The Home Depot Financial Analysis

Brief history of the company

The Home Depot is a publicly traded American retailer offering construction and home improvement services and products. It was established in 1978 by Pat Farrah, Bernads Marcus, Ron Brill and Arthur Blank. They had a proposition to build home improvement superstores that are larger than those of their closest rivals. It is headquartered at Unincorporated Cobb County, Georgia, 30339 United States. It is in the retailing industry and offers products such as home appliances, building materials, hardware, flooring, paint, tools, garden supplies, plumbing, and plants. In addition, it offers installation programs, home maintenance, and professional service programs. The Home Depot has more than 371,000 employees as well as more than 2248 locations.  The paper presents in-depth Financial Statement Analysis of the Home Depot.

Ratio analysis

Liquidity Ratios

This category of ratios indicates the ability of the Home Depot to meet its short-term obligations using current assets (Weygandt et al. 2015).

  2016 2015 Industry
Current ratio 1.357 1.358  1.14
Working capital $4,467,00,000 $4,033,000,000  

 

The current ratio decreased from 1.358 in 2015 to 1.357 in 2016 indicating a reduction in liquidity. However, the decrease is minimal and the Home Depot is very liquid because the value of the ratio is more than one. Therefore, the company is able to meet its short-term obligations. For every $1.00 in short term obligations accumulated, it has $1.36 in current assets to cover for it. Compared to the industry (1.14) (Appendix A), the Home Depot is more liquid than other firms in the industry; it is more able to meet its current obligation. In addition, it has a positive working capital implying that it is liquid. It increased from $4,033,000,000 in 2015 to $4,467,000,000 in 2016 which is an indication of the increase in liquidity. It has sufficient working capital to carry out its normal operations. The increase in liquidity ratios is favorable because it indicates more cash to meet daily operations.

Solvency Ratios

Solvency ratios measure the percentage of funds or assets of a company that are provided by the creditors (Weygandt et al. 2015). They measure how leveraged the company is.

  2016 2015 Industry
Debt to total assets 0.85 0.77  
Times interest earned 12.99 times 13.02 10.42

 

The debt to total assets ratio increased from 0.77 in 2015 to 0.85 in 2016. This implies an increase in the use of debts. For every $1 in assets earned, the Home Depot has $0.85 in debt in 2016 and $0.77 in 2015, implying that it has $0.15 in equity in 2016 and $0.23 in equity in 2016. The increase in the debt to total assets ratio implies an increase in financial leverage resulting in more business risks. The times interest earned decreased from 13.02 in 2015 to 12.99 in 2016, the decrease was minimal and hence is more able to meet its regular interest payments (Weygandt et al. 2015). This indicates that it is a strong firm financially due to its higher ability to make regular interest expense payments. It has a higher TIE than the industry average meaning it has sufficient income to pay for its total finance costs. 10.42 is less than 12.99 implying that the company is less risky (Appendix A). The increase in solvency ratios is unfavorable because it indicates more cash are paid in form of interest, however, the increase is minimal and the company is still profitable.

Profitability Ratios

This category of ratios determine the bottom line of an organization as well as the returns it provides for its investors as they show the organization’s overall performance and efficiency (Kieso et al., 2011).

  2016 2015 Industry
Return on Assets 16.47% 15.88% 7.59%
Return on Equity 110.97% 68.06% 21.64%
Gross profit ratio 34.19% 34.13% 24.50%
Profit margin Ratio 7.92% 7.63% 5.61%

 

Return on Assets ratio increased from 15.88% to 16.47% and return on equity increased from 68.06% to 110.97%. The increase indicates that the company has a decent return on the dollars investors decide to invest in the company as well as on the total assets. It is evident that the Home Depot has a higher ROE and ROA than the industry average implying that the Home Depot is utilizing its assets and investor’s funds more effectively than other firms in the industry. On the other hand, gross profit increased from 34.13% to 34.19% and profit margin increased from 7.63% to 7.92%. The industry gross margin was 24.50% and profit margin 5.61% implying that the Home Depot is more profitable than other firms in the industry (Appendix A). It is relatively more efficient in turning revenues into actual profit.  The increase in profitability ratios is favorable because it indicates more cash to meet daily operations.

 

Market value ratios

  2016 2015 Industry
EPS $5.49 $4.74 $4.50
P/E ratio 23.03 22.12  

 

Market value ratios gauge the financial status of a company in the wider marketplace (Kieso et al., 2011). EPS showed an upward trend, $4.74 to $5.49, indicating an increase in profitability. P/E ratio also increased, 22.12 to 23.03, indicating an increase in the value of the Home Depot’s stocks. The company’s EPS is higher than industry average ($4.50) (Appendix A), which implies that it is making more money for their shareholders. The investors of Home Depot expect a moderately higher earnings growth from the firm. The company has a good current performance and future prospects because the investors are willing to pay more per dollar of earnings (Kieso et al., 2011). The increase in market value ratios is favorable because it indicates higher earnings growth from the firm and more money for their shareholders.

Efficiency ratios

  2016 2015 Industry
Accounts receivable turnover ratio 52.47 57.72 8.2
Inventory turnover ratio 5.09 4.95 22.42
Asset turnover ratio 2.15 2.07  

 

Efficiency ratios outline how well an organization is managing its liabilities or how well it is effectively utilizing its assets in generating revenues (Kieso et al., 2011).  Accounts receivables turnover decreased from 57.72 times to 52.47 times; implying a reduction in the efficiency with which the company collects its credit sales from customers. However, it is over 6 times greater than industry average of 8.2, which indicates that the Home Depot is more efficient in its operations. Inventory turnover ratio increased from 4.95 to 5.09 and asset turnover ratio increased from 2.07 to 2.15 indicating an increase in efficiency. The home Depot is using fewer assets in generating more revenues. Also, it is using fewer inventories in generating more revenue. Compared to the industry average, the Home Depot is less efficient in using inventories to generate revenue (Appendix A).

Analysis

The Home Depot offers an immense range of products for their customers. It has a good financial performance which makes it a good investment. It offers high-quality products at the lowest price possible which make the company to have high financial performance; therefore, it has the ability to provide the highest financial rewards to the investors or shareholders (Kieso et al., 2011). Besides, it has relatively lower debt ratios compared to other firms in the industry; it uses few debts in financing its operations. This implies that its cash flow in terms of interest payment is limited thus the organization can keep such costs to a minimum (Weygandt et al. 2015). The Home depot has low exposures to interest rate risk compared to its rivals which makes it very attractive to the investors as it is less risky than other firms in the industry. They pay lower interest which leaves them with more cash at the discretion of the company which can be used as financial rewards to the investors in terms of dividends or the surplus cash can be reinvested into the company to generate or create value for the shareholders of the company (Kieso et al., 2011). Whichever the case, the investors stand to benefit.

In addition, the home Depot is positioned to provide the highest financial rewards to its investors because it is more liquid, more profitable and more efficient in its operations than other firms in the industry (Weygandt et al. 2015). The Home Depot has higher profitability and liquidity and hence has enough cash to meet its daily operations. It is more liquid because for every $1.00 in short term obligations accumulated; it has $1.36 in current assets to cover for it. It is more profitable, because for every $1.00 in total revenue, it has $0.34 in gross profit and 0.079 in net profit; therefore, it is relatively more efficient in turning revenues into actual profit. On the other hand, it has strong brand recognition as well as loyalty, all conditions that provide the entity with an opportunity of obtaining high revenues that they can offer to their investors (Kieso et al., 2011). Finally, the company is a good investment because of an increase in the value of the Home Depot’s stocks. The investors of Home Depot expect a moderately higher earnings growth from the firm because of its good current performance and future prospects. The increase in P/E ratio from 22.12 to 23.03 indicates that the investors are willing to pay more per dollar of earnings (Weygandt et al. 2015).

Conclusion

The Home Depot is relatively good investment because of the following reasons. Firstly, it has a higher liquidity and profitability. Secondly, it has greater efficiency indicating that it is effective in its operations. The home Depot is using fewer assets in generating more revenues. Finally, it has manageable financial leverage and fewer business risks because it has sufficient money to pay for its finance costs. The Home Depot has a good current performance and future prospects because the investors are willing to pay more per dollar of earnings hence have a higher future earnings growth.

 

 

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