Home Depot Financial Analysis

Topics: Income statement, Generally Accepted Accounting Principles, Financial ratios Pages: 8 (1835 words) Published: September 24, 2008

(Note: all $ amounts are stated in millions)


a)There are 3 years covered in the following primary comparative financial statements, namely fiscal years ended 1 February 2004, 2 February 2003 and 3 February 2002: •Consolidated Statement of Earnings

Statement of Stockholders Equity and Comprehensive Income •Consolidated Statements of Cash Flows

There are 2 years covered in the Consolidated Balance Sheet, namely fiscal years ended 1 February 2004 and 2 February 2003.

All of the primary comparative financial statements were audited, namely the Consolidated Balance Sheet, the Consolidated Statement of Earnings, the Statement of Stockholders Equity and Comprehensive Income and the Consolidated Statements of Cash Flows.

The auditors were KPMG LLP.

The auditor’s conclusions about these Statements (i.e. the audit opinion) was that the Consolidated Financial Statements present fairly, in all material respects, the financial position of Home Depot and its subsidiaries in conformance with accounting principle generally accepted in the United States of America. The auditors also highlight that there was a change in the method in which the Company accounted for cash considerations received from vendors.

This information was found in Note 1 (Summary of Significant Accounting Policies – Fiscal Year) to the Consolidated Financial Statements and in the Independent Auditors’ Report.

b)The details relating to changes in the amount of retained earnings are found in the Consolidated Statement of Stockholders’ Equity and Comprehensive Income.

c)1. Operating activities: All years – positive
2. Investing activities: All years – negative
3. Financing activities: All years – negative

The Cash balance increased from 4 February 2001 to 3 February 2002, decreased from 3 February 2002 to 2 February 2003 and increased from 2 February 2003 to 1 February 2004.

This information was found in the Consolidated Statements of Cash Flows.

d)The amount of net sales during the fourth quarter of the fiscal year ended 1 February 2004 was $15 125.

The amount of net sales during the fourth quarter of the fiscal year ended 2 February 2003 $13 213.

The percentage change is therefore a 14.5% increase ((15125-13213)/13213 * 100).

This information is found in Note 10 (Quarterly Financial Data - Unaudited) to the Consolidated Financial Statements.

The pattern of quarterly net sales, as seen in the graph above, is consistent from year to year. The general trend of net sales in each year increases in the 2nd quarter and steadily decreases in the 3rd and 4th quarters. The increased sales in quarter 2 could have resulted from volume drives (i.e. by increase in promotional activity), particularly due to the anniversary of the store opening being in this quarter.

The overall sales pattern could be explained by seasonal fluctuations in demand. One possible reason for this is that the majority of Home Depot products are outdoor related in nature, which will attract an increased demand in quarter 2, which falls in the US Summer season.

Another possible reason for an increase in sales in quarter 2 is if their annual price increase takes place in quarter 3. This would create an increase in demand for goods prior to the price increase taking effect, increasing sales in quarter 2, with a resultant steady decline in sales for the remainder of the year.

e)Management are of the opinion that the company’s financial condition remains strong. The key indicators of this, in management’s opinion, are: •Growth in sales
Increase in comparable store sales
$2.9 billion in Cash and Short Term Investments
Low debt-to-equity ratio of 6.1%
Improvement in return on invested capital of 20.4%
Opening of 175 new stores
Percentage relationship between net sales and selling and store operating expenses, pre-opening expenses, general and administrative expenses, interest...
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