For Fiscal Year Ending February 3, 2008
Team FAB 5
Financial Analysis of Home Depot
Founded in 1978 by Arthur Banks and Bernie Marcus, who were both fired from a local hardware store after a disagreement with their supervisor (http://founderbios.com/bernie-marcus.php), Home Depot opened its first store in Atlanta, Georgia on June 22, 1979 (www.corporate.homedepot.com). The founders had a vision to create a big-box retail chain that empowered customers to take on their own home improvement and repair projects. As the fourth largest retailer in the U.S. and the world’s largest home improvement retailer (www.corporate.homedepot.com) , Home Depot operates nearly 2,000 stores in the U.S., Canada, Mexico and China, with annual retail sales in excess of $66 billion dollars.
In the spirit of “do-it-yourself”, our team carefully reviewed the 2007 and 2008 financial statements presented in our class text. Our purpose is to provide a thorough but poignant analysis of Home Depot’s financial strength. The following report will focus on liquidity, profitability, credit risk and other financial measures.
The below information is information that was obtained from Appendix A; Williams, J., Haka, S., Bettner, M., Carcello, J., Financial & Managerial Accounting the Basis for Business Decisions, 15e, 2010
1. Is The Home Depot's liquidity situation such that current liabilities can be easily paid? Why or why not?
With net earnings of $4,395,000 as of February 2008, Home Depot was not as profitable as the previous two years. Its net income percentage (net income $77,349 divided by total revenue $4,395) was only 5.7% meaning that the company was only able to convert 5.7% of its revenue into net income. Its return on equity (net income $77,349 divided by average stockholders’ equity $17,714 + $25,030/2 = $21,372) was 20.5% meaning that for every dollar of equity capital, Home Depot only earned income of about 20 cents.
With a current ratio (current assets divided by current liabilities) of 1.15:1 and a working capital (current assets – current liabilities) of $1,968,000 Home Depot is in a good position to meet its cash obligations as they become due. A current ratio of 1.15 translates into stating that HD has 1.15 times that of current assets than current liabilities and will have the resources to pay it’s liabilities.
Computing the quick ratio (quick assets which include cash, marketable securities and receivables divided by current liabilities $12,706), we find that Home Depot’s ratio is only .135, < 1. The ideal ratio for quick ratio should be at least 1:1 and according to the financial statements, HD is .135 or below 1 indicating that HD’s liquidity is low and that they may have difficulty in the future attempting to buy inventory on credit as a result of their quick assets being lower than their overall current assets. In a strong economy with a booming real estate and construction market, this may not be so alarming. However, in a slow economy, HD needs to be cognizant that their creditors may question HD’s ability to meet their cash obligations for fear that the company would have significant trouble turning over its inventory.
2. Are the company's receivables "turning over" at a rate that should be pleasing to management? Why or why not? What actions might management consider taking to speed up collections?
The following calculations are as follows:
Net Sales (for year ending 2/3/2008): $77,349
Accounts Receivable (1/28/2007): $3,223
Account Receivable (2/3/2008): $1,259
Average inventory (year ending 2/3/2008): [pic]
Receivables turnover rate ($77,349 / $2,241): 34.5 times
Average days outstanding (365 / 34.5): 10.6 days
It only takes 10.6 days for HD collect on their outstanding receivables and turns them into cash. HD management is...