Home Depot and Lowe's are the leading home improvement retail chains in the United States. In 2009, Home Depot reported $41 billion in total assets and $23 billion in total liabilities, while Lowe's reported $33 billion in total assets and $15 billion in total liabilities. Both companies, as is the case with most large retailers, lease most of their stores. At the time, Home Depot incurred about $10.1 billion per year in lease payments, treating about 87 percent of its leases as operating leases for financial reporting purposes. Lowe's incurred about $6.8 billion per year in lease payments and treated about 92 percent of its leases as operating leases. The approximate present values of the future cash flows associated with the operating leases of Home Depot and Lowe's were $2.7 billion and $3.6 billion, respectively.
REQUIRED:
a. Compute the liabilities/total assets ratio for both companies.
b. Assume that both companies accounted for all their leases as capital leases, and recompute their liabilities/total assets ratios.
c. By how much did Lowe's adjusted ratio exceed that of Home Depot? Did the adjustment make much of a difference? Why or why not?
d. Explain why an analyst may wish to make the adjustments required above.