Financial ratio comparison of Home Depot and Sears Holdings

Ratio Analysis of Different Companies Within the Same Industry

The aim of this report is to make a comparison between 10 important companies, from different fields of activities. The comparison tool would represent various financial-accounting ratios that would best highlight in quantitative terms the specific characteristics and performance of the company.

This comparison based on financial and accounting ratios is important due to the fact that stakeholders in these companies need to be informed at all times about their investments. A basic principle of security placements is that all investors must be aware about the opportunities on the market and should act only upon an informed decision.

The five fields of activity included in the presentation represent main industries in the current economy, each employing a large share of the global workforce, involving important investments and budgets. The magnitude and the importance of the industry can be perceived differently - the attention paid to these companies by individuals, specialists and even Governments as well as the fact that market is heavily influenced by their performance.

For example, a retailer conducts business in collaboration with a multitude of other types of enterprises, among which we can mention - logistics companies, manufacturers, shipment companies, and so on. If the retailer has a negative performance, or even worse goes bankrupt, it can influence in an unwanted manner the other corporations it does business with. The companies, which represent the subject of our analysis, are to be presented in a pair of two, and have different characteristics and attributes.

Retailer Industry: Home Depot vs. Sears

Home Depot was founded in 1978 in Atlanta, U.S., being the one of the largest home improvement retailer in the world. It has more than 2000 stores - Home Depot Stores, Expo Design Centres, Landscape Supply stores, conducting businesses in developed markets - Canada and U.S., as well as in emerging ones - Mexico, Puerto Rico and China. The securities of the company are traded at the New York Stock exchange, among other important shares. Regarding the number of employees, Home Depot is one of the largest companies in U.S., having more than 300.000 persons working and believing in the Home Depot objectives and targets. The social responsibility of Home Depot is proven by its numerous involvements in the building and refurbishing of playgrounds - attract both the parents and children; ensures the safety and accessibility of socializing places within the community - helps bring people more closer one to another; building affordable houses - ensure proper housing facilities for all social layers; and prepare communities for emergencies - both natural (typhoons) and artificial (terrorist attacks).

Sears Holdings Corporation is the fourth American broadline retailer conducts business in more than 3800 full line and speciality shops in United States and Canada, having annual revenues at the level of 50 billion dollars. Also, an important part in the Sears's activity is the sale of home appliance, offering to customers a diverse range of products, like garden tools, home electronics and automotive repair and maintenance. The public perception of the company has heavily risen following the merger between Sears and Kmart in 24th of March 2005. Sears Holding has besides corporate goals, very important social ambitions like improving the life of customers, by offering them qualitative products and services. The corporate culture of the company is guided by three directions - vision, mission and values.

In discussing the performances and financial ratios of the two companies, we should aim at tackling the major financial ratio, depicting liquidity, financial leverage and profitability. The current ratio, computed as the Current Assets over the Current Liabilities, indicate the coverage of short-term payments as compared to current assets. Regarding the two retailers, Home Depot has a Current ratio in 2006 of 1.4 as compared to 1.5 belonging to Sears.

An interpretation of these figures is that Sears is more liquid than Home Depot, offering more certainties to short-term suppliers. The strong brand name that is Sears ensures suppliers that they will recover the money on their shipments of merchandise towards the retail centres. However, a current ratio of 2 would indicate a sound relationship between the short-term financial inputs and outputs. The difference between the two ratios is however too small to be able to draw a sound conclusion on the differences between the two companies and it rather comes to show that these are large retailers, with large volumes of sales that can afford to be liquid and maintain short-term solvability.

The next financial ratio to be discussed is the Leverage ratio, identified through the division of Total Assets to the Total Equity of the company offers some guidelines on the extent to which the business relies on debt financing. A ratio higher than 2 indicates a riskier company, a company that has extended its financial leverage to a certain degree.

It should come to no surprise that Home Depot registers an inferior Leverage ratio than its counterparty. This can be explained by the fact that Home Depot conducts business on more markets than Sears, so the risk is diversified in a way. The difference is quite important - 2.5 in the case of Sears and 2.1 in the case of Home Depot. It also shows a more prudent policy in the case of Home Depot and this is also understandable, considering the presentation of the company as mentioned in a previous paragraph.

Lastly, the Return on Assets ratio is an indicator of the company's profitability on the market and stipulates whether the corporation was successful in its objectives. This ratio is computed by dividing the Net income over Total Assets and amount to 4.9% in the case of Sears and to 8.9% in the case of Home Depot. These figures offer some indications on how efficient the management of the companies was in using the asset for profit generation. The striking difference in favour of Home Depot clearly shows a more responsible investment policies and more sound management tactics than in the case of its competitor. The result says more than words, as the figure of Sears is half of the Home Depot Figure. Simply put, the assets that Home Depot has generate more income than those of Sears.

Beer Industry

Anheuser-Busch is the company with the largest volume of beer produced, having an impressive 48.8% of the American market sales - 121.9 million barrels in 2005. At a global level, the corporation maintained its efficient performer position, occupying the third place after InBev and SABMiller. The headquarters of the company are in St. Louis, Missouri and the enterprise possesses 12 breweries in United States and another 20 abroad. Anheuser Busch belongs to a greater commercial group - Anheuser-Busch Companies, Inc. (ABC) that conducts various lines of business, and more specifically - domestic beer, international beer, packaging and entertainment. Approximately 93% of the ABC's net sales are generated in the United States. The international activities of the company consist in producing beer, under licence and specific brewing contracts plus exports. Among the well-known brands of the company we can mention Budweiser, Busch, Michelob and Natural Light.

While Anheuser Busch has large breweries, both its own and under license, the Boston Beer Company represents the top American brewer of handcrafted full-flavoured beers. Using even from the start traditional recipes and finest ingredients, the company was able to offer the customers 18 distinctive, quality types of beer. The distribution of the company started to evolve in '90-'92 and the process was concluded in 1995, when it was an official national brand. Since then, through a network of distributors, it exports its products into Pacific Rim, Europe, Canada and the Caribbean. The success of the company attracted both the views of customers and of competitors, who tried to copy the performance of Boston Beer Company. Founded in 1984, the company has now only 433 employees. The stable growth of the revenues led to the situation of 2006 of 285 million dollars, as compared to 2005 when the revenue levels registered 238.3 million dollars. Another excellent result of the company was the fact that it managed to cut costs, more specifically sales, general and administrative costs by about 3%.

In making the comparison between the two we shall use again the financial ratio approach and will try to discover the discrepancies in performance related to liquidity, financial leverage and profitability. Boston Beer has a Current Ratio of 3, representing one of the leader performances in terms of liquidity from the entire industry. Anheuser-Busch's liquidity ratio was 0.81, indicating a possible problem in the company's capacity in meeting its short-term payment obligation. Creditors should be aware in handling the Anheuser Busch, given this reduced level of the ratio.

The explanation for this is quite reasonable. As a microbrewer, Boston Beer had to pay attention to the way it ensured its financial credibility on the market. This meant that it could not be afford to be perceived as an untrustworthy short-term partner and it believed in leading a prudent short-term financial policy. Anheuser, on the other hand, had larger spread operations and could simply use its stance on the market to cover short-term liabilities.

In terms of financial leverage, the charts indicate a ratio of 4.7 for Anheuser Busch and a ratio of 1.4 for Boston Beer. The numbers show a high risk in case of Anheuser Busch (surpassing more than twice the industry mean of 2) and a very stable Boston Beer corporation. It seems that the winning strategy is to develop gradually, to offer your products to an increasing number of possible consumers, but not to overdue it and stick to your fundamental beliefs (in the case of Boston Beer - developing traditional beer with finest ingredients). Again, we notice the same financial reckless approach in the of Anheuser and the traditional stable financial approach for Boston Beer.

The Return on Assets for Anheuser-Busch was of 12.6% for 2006, while the same ratio for Boston Beer amounted 11.8%. Similar figures, with a slight advantage in the case of Anheuser-Busch, highlight the fact that both companies use their existent assets for obtaining profits and revenues in a correct manner.

Johnson and Johnson

Johnson & Johnson's was set up in New Jersey in 1886 and registered an impressive 73 years of consecutive sales increase and 44 years of dividend increase. Employing 120,000 people at global level the company focuses in the production and sale of broadline healthcare products, protecting in this way the safety and the well being of their customers. The decentralization is one of the most important strategies, the activity being divided into a few business lines - Consumer, Pharmaceutical and Professional segment. The company is one of the most profitable corporations in its line of activity - with a value of the Gross profit margin of 75.3%.

Eli Lilly company operates in the bio-tech industry, included in the Fortune 500 Pharmaceutical corporations. Based in Indianapolis, U.S. has over 14 billion in Sales for the year 2005. Eli Lilly Company holds own 24 manufacturing facilities, without including in this figure the 3rd party manufacturers. Among the key products of the corporation we can state:: Prozac, Zyprexa, Cialis, Insulins. Eli Lilly is one of the most important innovation driven companies committed to developing a first pharmaceutical products that would improve the life of individuals. Lilly products treat depression, schizophrenia, attention deficit hyperactivity disorder, diabetes, osteoporosis and many other conditions. Also the gross profit margin is excellent - amounting 82.8%.

Comparing the two pharmaceutical corporations, we once again aim at describing their liquidity, profitability and profitability ratio. Johnson&Johnson's current ratio is 1.5 while the same indicator for Eli Lilly is 2.6. As a conclusion, Eli Lilly can better meet their short-term obligations, as the current assets are 2.6 higher than the current liabilties. The leverage rate, denoting the ratio between the total assets and total debt, is also another financial benchmark - 1.8 for Johnson&Johnson's and 1.9 for Eli Lilly. This similarity show identical strategies of both pharmaceutical companies - that is maintaining a low financial leverage. Therefore, the risk for the two companies is present at reduced levels. The return on Assets for Eli Lilly company is only 8.9% as compared to Johnson&Jonhson's figure of 13.6%. That is the managers of the latter company have better administrated the corporate assets for the previous period.

Books industry

Barnes & Noble is the number one bookseller in U.S., operating more than 700 own branded superstores in America. It also owns almost 100 mostly mall-based B. Dalton bookstores. Also, the new trends in the economy are observed by the corporation and the e-commerce with books is also booming. Despite the fast start, only 10% of the sales are performed in the online environment. In 2004, Barnes & Noble's started a new line of business, when opened the GameStop subsidiary -nowadays being one the most important U.S. video game retailer. With annual sales of 5,261 million dollars and an net income, the company can be characterized as a top performer.

Amazon started as the biggest retailer of books and now sells an outstanding range of products. Music, DVDs, books, videos, electronics, tools, groceries and other types of services sell at Amazon.com at a pace of 10,711 million dollars, registering an annual growth in sales volume of 26.2%.

In comparing the two large book retailers, we aim again at discussing issues related to short-term liquidity, profitability and financial leverage. The current ratio for Amazon is 1.5 while the same indicator for Barnes & Noble is 1.2, above the average of the industry. The lack of liquidity can be explained by the fact that Barnes & Noble has retail bookstores that imply large administrative costs, reducing in this way the short-term liquidity of the corporation. The Total Debt over Equity ratio for Barnes & Nobles is 2.5 while the leverage indicator for Amazon is 1.67. The conclusion is that Barnes & Nobles is more risky, and this can be explained by the large investments incurred by the company in maintaining the stores. The Return on Assets for Amazon - the profitability of the company - is 7.9%, while the indicator for Barnes & Nobles is 4.57%. The reasons stipulated above also fit for the computed profitability index.

Conclusion

The ratio analysis described was targeted at depicting the differences between large corporations within the same industry. Competitors have different financial ratios, describing the various performances registered by each entity.