Investor Analysis

Investment serves as the epitome of economic development, and capitalistic individuals, societies, and companies alike apply this approach to fulfill their objective of capital accumulation. Investing implies allocating one’s money or other resources with the expectation that in the future, it gives some benefits (Roy & Joseph, 2018). However, finance is mainly concerned with the return benefits of an investment. An investment return may include income or capital gain, such as dividends, rental income, and interest, among others. However, taking a blind leap into an investment might have deleterious effects on an investor (Roy & Joseph, 2018). For this reason, many investors perform an investment analysis to Investment analysis is a necessary process for any investor willing to understand the profitability or risks inherent to a specific investment. Performing an investment analysis serves the purpose of evaluating how a certain investment is ideal for a portfolio. In this analysis, the core attention is channeled toward The Home Depot and its core competitors, Lowe’s Companies Inc. and Amazon.

The Home Depot is a retailer whose specialty is in home improvement. According to Reuters (2020), the company provides its customers with products, such as lawn and garden products, building materials, and décor products. It offers services such as rental equipment and installation services. The company is headquartered in Atlanta, US, and it operates about 2,291 stores that traverse territories such as Mexico, Canada, US Virgin Islands, and Puerto Rico. According to CNN Business, The Home Depot has about 413,000 employees.

Lowe’s Companies is The Home Depot’s core competitor, which went public in 1961. The company has approximately 190,000 employees, and it serves about 18 million customers weekly. Lowe’s is headquartered in Mooresville, NC, and it has 2,200 stores scattered across the US, Mexico, and Canada. Lowe’s specializes in maintenance, remodeling, repair, construction, and decoration products. Similar to The Home Depot, Lowe also offers its customers’ installation services.

The third competitor is Amazon. Amazon is a US based company, headquartered in Seattle. The company is different from The Home Depot and Lowe’s, who focus on home improvement, while it specializes in eCommerce, artificial intelligence, digital streaming, and cloud computing, among others. The company has approximately 840,000 employees and its operating income was $14.541 billion in 2019. Moreover, the company has assets worth $225.248 billion in 2019.

Several useful techniques are harnessed in evaluating the choice company alongside its competitors to help in decision-making regarding the most profitable option. Often, stockholders and investors are mainly concerned with the ratios and market price per share, and they use ratios that are current with the market. The ratios of interest for this analysis are detailed below:

Earnings per Share (EPS)

Chen (2020) defines EPS as the financial ratio calculated in terms of a company’s profits in relation to its outstanding shares. The values obtained are particularly important to investors since they indicate the company’s profitability. A company with a higher EPS value is more desirable to an investor. For The Home Depot, the EPS for the first quarter, year 2020, was +10.25 (WSJ Markets, 2020a). Lowe’s had an EPS of +5.49 (WSJ Markets, 2020b), while amazon had an EPS of +22.99 (WSJ Markets, 2020c). Given these figures, the company with the most desirable profits is Amazon.

Price-Earnings Ratio (P/E)

P/E is a commonly used tool for stock analysis. As Ghaeli (2017) elucidates, the approach is preferable to investors since it is simple and offers a comprehensive assessment of a company’s value by evaluating its market value per share relative to its earnings per share. The ratio is essential to investors since it enlightens them on the value of the company’s shares compared to other market players. The Home Depot has a P/E of 27.63, while Lowe and Amazon have 25.98 and 122.12, respectively. If an investor singly relied on P/E to determine which company to invest, Amazon would be the most desirable.

Dividend Payout

In the modern world, investors insist on understanding how an investment can benefit them in terms of dividend paid. As a result, they seek to understand the dividend payout ratio, which is the number of dividends a company pays relative to its net income (Nwaubusi et al., 2017). The Home Depot has a payout of 55.31 while Lowe’s has a payout of 37.11. Unfortunately, Amazon does not payout any dividends. Hence, The Home Depot is more attractive from this perspective.

Dividend Yield

The Home Depot has an annual dividend yield of 2.13 and a five-year average of 2.06. On the other hand, Lowe has an annual dividend yield of 1.41 and a five-year average of 1.66. However, Amazon does not make any dividend yield. Hence, this part correlates with the dividend payout, which identifies The Home Depot as the ideal option for an investor.

Leverage Ratio

Leverage ratio refers to a financial assessment that evaluates the amount of capital a corporation receives in terms of loans. Additionally, the ratio is used to assess the company’s capacity to meet its financial obligations (Hayes, 2020). Among the three companies, Lowe’s have the best leverage ratio of 12.04, followed by The Home Depot with 17.81, and Amazon at 33.48. These ratios indicate that Lowe is in a better position to pay off its debt than Amazon and The Home Depot.

Gross Margin

Gross margin is a financial ratio that details the difference between a company’s revenue and the cost of goods sold over the revenue. As Bloomenthal (2020) enlightens, a higher gross margin is an indicator of higher capital retention for every dollar of sales. Higher retention implies a company can repay its debt obligations or other costs. After an analysis from WSJ Markets (2020a), The Home Depot has a +32.28 gross margin while Lowe’s and Amazon have +30.05 and +40.99, respectively. These values indicate that Amazon retains more on its sales compared to its rivals.

Net Profit Margin

The net profit margin tries to assess the amount of profit a company generates relative to its revenue. As Murphy (2020) elucidates, the ratio expresses the number of dollars collected for every revenue a company collects and is translated into profits. Compared to its rivals, The Home Depot has performed exceptionally well since it recorded a +10.20 net profit margin compared to its competitors (WSJ Markets, 2020a). Lowe’s recorded a +5.92 net profit margin while Amazon recorded a +4.13 net profit margin (WSJ Markets, 2020b: WSJ Markets, 2020c). Even when combined, The Home Depot still surpasses its cumulative values. The values indicate that The Home Depot has managed to contain its overhead costs and operating costs, and simultaneously generated enough profits to trickle down to the investors.

Return on Assets (ROA)

As Hargrave (2020) informs, ROA refers to a financial ratio that indicates a company’s profit relative to its usage of its overall resources. ROA is achieved by dividing the net income by the company’s total assets. Home Depot’s ROA for the year 2020 is 23.61 (WSJ Markets, 2020a). The value is a decline from its 2019 ROA of 24.03. Comparatively, Lowe’s and Amazon have recorded 11.29 (WSJ Markets, 2020b) and 5.97 (WSJ Markets, 2020c), respectively. While The Home Depot’s ROE has reduced compared to its previous year, it still performs better upon benchmarking with its two competitors.

Return on Equity (ROE)

According to Hargrave (2020), ROE refers to the financial measure that divides net income by the shareholder’s equity. The ratio is also considered a measure of a company’s effectiveness in using its assets to profit. For the past five years, The Home Depot ROE has not performed well, and it has averaged at -1031.7%, with its five-year low being in 2019, where it recorded an ROE of -5,245%. In its current fiscal year, The Home Depot has recorded an ROE of -496.11%. On the other hand, its competitors have performed comparatively better, with Lowe’s and Amazon gaining an ROE of 151.99% and 21.95%, respectively (WSJ Markets, 2020a: WSJ Markets, 2020b: WSJ Markets, 2020c).

Table 1: Financial Ratios for The Home Depot and its competitors Lowe’s and Amazon.

Ratio The Home Depot Lowe’s Companies Inc. Amazon
Earnings per Share (EPS) +10.25 +5.49 +22.99
Price-Earnings Ratio (P/E) 27.63 25.98 122.12
Dividend Payout 55.37 37.11 0.00
Dividend Yield 2.13 1.41 0.00
Leverage Ratio 17.81% 12.04% 33.48%
Gross Margin +32.28 +30.05 +40.99
Net Profit Margin +10.20 +5.92 +4.13
Return on Assets (ROA) 23.61 11.29 5.97
Return on Equity (ROE) -496.11% 151.99% 21.95%

An investment analysis is indispensable for any investor. Given the three options previously discussed, the ratios indicate a favorable investment future in any of the options. However, as Rivas (2020) informs, The Home Depot is poised to gain more in the near future and considering its current ratios, an investor would not make a misguided choice opting to invest in their stocks.

 

References

Chen (2020, May 15). Earnings per share – EPS definition. Investopedia. Retrieved from https://www.investopedia.com/terms/e/eps.asp

CNN Business. (n.d.). Home Depot Inc. Retrieved from https://money.cnn.com/quote/profile/profile.html?symb=HD

Ghaeli, M. R. (2017). Price-to-earnings ratio: A state of the art review. Accounting, 3, 131-136. https://doi.org/10.5267/j.ac.2016.7.002

Hargrave, M. (2020, April 12). Return on assets – ROA. Investopedia. Retrieved from https://www.investopedia.com/terms/r/returnonassets.asp

Hargrave, M. (2020, March 13). Return on equity – ROE. Investopedia. Retrieved from https://www.investopedia.com/terms/r/returnonequity.asp

Hayes, A. (2020, April 30). Leverage ratio definition. Investopedia. Retrieved from https://www.investopedia.com/terms/l/leverageratio.asp

Holmes, F. (2020, April 2). These U.S. companies have the highest debt-to-equity ratios right now. Forbes. Retrieved from https://www.forbes.com/sites/greatspeculations/2020/04/02/these-us-companies-have-the-highest-debt-to-equity-ratios-right-now/#191842465826

Murphy, C. B. (2020, February 18). Net profit margin. Investopedia. Retrieved from https://www.investopedia.com/terms/n/net_margin.asp

Nwaubusi, N. A., Aseoluwa, A. C. N., & Tolilope, O. O. (2017). Dividend payout ratio and share price: Evidence from quoted manufacturing companies in Nigeria. IOSR Journal of Business Management, 19(10), 30-43. https://doi.org/10.9790/487X-1910093043

Reuters (2020). Home Depot Inc HD. Retrieved from https://www.reuters.com/companies/HD

Roy, R. & Joseph, J. M. (2018). A study on the information seeking and investment behavior of equity investors. International Journals of Multidisciplinary Research Review, 3(9), 370-375.

WSJ Markets. (2020a). Home Depot Inc. Retrieved from https://www.wsj.com/market-data/quotes/HD/financials

WSJ Markets. (2020b). Lowe’s Cos. Retrieved from https://www.wsj.com/market-data/quotes/LOW/financials

WSJ Markets. (2020c). Amazon.com Inc. Retrieved from https://www.wsj.com/market-data/quotes/AMZN/financials

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