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Financial Analysis of Home Depot

Financial Analysis of Home Depot

Financial Analysis of Home Depot

Home Depot is one of the leading companies in the home improvement industry. The company was founded in 1978 and has grown to become the largest home improvement firms in the world. It operates more than 2200 stores in North America. It is a favorite one-stop shop for individuals who are interested in professional contractors and do it yourself home improvement. The company provides a variety of branded products such as building materials, home improvement products, and garden products. The company also provides installation services for their clients. The firm has been successful in the last financial years. Its retail giant store realized over $6 billion in net profit. The company accomplished several projects in 1998 to 2000. For instance, in 1998 the company realized highest net income earnings as a percentage of the total sales. Home Depot has continued to solidify both aggressive and innovative plans for its future financial success. During the financial year 1998, the company opened 137 new stores which have contributed to its excellent financial condition over the past four years. The investors were provided with an opportunity for continued growth resulting from the expansion of the existing market.

The US home improvement industry, experienced tremendous growth over the past four years which provided an opportunity for Home Depot to enhance its services and tap the opportunities presented in the market. The consolidated financial statement of Home Depot over the last shows information concerning sales, gross profit, earnings per share and net profit. The statement shows the net sales of the company and where it increases in 1999 from 1998 with $ 38,434 million. The cost of sales also increased over the last four years, and this is why the gross profit of the firm increased over the years. Over the years Home Depot recorded net earnings of 18% and their share per capital increased to $1.29. The sales grew by 17% to $53.6 billion. At the end of the financial year 200, the company recorded the second highest sales returns in its history. The firm recorded an increase of $2.5 billion in cash at the end of the period. The debt to equity ratio also declined to 6.9% making the company have one of the most active balance sheets in the home improvement industry over the period. As such, they were able to generate additional growth and reinvest their stock. The share price of the firm increased by 12.5%, making the company outperforms major competitors in the industry. At the end of the fourth quarter, the annual dividend increased by 25% which gave the stockholders the opportunity to benefit from the excellent cash flows produced by the company. At the end of the financial year 2001, Home Depot reinvested over $3.3 billion in new stores and system enhancement. The company increased the number of staff by 40,000 to operate the new 204 stores. Home Depot had an excellent financial condition because during this period many firms were downsizing.

The interest expenses decreased over the entire duration and this why the interest expenses were low during the entire duration. The provision for income tax increased over the four years, which is the main reason for an increase in sales and net earnings. The consolidated financial statement for the past four years is essential since it provides essential financial information to the stakeholders, investors, shareholders and the managers of the company. The data on income and expenses for the entire duration describes the profitability of the company. It allows the company to make important decisions by using income statement. Such decision may include reducing cost expenses such as inefficient procedures and operations that enhance costs.

The balance sheet of Home Depot provides useful information concerning the assets, liabilities and stockholder’s liability of the company. The first part of the balance sheet indicates the current and fixed assets of the company. Over the entire period, the assets of the company increased by 23% to $26,394 in the financial year 2001. The total current assets increased in the year 2001 to $7,777 million as compared to the previous years. The value of the fixed assets such as land, buildings, leasehold improvements and construction in progress also increased significantly by the end of 2001. The second part of the balance sheet is the liabilities and stockholders’ equity. Both the current and long-term liabilities increased at the end of the financial year 2001 to $4,385 and $21,385 respectively. The paid-in capital of Home Depot is $5412 in the year 2001 and $4810 in the year 2000. The retained earnings have also increased over the period from $10151 in the year 2000 to $12,799 in the year 2001. The information contained in the balance sheet is beneficial since it provides information about the assets and liabilities that the company owns out and how much the company owes regarding short-term and long-term debt.

The statement of cash flow is another important financial statement for the Home Depot. It provides financial information in three parts which include operational activities, investment activities, and financial activities. The cash flow from the operating activities declined during the period while the cash flow over the investment activities increased during the period. This is an indication that the company spent more to open new outlets and acquire more stock which generated cash for the firm. On the other hand, the cash flow from the financial activities showed equity and debt transactions. Besides, there are long-term debts that the company used to repurchase its stock.

The income statement provides information concerning sales, operating expenses, cost of sales, earnings per share and net profit. The information is useful in making investment decisions for the company. Over the entire period of four years, the firm recorded a significant increase in sales which increased operating expenses. The net profit of the firm increased, and the revenues realized were used to open new stores and acquisition of additional staff members.

Over the entire duration, the operating return on assets for Home Depot was increasing as a result of the increase in net earnings. The net assets also declined to make the firm to realize significant sales. The sales and net income of Home Depot increased over the entire duration. As a result, the returns on equity increased because the leverage and returns on assets were growing. The company was reducing debt financing while increasing shareholders equity by repurchasing shares. The operating asset turnover of the company increased for the entire duration. The sales rose thus reducing net assets. In this way, the assets that were available were used efficiently. Therefore, the financial condition of the Home Depot during the past four years was excellent. The company realized increasing sales and opened more stores to expand its market niche.

References;
  • Subramanyam, K. R., and John J. Wild. Financial statement analysis. McGraw-Hill, 2009.
  • Penman, Stephen H., and Stephen H. Penman. Financial statement analysis and security valuation. New York: McGraw-Hill, 2007.
  • The Home Depot, Inc Annual Report 1998 in Fundamentals of Financial Accounting Retrieved   December 4, 2017.
  • The Home Depot, Inc Annual Report 1999 in Fundamentals of Financial Accounting Retrieved   December 4, 2017
  • The Home Depot, Inc Annual Report 2000 in Fundamentals of Financial Accounting Retrieved   December 4, 2017
  • The Home Depot, Inc Annual Report 2001 in Fundamentals of Financial Accounting Retrieved   December 4, 2017

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