Financial Analysis of Home Depot Term Paper

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Financial Research Report: Home Depot

For stakeholders and investors, financial analysis is of great importance as it enables them to evaluate and assess a company's performance and financial health from different perspectives. One of the important aspects is financial ratios deemed important in the financial analysis of a company. Financial ratio analysis encompasses different aspects of business performance for instance profitability, efficiency, leverage, liquidity and so on. This financial research report aims to analyze the financial performance of Home Depot, Inc. which is a publicly traded company centered in the United States. Home Depot has been selected as an investment opportunity for a client and this report seeks to provide the rationale of selecting this particular company and offering as much information as possible about this company in order to explore the merits and risks in its consideration as an investment opportunity (Home Depot, 2015).

Rationale

Home Depot Inc. is the biggest home improvement retailer in the United States and the most consistent growing retailer in the history of the United States. Home Depot's main center of operations is situated in Atlanta, Georgia. The company has its retail stores in every state in America and has expanded globally into Mexico, Canada and China as well. It is a publicly traded corporation in the New York Stock Exchange (NYSE).Home Depot offers several different products for home improvements and Do-It-Yourself (DIY) products, too. The list of its products consists of plumbing, electrical, hardware, construction materials; timber, paint and floor boards just to mention a few. The consumer base of the company encompasses four different categories of consumers, which are professional consumers, Do-It-For-Me consumers and the Do-It-Yourself consumers. Home Depot is one of the consistently successful companies in the local as well as international markets, and has continued to be so owing to its mission, which is to 'know the consumer's current requirements and trends and respond to them adequately (Home Depot, 2015).

Ratio Analysis

The financial statements of a company provide a limited overview and comprehension into its level of performance. Towards gaining a much deeper insight of the performance of a company, there has to be a relatable base of evaluation and assessment. An examination of financial ratios and industry benchmarks offers the investors and the stakeholders with implements to become aware of the company's strong points and weaknesses. The following financial ratio analysis will be carried out taking into consideration the financial statements of Home Depot for the past three years 2015, 2014 and 2013.

1. Current Ratio

The current ratio is calculated as current assets divided by current liabilities. This ratio takes into consideration a period of not more than one fiscal year at a time. The ratio is a measure of the current assets with respect to the current liabilities and helps to establish and determine whether the company has sufficient liquid assets that can be used instantaneously settle immediate payments, and provide for interests, debts and other obligations (Gibson, 2009).

Current Ratio = Current Assets / Current Liabilities

2015: - 15,302 / 11,269 = 1.36

2014: - 15,279 / 10,749 = 1.42

2013: - 15,372 / 11,462 = 1.34

The current ratio of Home Depot improved from 1.34 in 2013 to 1.42 in 2014 but deteriorated to 1.36 in the year 2015. However, in as much as the current ratio declined in the last fiscal, the company still has sufficient liquidity implied by the fact that Home Depot has $1.36 of current assets for every $1 of current liabilities.

2. Quick Ratio

The quick ratio is calculated by dividing cash and short-term marketable securities plus receivables by current liabilities. This ratio is similar to the current ratio, but the difference being, in this case, it is devoid of inventories (Troy, 2008).

Quick Ratio = (Current Assets - Inventory - Advances -- Prepayments) / Current Liabilities

2013 = (15,372 -- 10, 710) / 11,462 = 0.4067

2014 = (15,279 -- 11,057) / 10,749 = 0.4029

2015 = (15,302 -- 11,079) / 11,269 = 0.

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3747

As depicted above, the Quick ratio of Home Depot decreased continuously over the three years from, 0.4067 in 2013 to 0.4029 in 2014 and further down to 0.3747 in the year 2015. In addition, the inventory of the company makes up a huge part of the current assets. This in turn implies that the company has small quantities of cash and cash convertibles which that can be readily used to meet short-term obligations.

3. Operating Profit Margin

The operating profit margin ratio is a profitability ratio, calculated by dividing the operating income generated by the revenue generated. In particular, the ratio makes a comparison of the amount of income the company has against what was generated in revenues. It takes into consideration the costs of production that are not linked to the direct production or manufacture of the products and services being offered. Some of these costs include administrative costs (Gibson, 2009).

The operating profit margin is calculated as:

Operating Income / Revenues

2013: 7,766 / 74,754 = 0.10388 = 10.39%

2014: 9,166 / 78,812 = 0.1163 = 11.63%

2015: 10, 469 / 83,176 = 0.1259 = 12.59%

The operating profit margin of Home Depot increased throughout the three years from 10.39% in 2013 to 11.63% in 2014 and furthermore to 12.59%. This indicates that the company's revenue and income of the company has increased significantly and the company has at the same time checked its expenses. This implies that in the year 2015, for every dollar invested by Home Depot in its operations, the company made a return of 12.59 cents.

4. Net Profit Margin

The net profit margin ratio is a profitability ratio, calculated by dividing the net income generated by the revenue generated. In particular, the ratio makes a comparison of the amount of income the company has against that generated in revenues. This ratio is indicative of the profitability levels of the company corresponding to the net income in comparison to the revenues of the firm (Troy, 2008). The operating profit margin is calculated as:

Net Income / Revenues

2013: 4,535 / 74,754 = 0.06066 = 6.07%

2014: 5,385 / 78,812 = 0.06832 = 6.83%

2015: 6,345 / 83,176 = 0.07628 = 7.6%

The net profit margin of Home Depot increased throughout the three years from 6.07% in 2013 to 6.83% in 2014 and furthermore to 7.6%. This indicates that the company's revenue and income has increased significantly and the company has also limited its expenses. This implies that in the year 2015, for every dollar invested by Home Depot in its operations, the company made a return of 7.6 cents. This indicates that the company has been not only increasing its level of profitability but also increasing their revenue levels.

5. Return on Equity

The return on equity ratio measures how well a corporation generates profit from every single dollar that it invested (financed by investors and stakeholders). In particular, the ratio gives a measure of how well the shareholders' equity is being utilized by the management of the company. The return on equity ratio is calculated by dividing the net income of the company by the equity of its shareholders.

Return on Equity = Net Income / Equity

2013: 4,535 / 17,777 = 0.2551 = 25.51%

2014: 5,385 / 12,522 = 0.4300 = 43%

2015: 6,345 / 9,322 = 0.6806 = 68.06%

The return on equity ratio of Home Depot increased throughout the three years from 25.51% in 2013 to 43% in 2014 and furthermore to 68.06%. This indicates that the management of the company is properly utilizing the shareholders' equity in generating income. The company in the year 2015 generated 68.08 cents for every dollar financed or invested by the shareholders.

6. Return on Assets

The return on assets ratio measures just how effective a company is in the utilization of its assets to generate income or proceeds......

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