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A. Introduction

  1. The Chief executive officer is Francis S. Blake.
  2. The home office is located in Atlanta Georgia.
  3. The last fiscal year ended on 31 January 2011.
  4. The company deals with home improvement services and has three-customer group namely: Do – It – Yourself (DIY) customers, Do- It- For- Me (DIFM) Customers and Professional Customers.
  5. The main geographic area of activity is United States.
  6. The Company’s independent accountants are KPMG LLP.
  7. According to the independent accountants, Home Depot, Inc. confirmed to all the set regulations set by the Committee of Sponsoring Organizations of the Tread way Commission.
  8. The Financial statements are the responsibility of Home Depot Inc’s management.
  9. The Closing Market price of the company’s stock is $ 26.50
  10. The Dividend per share for the year was $ 2.01
  11. The Company is listed in the New York Stock exchange
  12. The ticker symbol for the company is HD.

B. Industry Situation and Company Plans

 

The home improvement industry includes stores that deal with home repair and maintenance merchandise. These include electrical goods, tools and hardware. The companies in these industry buy merchandise from international and domestic suppliers and resell them professional contractors and to do it yourself consumers.

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The company’s plans are to introduce new technologies to transform the home improvement supply chain to include even on – line purchases. The company also plans to restructure distribution to ensure that all goods are supplied to the customers in good time. There is an investment in training of staff to provide the company’s customers with high level and quality services. This will help maintain the current customers and attract new ones in future.

C. Financial Statements

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Income Statement:

 

  • The format is most similar to Multi step format.
  • The gross profit for the financial year ending 31 January 2011 was $ 23.3 billion while for the financial year ending 31 January 2009 was $ 22.4 billion. This was an increase by
  •  The income from operations for the financial year ending 31 January was $ 8.6 billion while for the financial year ending 31 January 2009 was $ 7.3 billion. This was an increase by $ 1.3 billion
  • The net income for the financial year ending 31 January was $ billion while for the financial year ending 31 January 2009 was $ 6.0 billion. This was an increase by $ 1.8 billion

Balance sheet:

  • For financial year ending 31 January 2011

Liabilities = $ 21, 236 million

Stockholder’s equity =$ 18889million

Assets =$ 40, 125 million

 

  • For financial year ending 31 January 2010

Liabilities = $ 21,484 million

Stockholder’s equity =$ 19,393 million

Assets =$ 40, 877million

Statement of Cash Flows:

  • Cash flows from operations are more than the net income in both years.
  • The company’s main investing activity is sale of property and equipment.
  • The company’s most important source of financing is common stock.
  • Cash has increased.

D. Accounting Policies (10 Points)

Accounting policies:

  • Revenue is recognized when the customer takes possession of merchandise or receives services.
  • Merchandise inventories are stated at the lower of cost or market. 80% is valued under retail inventory method and the remaining 20% under cost method.
  • Long-lived assets are evaluated each quarter by comparing its undiscounted cash flows with carrying value.

Topics to footnotes:

  • Debt
  • Income taxes
  • Real estate

Would any of the information in the footnotes change your opinion of the company?

No, they do not change my opinion of the company.

 

E. Ratio Analysis

1. Return on Equity     

=income/ equity = 3338000/86000=38.81395349

2. Return on Assets     

= income/ assets = 3338000/ 40125000=0.083190031

3. Financial leverage    

=% change in earning per share/ % change in earnings before interest and tax

= {[3338000/5552446-2661000/5552446]/[ 2661000/5552446]}/ [(5803000-4658000)/ 4658000]

= 1.034993904

 

                       

4. Earnings per share (Basic)   

=income/number of shares = 3338000/5,552,446=0.601176491

5. Quality of income    

= net cash flow/ income = 4,585,000/3338000=1.373576992

6. Profit margin

= income / revenue =3338000/67997000=0.049090401

7. Average fixed asset turnover ratio   

= revenue/ fixed assets =67,997,000/26,646,000=2.551865196

 

Liquidity                                 

8. Cash ratio   

= cash/ current assets = 545000/13,479,000=0.040433267

9. Current ratio           

= current assets/ current liabilities = 13,479,000/10122000=1.331653823

10. Quick ratio           

=Current assets- inventory/ current liabilities=2,854,000-10122000=0.281960087

11. Receivable turnover          

=credit sales/ receivables =121000/1085000=0.111520737

12. Inventory turnover

=Cost of sales/ inventory = 44693000/10,625,000=4.2064

 

 

 

Solvency and Equity Position                                      

13. Times interest earned

=EBIT/ interest =5,803,000/530000=10.9490566     

14. Cash coverage      

= EBIT + depreciation / interest=5,803,000+1616000/530000=13.99811321

15. Debt-to-equity ratio

= debt/ equity = 1042000/86000=12.11627907        

 

Market Tests                                      

16. Price/earnings ratio           

= price/ EPS = 37.13/0.601176491=61.76222887   

17. Dividend yield ratio

= dividends/ price =     1/37.13=0.0269324   

F. Conclusion

From the results in the profitability ratios section it is evident that the company is profitable, the profit margin is relatively high and also asset turnover ratio is also high, this means that the company has created wealth for the share holders. The ROE (return on liabilities) and ROA(return on assets) indicates that the returns are high and therefore investing in this company would be profitable.

Current rations and times interest earned ratio indicates that the company is capable of paying up its liabilities using available cash, this shows that the the firm is credit worthy and can easily receive funds from outside sources. The dividends yiled ratio and price earning ratio indicate that the company also creates value for shareholders, this means that investing in the company will also increase share holder value.

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