Hi fellow investors! I thought about the latest HD report and their economic model, then compared their performance with LOW, and what I want to say – the amount of debt these companies have may be frustrating. It’s like analyzing REITs – you feel that something is wrong. In general I use financial stability and liquidity ratios to quickly assess companies.
https://snowball-analytics.com/public/asset/HD.NYSE#financials
First indicator to determine is Liquidity, which based on 3 main ratios:
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Cash Ratio = Cash + Cash Equivalents ÷ Current Liabilities, must be > 0,2
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Quick Ratio = Cash + Cash Equivalents + Short-term Investments + Accounts Receivable ÷ Current Liabilities, must be > 1,0
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Current Ratio = Current Assets ÷ Current Liabilities, must be > 2,0
| HD | LOW | |
|---|---|---|
| Revenue | 155 239 | 95 392 |
| Total Liabilities | 75 588 | 55 167 |
| Cash ratio | 0,045 | 0,072 |
| Quick ratio | 0,179 | 0,095 |
| Current ratio | 1,18 | 1,11 |
As you can see both companies are experiencing a huge lack of liquidity. In general these ratios tell us that a company does not have money to pay its current liabilities and can be on the verge of bankruptcy. But HD is TOP 3 holding of SCHD, how can it be? The answer covers in its debt, so we need to look to second ratios of financial stability, which based on:
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Equity Ratio = Total Equity ÷ Total Assets, must be > 0,4
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Debt Ratio = Total Liabilities ÷ Total Assets, must be < 0,6
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Interest coverage ratio = EBIT ÷ Interest Expenses, must be > 1,5
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Debt to EBITDA = Total Debt ÷ EBITDA, less is better
| HD | LOW | |
|---|---|---|
| Equity ratio | 0,0031 | <0 |
| Debt ratio | 0,99 | 1,18 |
| Interest coverage | 16,5 | 54,5 |
| Debt to EBITDA | 1,57 | 2,11 |
Retail companies have a lot of money in circulation and little in assets, and deliveries with deferred payments increase current accounts payable (their “assets(goods)” recorded in the balance sheet as liabilities). They also have good margins and can use loans effectively without having to freeze their own funds, because their money comes from sales, not assets (many retail spaces are leased).
Well, what conclusions can be drawn on comparison: HD has more debt, compared to LOW in flat numbers, but vice versa in relative comparison.
HD has a fairly conservative debt to EBITDA ratio and its EBIT covers its interest expense 16.5 times over. It grows revenue quicker and greatly uses leverage, has greater net profit margin and ROA.
LOW has cheaper debt (less interest expenses, EBIT covers it 54,5 times), has more liquidity, but debt grows faster than earnings. Debt counts as healthy when it’s cheap and the company can grow faster because of it.
So if you choose between them, what is more attractive? I personally stick with HD.
