Home Depot Financial Analysis

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Overview
Office Depot, Inc. (“Office Depot”), a supplier of a broad assortment of office products and business services throughout the United States and worldwide, announced on February 20, 2013 a merger agreement with OfficeMax, Inc., which will better equip them to compete in the rapidly-changing industry. In fiscal year 2012 alone, Office Depot generated $10.7 billion of revenues from its products and services, yet industry reviews of this company seem unfavorable.

In this FSA Case Analysis, our team takes a careful look at Office Depot’s most recent financial statements; and, using the FSA spreadsheet, performs an internal environment analysis of its liquidity, solvency, operating efficiency and capital structure. In order to make the analysis complete, prior period reported information is compared with the latest information, along with industry standards. For the liquidity analysis, we assess Office Depot’s current ratios, quick ratios, inventory turn rate based on COGS, and Altman Z-scores, as well as examine its accounts receivable collection. Its solvency is investigated using cash flows from operations, from investing activities, and from financing activities, while, as measures of operating efficiency, its return on assets (ROA), return on sales (ROS), and asset turnover are evaluated. ROA and ROS are used for the DuPont Equation. Economic profit, breakeven, and capital structure analyses are performed, as debt-to-equity ratio and leverage ratio are computed given the ROA and ROE. Lastly, some interesting findings are enumerated and explored at the end of the report.

Liquidity Analysis
In assessing an organization’s financial health, one of the most important measures that investors look at is liquidity. Since it indicates the organization’s ability to ward off short-term threats, it is especially important for an organization to maintain a certain level of liquidity that will assure its survival, in case the need arises.

Office Depot’s current ratios, as shown in Figure 1, indicate that the firm is liquid, but is becoming less liquid, from a liquidity ratio of 1.34 in 2011 to 1.32 in 2012. It is much less liquid than the industry average of 2.13.

Figure 2 shows its quick ratios of .70 in 2011 and .72 in 2012, indicating the firm’s dependency on inventory or other non-cash current assets to liquidate short-term debt. With the industry average of 1.02, this means that Office Depot’s ratios are low, compared with other firms in the same industry. This also means that if inventory fails to turnover, this firm would not be able to meet its current obligations with the readily-convertible assets on hand.

Its inventory turn rate based on COGS (Figure 3) is higher than the industry average of 2.12 and is improving from 7.03 in 2011 to 7.09 in 2012, indicating an effective sales strategy. Although Figure 4’s Altman Z-scores from both years predict that the firm is safe from going bankrupt, this measure may not be reliable because Office Depot is not a manufacturing firm. Also, the rest of the factors taken into consideration suggest otherwise.

Although an analysis of the firm’s accounts receivable collection in Figure 5 reveals that the firm’s tight credit terms are having a negative effect on cash flow, the increase is minimal, going from 27.41 in 2011 to 27.44 in 2012, while the industry average is 64.67.

Solvency Analysis
As shown in Figure 6, Office Depot was not solvent in 2010 and 2011 with negative net cash flows of $32,420,000 and $56,797,000 respectively. However, it became solvent in 2012 as its net cash flow jumped to $100,130,000.

Figure 6: Net Cash Flow from 2010 to 2012 (in thousands)

The stakeholders, nevertheless, should not be overoptimistic about the improvement in solvency since it was not a result of cash flow from operations. Instead, it was a result of the...
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