|Type of paper:||Term paper|
|Categories:||Budgeting International business Financial analysis|
For investors and stakeholders, financial analysis is of much importance since it helps in the assessment and evaluation of the performance of the company and the financial health from various views. The financial ratios are among the aspects which are regarded to be very important in the company's financial analysis. Financial ratio analysis comprises of multiple elements of business performance, for example, leverage, efficiency, liquidity, profitability, and many others. This economic research report is determined to analyze the financial performance of Home Depot, Inc., a company that gets traded publicly and it located in the United States. The company has gotten chosen as an opportunity for investors to clients (Canaday & Flynn, 2016). This report aims to provide the rationale for selecting this specific company and bring forward as many details as it can be based on the performance of the company and provide information on the risks and merits which are associated with the company as an opportunity of investment.
Home Depot is the second largest organization in retailing globally; however, just like every firm, there exist some issues and factors which can result in creating a more productive environment for the company. The company is a home products market that is very competitive globally, and the organization has taken advantage of the market in the United States a lot and leaves the international market unused. The analysis will illustrate and examine the situation of the company, determine the problems which the company faces, and are required to get addressed.
Home Depot Inc. is a retail company associated with home improvement products, and it is the biggest in the United States, it is also the most consistent company in the growth of retailing in the United States history. Home Depot's primary operations are center in it is the main operation center, which location is in Atlanta, Georgia. The organization stores retailing get found in all states in America, and the company has been able to expand its branches further globally. To countries like China, Canada and Mexico as well. It is a corporation that gets publicly traded on the New York Stock Exchange (NYSE). The company provides various types of equipment for home improvement and Do-It-Yourself (DIY) products, as well. The list of the products is comprised of hardware, plumbing, electrical, construction types of equipment, floorboards, paint, and timber, to name a few of the materials. The base of the consumers gets comprised of four different types of consumers, which get grouped into DIY consumers, professional consumers, and Do-It-For-Me consumers. Home Depot is among the companies which are successful consistently companies locally as well as in the international market segment. It has gone on to be perfect to accomplish its mission in the market, which is to know the needs of the customers presently and trends of the market as well and be able to address them appropriately.
The financial statements of an organization give out an overview, which is always limited, and its comprehension got based on the performance level of the company. Based on the consideration of gaining of in-depth performance and insight into the company, there has to be an existence of a base which is relatable to the assessment and evaluation of the performance of the firm. An examination of the industry benchmarks and financial ratios provides the stakeholders and the investors with information which makes them aware of the company's weaknesses and strong points. The following analysis of the business rate is going to get carried outputting into account the consideration of the financial statements of the Home Depot, Inc. for the previous year's 2015, 2014, and 2013.
The current ratio is the existing assets' division by current liabilities. The rate puts more consideration into a period that is not less than one fiscal year at the moment. The ratio is the current assets measure with links to the current liabilities and aids in the development and determination of if the company has enough liquid assets, which can instantly be used to settle the immediate pays, and give out for the interests, other obligations ad debts altogether.
Current ratio= current assets divided by current liabilities
- 2013: 15372/11462=1.34
- 2014: 15279/10749=1.42
The current ratio of the company has been improving since the start of the decade until now. However, it has been facing some decline in some years, but in overall, it has improved a lot. The company is still seen to have enough liquidity regardless of a few years of less current ratio than the fiscal year.
The quick ratio gets achieved through the division of cash and receivables pus marketable securities, which are of short term period by the current liabilities. The ration is the same as the current ratio. However, it has a difference since it is devoid of inventories.
Quick ratio= (current assets-prepayments- inventory- advances)/ current liabilities
- 2013= (15372-10710)/ 11462 = 0.4067
- 2014= (15279-11057)/10749 =0.4029
- 2015= (15302-11079)/11269=0.3747
As it gets illustrated in the above calculations, the Home Depot has been decreasing in the quick ratio continuously over a couple of years. The inventory of the Home Depot creates up a significant part of the current assets. It shows that Home Depot has small quantities of cash convertibles and cash, which can be taken into use to cater to the short term requirements in the company.
Operating Profit Margin
The profit margin, which is running, is the profitability ratio; it gets calculated by dividing generating income, which is in operation by the generated revenue. Specifically, the rate creates a comparison between the generated profits of the Home Depot against the revenues which have gotten generated. The consideration of production cost is taken into account as long as there are not linked directly to the manufacture and production of the products and the services which get provided. Some of the costs confine the costs involved in administrative functions.
Operating profit margin= Operating income/revenues
- 2013: 7766/74754=0.10388=10.39%
- 2014: 9166/78812=0.1163=11.63%
- 2015: 10469/83176=0.1259=12.59%
The company's operating profit margin has been increasing since the fiscal year. It illustrates that the Home Depot income and revenue of the Home Depot has significantly increased, and the organization at the same time has checked its expenses (Ehrlich et al., 2013). It shows that the money which has been invested by the Home Depot has made profits all through the period it has been operating.
Net Profit Margin
The profitability ratio is the net profit margin. It's calculated by dividing the generated net income by the generated revenue. Specifically, the rate creates a comparison of the generated income and the generated revenues. The ratio is an illustration of the profitability levels of the company considering the net income gets compared to the taxes in the organization.
Operating profit margin= Net income/ Revenues
Through the period of the Home Depot in its operations, the company has been seen to have a net profit, which has been increasing throughout the period. It shows that the Home Depot income and revenue have significantly increased, and the firm has limited expenses. It means that the cash which the company invested in every year in the operations of the company has been making a good return to the firm. The company has been increasing the levels of its revenues the same as the profitability levels.
Return on Equity
The return on equity ratio measures how good the profit gets generated by the corporation from every cash that it has invested. Specifically, the rate provides a measure of the way the equity of the shareholders is good and is being used effectively by the company's management. The return on the equity ratio gets calculated by the division of the net income by the equity of the company's shareholders.
Return on equity= Net income/ equity
The return on equity ratio of the company has been increasing since the start of the company's start of operations (Souza et al., 2015). It shows that the organization's management has been using the equity of the shareholders properly and effectively in the income generation.
Return on Assets
The return on assets ratio measures the effectiveness of the firm in the using of the assets in the generation of the proceeds and income. The profitability ratio is calculated through the division of the net income by the total assets of the company.
Return on assets= Net income/ total assets
The return on assets ratio of the company has been increasing through, and this shows that the firm's management has been utilizing the total assets of the company properly and effectively in the generation of the income.
Each of the above ratios can be examined and get used in the provision of insight into the company's operations. The initial rate to be analyzed will be the profitability ratio, which confines the net margin, the operating margin, and the gross margin. The top line includes the gross margin. The gross margin illustrates the company's bargaining power. Mostly, the spread between the cost of the sold goods and the revenues shows the level of the firm in the power of pricing with the suppliers and the customers. The organization, at this level, is considered as oligopoly when it is not a duopoly outright.
The operating margin comprises not just the gross margin, but also it consists of the operating cost of the organization. The operating expenses of the company are supposed to be better together with the company's scale. The company has a very efficient cost structure. The subjection of the financial statement of the company and its relevance is a too intensive analysis that cannot get overstated. It is the provided case in which the details obtained from such a review comes in a handy in the company's determination, and financial health as well.
Canaday, J., & Flynn, N. A. (2016). U.S. Patent Application No. 29/495,227.
Ehrlich, N. D., Flynn, N. A., Rousseau, S. M., & Runnels, N. (2013). U.S. Patent Application No. 29/438,762.
Souza, T. T. P., Kolchyna, O., Treleaven, P. C., & Aste, T. (2015). Twitter sentiment analysis applied to finance: A case study in the retail industry. arXiv preprint arXiv:1507.00784.
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