McGraw-Hill/Irwin Slide 1

Preliminary Press

Releases

Releasing Financial Information

Quarterlyand Annual

Reports

Securitiesand Exchange Commission (SEC) Filings

Investor Information

Websites

McGraw-Hill/Irwin Slide 2

Horizontal (Trend) Analysis

Horizontal analysis compares a company’s financial condition

and performance over time.

PercentChange

Current Year’s Total ̶ Prior Year’s Total

Prior Year’s Total

100%= ×

A year-over-year percentage change expresses the current year’s dollar change as a percentage

of the prior year’s total using this formula.

McGraw-Hill/Irwin Slide 3

Horizontal Analysis of Lowe’s Summarized Balance Sheets

LOWE'SComparative Balance Sheets (in millions)

2006 2005Dollar

ChangePercent Change*

AssetsCurrent assets: Cash 364$ 423$ (59)$ (13.9) Short-term investments 432 453 (21) (4.6) Accounts receivable - - - - Inventories 7,144 6,635 509 7.7 Other current assets 374 277 97 35.0

Total current assets 8,314 7,788 526 6.8 Property and equipment, net 18,971 16,354 2,617 16.0 Long-term investments 482 497 (15) (3.0)

Total assets 27,767$ 24,639$ 3,128$ 12.7

* Percent rounded to first decimal point.

McGraw-Hill/Irwin Slide 4

Horizontal Analysis of Lowe’s Summarized Balance Sheets

LOWE'SComparative Balance Sheets (in millions)

2006 2005Dollar

ChangePercent Change*

Liabilities and Stockholders' EquityCurrent liabilities 6,539$ 5,832$ 707$ 12.1

Long-term liabilities 5,503 4,511 992 22.0

Total liabilities 12,042 10,343 1,699 16.4 Stockholders' equity 15,725 14,296 1,429 10.0

Total liabilities and stockholders' equity 27,767$ 24,639$ 3,128$ 12.7

* Percent rounded to first decimal point.

McGraw-Hill/Irwin Slide 5

Horizontal Analysis of Lowe’s Summarized Income Statements

LOWE'SComparative Income Statements (in millions)

2006 2005Dollar

ChangePercent Change*

Net sales revenue 46,927$ 43,243$ 3,684$ 8.5 Cost of revenues 30,729 28,453 2,276 8.0

Gross profit 16,198 14,790 1,408 9.5 Operating and other expenses 11,046 10,136 910 9.0 Interest expense 154 158 (4) (2.5) Income tax expense 1,893 1,731 162 9.4

Net income 3,105$ 2,765$ 340$ 12.3

Earnings per share 2.02$ 1.78$ 0.24 13.5 * Percent rounded to first decimal point.

McGraw-Hill/Irwin Slide 6

Changes Revealed in Trend Analysis

Lowe’s grew significantly in 2006.

Total assets rose by

12.7 percent

Net sales revenues rose by

8.5 percent.

Gross profit

rose by 9.5

percent

Net income rose by

12.3 percent.

The growth in net sales revenues more than offset the growth in expenses resulting in net income growth in 2006

that was greater than the net sales revenues growth.

McGraw-Hill/Irwin Slide 7

Vertical (Common Size) Analysis

Common-size percentages for financialstatements are calculated using this formula.

Common-size Percent

Analysis AmountBase Amount

100%= ×

Vertical analysis focuses on important relationships within financial statements by expressing each financial statement amount as a percentage of

another amount on that statement.

The base amount is total assets for the balance sheetand sales revenue for the income statement.

McGraw-Hill/Irwin Slide 8

Vertical Analysis of Lowe’s Summarized Balance Sheets

LOWE'SComparative Balance Sheets (in millions)

Amount Percent* 2005 Percent*Assets

Current assets: Cash 364$ 1.3% 423$ 1.7% Short-term investments 432 1.6% 453 1.8% Inventories 7,144 25.7% 6,635 26.9% Other current assets 374 1.3% 277 1.1%Property and equipment, net 18,971 68.3% 16,354 66.4%Long-term investments 482 1.7% 497 2.0%

Total assets 27,767$ 100.0% 24,639$ 100.0%

Liabilities and Stockholders' EquityCurrent liabilities 6,539$ 23.5% 5,832$ 23.7%Long-term liailities 5,503 19.8% 4,511 18.3%Stockholders' equity 15,725 56.6% 14,296 58.0%

Total liabilities and stockholders' equity 27,767$ 100.0% 24,639$ 100.0%

* Percent rounded to first decimal point.

2006 2005

McGraw-Hill/Irwin Slide 9

Vertical Analysis of Lowe’s Summarized Income Statements

LOWE'SComparative Income Statements (in millions)

Amount Percent Amount PercentNet sales revenue 46,927$ 100.0% 43,243$ 100.0%Cost of revenues 30,729 65.5% 28,453 65.8%

Gross profit 16,198 34.5% 14,790 34.2%Operating and other expenses 11,046 23.5% 10,136 23.4%Interest expense 154 0.3% 158 0.4%Income tax expense 1,893 4.0% 1,731 4.0%

Net income 3,105$ 6.6% 2,765$ 6.4%

* Percent rounded to first decimal point.

2006 2005

McGraw-Hill/Irwin Slide 10

Interpreting Common Size Statements

Lowe’s total assets grew in 2006 by more than $3,000,000,000. Most of the growth was in

property and equipment which increased from 66.4 percent of total assets in 2005 to 68.3 of total

assets in 2006.

The growth in total assets was accompanied by increases in all major categories of liabilities and

equities. However, only long-term liabilities increased as a percent of total assets, from 18.3 percent of total assets in 2005 to 19.8 percent of

total assets in 2006.

McGraw-Hill/Irwin Slide 11

Interpreting Common Size Statements

Lowe’s was able to increase its net income as a percent of sales from 6.4 percent to 6.6 percent by reducing cost of goods sold as a percent of

sales by 0.3 percent.

The percentage decrease in cost of goods sold was partially offset by small increase in

operating and other expenses.

McGraw-Hill/Irwin Slide 12

Financial Ratios

Financial ratio analysis compares amounts for one or more financial statement items to amounts for other financial statement

items in the same year.

McGraw-Hill/Irwin Slide 13

Profitability Ratios

Net profit margin

Gross profit percentage

Asset turnover

Earnings per share (EPS)

Fixed asset turnover

Return on equity (ROE)

Profitability ratios provide us with measuresof a company’s ability to generate

income in the current period.

Return on assets (ROA)

Price/earnings(P/E)

McGraw-Hill/Irwin Slide 14

Profitability Ratios ̶ Net Profit Margin

Net profit margin represents the percentage of sales revenue that remains in net income after expenses

have been deducted.

Net profit

margin

Net income

Net sales revenue= × 100%

Lowe’s 2006: ($3,105 ÷ $46,927) × 100% = 6.6%

Lowe’s 2005: ($2,765 ÷ $43,243) × 100% = 6.4%

McGraw-Hill/Irwin Slide 15

Profitability Ratios ̶ Gross Profit Percentage

Gross profit percentage indicates how much profit was made, on average, on each dollar of sales, after

deduction of cost of goods sold.

Gross profit

percentage

Net sales ‒ Cost of goods sold

Net sales= × 100%

Lowe’s 2006: (($46,927 ‒ $30,729) ÷ $46,927) × 100% = 34.5%

Lowe’s 2005: (($43,243 ‒ $28,453) ÷ $43,243) × 100% = 34.2%

McGraw-Hill/Irwin Slide 16

Profitability Ratios ̶ Asset Turnover

The asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in assets.

Asset

turnover

Net sales revenue

Average total assets=

Lowe’s 2006: $46,927 ÷ (($27,767 + $24,639) ÷ 2) = 1.79

Lowe’s 2005: (Given) = 1.89

McGraw-Hill/Irwin Slide 17

Profitability Ratios ̶ Fixed Asset Turnover

The fixed asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in fixed assets

such as store buildings and land used in the business.

Fixed asset

turnover

Net sales revenue

Average net fixed assets=

Lowe’s 2006: $46,927 ÷ (($18,971 + $16,354) ÷ 2) = 2.66

Lowe’s 2005: (Given) = 2.86

McGraw-Hill/Irwin Slide 18

Profitability Ratios ̶ Return on Assets (ROA)

The return on assets ratio measures how much a company earns for each dollar of investment in assets.

ROANet income

Average total assets= × 100%

Lowe’s 2005: (Given) = 12.1%

$3,105 ÷ ($27,767 + $24,639) ÷ 2) × 100% = 11.8%Lowe’s 2006:

McGraw-Hill/Irwin Slide 19

Profitability Ratios ̶ Return on Equity (ROE)

The return on equity ratio measures the amount earned as a percentage of each dollar invested by stockholders.

ROENet income

Average stockholders’ equity= × 100%

Lowe’s 2006: $3,105 ÷ (($15,725 + $14,296) ÷ 2) × 100% = 20.7%

Lowe’s 2005: (Given) = 21.4%

McGraw-Hill/Irwin Slide 20

Profitability Ratios ̶ Earnings per Share (EPS)

Earnings per share indicates the amount of earningsfor each share of outstanding common stock.

EPSNet income

Average number of common shares=

EPS is reported in the income statement.

Lowe’s 2006: EPS = $2.02

Lowe’s 2005: EPS = $1.78

McGraw-Hill/Irwin Slide 21

Profitability Ratios ̶ Price/Earnings (P/E) Ratio

The P/E ratio measures the relationship between the current market price of the stock and its earnings per share.

P/E Ratio =Stock price

EPS

Lowe’s 2006: $31 ÷ $2.02 = 15.3

Lowe’s 2005: (Given) = 16.3

The stock price was $31 per share at thetime 2006 earnings were announced.

McGraw-Hill/Irwin Slide 22

Liquidity Ratios

Current ratio

Quick ratio

Receivables turnover

Inventory turnover

Liquidity ratios focus on a company’s abilityto convert its assets into cash in order topay current liabilities as they come due.

McGraw-Hill/Irwin Slide 23

Liquidity Ratios ̶ Receivables Turnover

The receivables turnover ratio is a measure ofhow fast a company collects its receivables.

Receivables

turnover

Net sales revenue

Average net receivables=

Lowe’s receivables balance from customers is insignificant

because most sales are cashor credit card sales.

Lowe’s receivables balance from customers is insignificant

because most sales are cashor credit card sales.

McGraw-Hill/Irwin Slide 24

Liquidity Ratios ̶ Inventory Turnover

The inventory turnover ratio indicates how many times inventory is bought and sold during the period.

Inventory

turnover

Cost of sales

Average inventory=

Lowe’s 2006: $30,729 ÷ (($7,144 + $6,635) ÷ 2) = 4.5

Lowe’s 2005: (Given) = 4.5

McGraw-Hill/Irwin Slide 25

Liquidity Ratios ̶ Days to Sell

The days to sell ratio converts inventory turnoverinto the number of days need to sell inventory.

Days to sell365

Inventory turnover ratio=

Lowe’s 2006: 365 ÷ 4.5 = 81.1 days

Lowe’s 2005: 365 ÷ 4.5 = 81.1 days

McGraw-Hill/Irwin Slide 26

Liquidity Ratios ̶ Current Ratio

Lowe’s 2006: $8,314 ÷ $6,539 = 1.27

Lowe’s 2005: $7,788 ÷ $5,832 = 1.34

Current

ratio

Current assets

Current liabilities=

The current ratio measures the ability of a company to pay its current debts as they become due.

McGraw-Hill/Irwin Slide 27

Liquidity Ratios ̶ Quick Ratio

Lowe’s 2006: $796 ÷ $6,539 = 0.12

Lowe’s 2005: $876 ÷ $5,832 = 0.15

The quick ratio is similar to the current ratio,but measures the company’s immediate

ability to pay it current debts.

Quick assets

Current liabilities=

Quick

ratio2006 2005

Cash 364$ 423$ Short-term Investments 432 453 Accounts receivable - - Quick Assets 796$ 876$

McGraw-Hill/Irwin Slide 28

Solvency Ratios

Debt-to-assets

Free cashflow

Times interest earned

Solvency ratios focus on a company’s ability torepay debt, pay interest, and finance replacement

and/or expansion of long-term assets.

McGraw-Hill/Irwin Slide 29

Solvency Ratios ̶ Debt-to-assets Ratio

Lowe’s 2006: $12,042 ÷ $27,767 = 0.43

Lowe’s 2005: $10,343 ÷ $24,639 = 0.42

The debt-to-assets ratio indicates the proportionof total assets that is financed by creditors.

Debt-to assetsTotal liabilities

Total assets=

McGraw-Hill/Irwin Slide 30

Solvency Ratios ̶ Times Interest Earned Ratio

Lowe’s 2006: ($3,105 + $154 + $1,893) ÷ $154 = 33.5

Lowe’s 2005: ($2,765 + $158 + $1,731) ÷ $158 = 29.5

The times interest earned ratio indicates the number of times a company’s interest expense

was covered by its operating results.

Net Interest Income tax

income expense expense

Interest expense

Times

interest

earned=

+ +