 Total
operating expenses 11,215 9,490 Income from
operations 4,932 4,191 Other income and
expenses Interest and investment inc. 53 47
Interest expense (28) (21)
Income before income tax 4,957
4,217 Income taxes 1,913 1,636 Net
income 3,044 2,581
69.9
70.1
27
14-27
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
2002
2001
Amount Percent Amount
Percent
Sales (net) 53,553 100.0 45,738 100.0 Cost of
merchandise sold 37,406 32,057 Gross
profit 16,147 13,681 Selling and store
operating exp. 10,280 8,655 General and
administrative exp. 935 835 Total
operating expenses 11,215 9,490 Income from
operations 4,932 4,191 Other income and
expenses Interest and investment inc. 53 47
Interest expense (28) (21)
Income before income tax 4,957
4,217 Income taxes 1,913 1,636 Net
income 3,044 2,581
69.9
70.1
29.9 18.9 1.8
20.7 9.2 0.1 (0.1) 9.2 3.6 5.6
28
14-28
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
2002
2001
Amount Percent Amount
Percent
Sales (net) 53,553 100.0 45,738 100.0 Cost of
merchandise sold 37,406 32,057 Gross
profit 16,147 13,681 Selling and store
operating exp. 10,280 8,655 General and
administrative exp. 935 835 Total
operating expenses 11,215 9,490 Income from
operations 4,932 4,191 Other income and
expenses Interest and investment inc. 53 47
Interest expense (28) (21)
Income before income tax 4,957
4,217 Income taxes 1,913 1,636 Net
income 3,044 2,581
70.1
30.1 19.2 1.7
20.9 9.2 0.1 (0.0) 9.3
3.6 5.7
69.9
29.9 18.9 1.8
20.7 9.2 0.1 (0.1) 9.2 3.6 5.6
29
14-29
HOME DEPOT INC. Income Statement (in
millions)For Periods Ended February 3, 2002 and
January 28, 2001
2002
2001
Amount Percent Amount
Percent
Sales (net) 53,553 100.0 45,738 100.0 Cost of
merchandise sold 37,406 32,057 Gross
profit 16,147 13,681 Selling and store
operating exp. 10,280 8,655 General and
administrative exp. 935 835 Total
operating expenses 11,215 9,490 Income from
operations 4,932 4,191 Other income and
expenses Interest and investment inc. 53 47
Interest expense (28) (21)
Income before income tax 4,957
4,217 Income taxes 1,913 1,636 Net
income 3,044 2,581
70.1
69.9 30.1 19.2 1.7
20.9 9.2 0.1 (0.0) 9.3
3.6 5.7
29.9 18.9 1.8
20.7 9.2 0.1 (0.1) 9.2 3.6 5.6
30
Learning Goal
2
Calculate and interpret the rate earned on
stockholders equity and the rate earned on total
assets.
31
Rate Earned on Stockholders Equity
The stockholder desires a return on his or her
investment. One measure of this return is the
rate earned on stockholders equity.
32
Rate Earned on Stockholders Equity
Home Depot
18.4
33
Rate Earned on Stockholders Equity
Lowe's
16.8
34
Rate Earned on Total Assets
Another ratio to measure the relative
profitability of a firm is rate earned on total
assets.
35
Rate Earned on Total Assets
Home Depot
12.8
36
Rate Earned on Total Assets
Lowe's
8.1
37
Comprehensive Profitability Analysis
The exhibit on the next slide diagrams the
comprehensive ratio relationship that can be used
to analyze the rate earned on stockholders
equity.
38
(No Transcript)
39
Comprehensive Profitability Analysis
The rate earned on stockholders equity is
normally higher than the rate earned on total
assets when a company uses debt, or leverage.
40
Comprehensive Profitability Analysis
Leverage Formula
41
Learning Goal
3
Analyze the rate earned on total assets by
evaluating the profit margin and the asset
efficiency of a business.
42
Rate Earned on Total Assets
Profit Margin Asset Turnover

43
(No Transcript)
44
Margin Analysis
Why is the profit margin of Home Depot over one
percentage point stronger than Lowes?
45
Home Depot and Lowes Condensed Common-Size
Income Statement For the Year Ended February 3
and February 1, 2002
Home Depot Lowes
Home Depot has a higher gross profit percentage
than Lowes.
Home Depots higher selling expenses are
somewhat offset by lower administrative expenses.
Sales (net) 100.0 100.0 Cost of merchandise
sold 69.9 71.2 Gross profit 30.1
28.8 Selling expenses 19.2 18.3 Administrative
expenses 1.7 2.4 Total operating
expenses 20.9 20.7 Income from
operations 9.2 8.1 Other income 0.1 0.0 Interest
expense (0.0) (0.8) Income before
income taxes 9.3 7.3 Income tax expense
3.6 2.7 Net income 5.7 4.6
Although Home Depot pays more income taxes
(percentage-wise), the overall profit percentage
is higher than Lowes.
46
Asset Efficiency
47
Accounts Receivable Analysis
Accounts Receivable Turnover
Home Depot Lowes
Net sales 53,553 22,111 Accounts receivable
(net) Beginning of year 835
161 End of year 820
166 Total 1,755 327 Average
878 164
61.0
134.8
(all dollar amounts in millions)
48
Accounts Receivable Analysis
Accounts Receivable Turnover
Home Depot Lowes
Net sales 53,553 22,111 Accounts receivable
(net) Beginning of year 835
161 End of year 820
166 Total 1,755 327 Average
878 164
Use To assess the efficiency in collecting
receivables and in the management of credit.
(all amounts except ratios in millions)
49
Accounts Receivable Analysis
Number of Days Sales in Receivables
Home Depot Lowes
Accounts receivable (net) end of
year 920 166 Net sales on account 53,553 22,11
1 Average daily sales on on account (net sales
365) 147 61
6.3
2.7
(all dollar amounts in millions)
50
Accounts Receivable Analysis
Number of Days Sales in Receivables
Home Depot Lowes
Accounts receivable (net) end of
year 920 166 Net sales on account 53,553 22,11
1 Average daily sales on on account (net sales
365) 147 61
Use To assess the efficiency in collecting
receivables and in the management of credit.
(all amounts except ratios in millions)
51
Inventory Analysis
Inventory Turnover
Home Depot Lowes
Cost of merchandise sold 37,406 15,743 Inventori
es Beginning of year 6,556 3,285 End of
year 6,725 3,611 Total 13,281
6,896 Average 6,641 3,448
5.6
4.6
(all dollar amounts in millions)
52
Inventory Analysis
Inventory Turnover
Home Depot Lowes
Cost of merchandise sold 37,406 15,743 Inventori
es Beginning of year 6,556 3,285 End of
year 6,725 3,611 Total 13,281
6,896 Average 6,641 3,448
Use To assess the efficiency in the management
of inventory.
(all dollar amounts in millions)
53
Inventory Analysis
Number of Days Sales in Inventory
Home Depot Lowes
Inventories, end of year 6,725 3,611 Cost of
merchandise sold 37,406 15,743 Average daily
cost of merchandise sold (COGS 365) 102 43
65.9
84.0
(all dollar amounts in millions)
54
Inventory Analysis
Number of Days Sales in Inventory
Home Depot Lowes
Inventories, end of year 6,725 3,611 Cost of
merchandise sold 37,406 15,743 Average daily
cost of merchandise sold (COGS 365) 102 43
Use To assess the efficiency in the management
of inventory.
(all dollar amounts in millions)
55
Fixed Asset Analysis
Fixed Asset Turnover
Home Depot Lowes
Net sales 53,553 22,111 Fixed assets
(net) Beginning of year 13,068 7,035 End
of year 15,375 8,663 Total 28,443 15,6
88 Average 14,222 7,844
3.77
2.82
(all dollar amounts in millions)
56
Fixed Asset Analysis
Fixed Asset Turnover
Home Depot Lowes
Net sales 53,553 22,111 Fixed assets
(net) Beginning of year 13,068 7,035 End
of year 15,375 8,663 Total 28,443 15,6
88 Average 14,222 7,844
Use To measure how many dollars of sales are
being made from investments in stores and
fixtures.
(all dollar amounts in millions)
57
Learning Goal
4
Determine and interpret leverage.
58
Leverage
Rate earned on total assets
Leverage
Rate earned on stockholders equity
59
Leverage
18.4
20
16.7
12.8
10
Home Depot
0
Lowes
Rate earned on stockholders equity
Rate earned on total assets
60
Current Balance Sheet Relationships
Working Capital and Current Ratio
Lincoln Co. Jefferson Corp.
Current assets 550,000 533,000 Current
liabilities 210,000 243,000 Working
capital 340,000 290,000 Current ratio 2.6
2.2
Use To indicate the ability to meet currently
maturing obligations.
(All dollar amounts in millions)
61
Current Balance Sheet Relationships
Quick Ratio
Home Depot Lowes
Quick assets Cash 2,477 799 Temporary
investments 69 54 Accounts receivable (net)
920 166 Total quick assets 3,466
1,019 Current liabilities 6,501 3,017 Quick
ratio 0.53 0.34
Use To indicate instant debt-paying ability.
(All dollar amounts in millions)
62
Long-Term Balance Sheet Relationships
Ratio of Fixed Assets to Long-Term Liabilities
Home Depot Lowes
Fixed assets (net) 15,375 8,653 Long-term
liabilities 1,811 3,734 Ratio of fixed
assets to long-term liabilities 8.5 2.3
Use To indicate the margin of safety to
long-term creditors.
(All dollar amounts in millions)
63
Long-Term Balance Sheet Relationships
Ratio of Liabilities to Stockholders Equity
Home Depot Lowes
Total liabilities 8,312 7,062 Total
stockholders equity 18,082 6,674 Ratio of
liabilities to stockholders equity 0.46 1.06

Use To indicate the margin of safety to
creditors.
(All dollar amounts in millions)
64
Long-Term Balance Sheet Relationships
Number of Times Interest Charges Earned
Home Depot Lowes
Net income 3,044 1,023 Add income
tax 1,913 601 Add interest expense
28 174 Amount available for
interest 4,985 1,798 Number of times interest
charges earned 178.0 10.3
Use To measure the relative risk of debtholders.
(All dollar amounts in millions)
65
Learning Goal
5
Calculate and interpret shareholder ratios
earnings per share, price-earnings ratio, and
dividend yield.
66
Earning per Share
Home Depot Lowes
Net income 3,044 1,023 Shares of common
stock 2,335 769 Earnings per share on common
stock 1.30 1.33
Use To assess the profitability of the
investment by common stockholders.
(All amounts except EPS in millions)
67
Price-Earnings Ratio
Home Depot Lowes
Market price per share of common 50.00 46.15 Ear
nings per share on common 1.30
1.33 Price-earnings ratio on common stock 38 35
Use To indicate future earnings prospects, based
on the relationship between market value of
common stock and earnings.
68
Dividend Yield
Home Depot Lowes
Dividends per share of common 0.20
0.08 Market price per share of common 50.00
46.15 Dividend yield on common stock 0.4 0.2
Use To indicate the rate of return to common
stockholders in terms of dividends.
69
Learning Goal
6
Summarize the uses and limitations of analytical
measures.
70
Keep in mind that these measures are not a
substitute for sound judgment.
Use Exhibit 9 of this chapter as a handy
reference tool.
71
Learning Goal
7
Describe the contents of corporate annual reports.
72
The financial highlights section summarizes the
operating results for the last year or two. Its
usually on the first few pages of the annual
report.
Financial Highlights
73
Presidents Letter to Stockholders
This letter usually discusses reasons for actions
taken by the company during the year.
74
Management Discussion and Analysis (MDA)

• A required disclosure in the annual report
• Includes an analysis of the results of operations
• Discusses managements opinion about future
  performance
• An analysis of the companys financial condition

75
Independent Auditors Report
Before issuing annual statements, all publicly
held corporations are required to have an
independent audit of their financial statements.
76
Historical Summary
This summary reports selected financial and
operating data of past periods, usually for five
or ten years.
77
Chapter 14
The End
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