EX 1-27 Ratio of liabilities to stockholders’ equity

Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,700 stores. Lowe’s recently reported the following balance sheet data (in millions):

                   Year 2 | Year 1

Total assets      $33,559 | $33,699

Total liabilities  17,026 | 15,587

a. Determine the total stockholders’ equity at the end of Years 2 and 1.

b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.

c.  What conclusions regarding the risk to the creditors can you draw from (b)?

d. Using the balance sheet data for The Home Depot in Exercise 1-26, how does the ratio of liabilities to stockholders’ equity of Lowe’s compare to that of The Home Depot?

Answer:

a. 

Year 2: $16,533 ($33,559 – $17,026) 

Year 1: $18,112 ($33,699 – $15,587) 

b. 

Year 2: 1.03 ($17,026 ÷ $16,533) 

Year 1: 0.86 ($15,587 ÷ $18,112) 

c. The risk for creditors has increased from 0.86 in Year 1 to 1.03 in Year 2. 

d. Lowe’s ratio of liabilities to stockholders’ equity is more than 1 in Year 2 (1.03) and less than 1 in Year 1 (0.86). In comparison, The Home Depot’s ratio of liabilities to stockholders’ equity is less than 1 for both years. Thus, the risk to creditors of Lowe's is slightly more than The Home Depot.