Home Depot And Lowes Decomposition Analysis

When conducting any analysis it is important to understand the accounting decisions and models. This paper is written to study and review decomposition analysis of performance ratio and its affiliation to the common-size income statement analysis. The decomposition analysis objectives include return on equity (ROE) and return on assets (ROA). It will also offer a discussion on the decomposition of return on investment (ROI) in the comparison of two companies: Home Depot and Lowes (the decomposing development and outcomes for comparison between the two companies). Decomposition analysis is referred to as DuPont system (Gibson, 2013). Dupont system is a main financial ratio analytical tool for assessing a company’s financial performance (Parrino,

This wills enables the users to gain insights from evaluating financial components of a business, which is to identify weaknesses, opportunities for developments and irregularities that raise red flags.
The combined components include total asset turnover, net profit margin, and return on an asset that influences the component parts that’s identified as Dupont return on assets (Gibson, 2013). Dupont creators recognize the standard return on equity analysis when converting equity into profit thus providing investors with data to make wise investments (Mitchell et al., 2013). Dupont method offers financial data to investors in order to make decisions to make the profitable investment (Mitchell et al., 2013). Decomposition returns are described as Dupont system that includes profitability and leverage (Pares, 1980; Parrino, & Kidwell, 2009). Dupont model allows the analysis of return on equity. Business owners use this model to break down the business’ profitability in order to see where it comes from (Peavler, 2016). As I refer to

ROI consists of the firm's profit margin and asset turnover or the capacity to generate profit (Peavler, 2016). Speaker (2009) stated, “that changing company’s performance information to ratio offers comparison data between two companies or industries”. ROI is defined as many segments, which is traceable on a systematic basis to expose firm’s activities within the market (Speaker, 2009). In addition, results can indicate an increase in productivity or high-risk decisions that can be avoided (Speaker, 2009). Dupont method is another name for decomposition of ROE that the major factors manipulate implementations on the return on equity and return on assets (Bodie et al., 2011; Pares, 1980; Parrino, & Kidwell, 2009). Return on Equity (ROE) is the ratio of profitability that relates the income of a business with the total shareholder equity financed in the business (Gibson, 2013). ROE = Earnings/Total Equity (Gibson, 2013). Using Dupont decomposition method there is a relationship of profitability ratios. Return on equity is abbreviated as ROE and measures performance. It’s a combination of ROA and the leverage ratio. ROE tells the user how efficient profits are generated by each dollar of equity invested. ROE is