Question

(analyzing the quality of earnings and sustainability of capital expenditures) use the information shown in the table, for lowes (low) and home depot (hd) to answer the questions found below.
a. compute the quality of earnings ratio for the latest three years for both firms.
b. compare the quality of earnings ratios for the two firms. for which firm do you feel more comfortable about the reported earnings quality? explain.
c. compute the capital acquisitions ratio for the latest three years for both firms. what can we learn from this analysis?

information about firms:
lowes:
year 2022: cash flow from operations $10,113,000, net income $8,409,000, capital expenditures $1,853,000
year 2021: cash flow from operations $11,049,000, net income $5,811,000, capital expenditures $1,791,000
year 2020: cash flow from operations $4,296,000, net income $4,268,000, capital expenditures $1,484,000

home depot:
year 2022: cash flow from operations $16,571,000, net income $16,433,000, capital expenditures $2,566,000
year 2021: cash flow from operations $18,839,000, net income $12,866,000, capital expenditures $2,463,000
year 2020: cash flow from operations $13,723,000, net income $11,242,000, capital expenditures $2,678,000

c. compute the capital acquisitions ratio for the latest three years for both firms. (type your answer as a percentage. round to one decimal place.)
lowes average capital acquisitions ratio over the three-year period is %

Explanation:

Calculate capital acquisitions ratio for Lowes

Using the Capital Acquisitions Ratio and Financial Statement Analysis knowledge points

$$ \text{Capital Acquisitions Ratio} = \frac{\text{Cash Flow from Operations}}{\text{Capital Expenditures}} $$

For Lowes:

• 2022: \(\frac{\$10,113,000}{\$1,853,000} \approx 5.4576 \ (545.8\%)\)
• 2021: \(\frac{\$11,049,000}{\$1,791,000} \approx 6.1692 \ (616.9\%)\)
• 2020: \(\frac{\$4,296,000}{\$1,484,000} \approx 2.8949 \ (289.5\%)\)

Calculate Lowes' average ratio

Using the Capital Acquisitions Ratio and Financial Statement Analysis knowledge points

$$ \text{Average Ratio} = \frac{545.76\% + 616.92\% + 289.49\%}{3} \approx 484.05\% \approx 484.1\% $$

Answer:

Lowes' average capital acquisitions ratio over the three-year period is <blank>484.1</blank>%