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Financial Ratios

A1: Based on the information gathered on the 5th August 2002, Home Depot is ranked at 18th, in terms of revenue rank. By looking at the industry rank, in the ‘Specialty Retailers’, Home Depot is ranked at 1st place. A2: From the information given, it can be said that Home Depot is financially strong, given that the revenue and profits it generated has increased quite significantly from the previous year.

Its revenue has increased for 17.1% to rake up at $53,553 millions, and its profits increased by 17.9% to $3,044 millions. (please refer to the attached printouts from the Internet). Its assets showed a stagnant position, worth at $26,394 millions and the stockholder’s equity is worth at $18,082 millions. Currently, the market value of Home Depot, as of 14th March 2002, is valued at $113,300.3 millions of dollars. Besides that, Home Depot has managed to elevate its rank from 23rd place in last year to 18th place in this year.

A3: Comparing the data gathered from the Fortune’s web site, the details are tabled below: a) From the details tabled above, if we look at the profit figure per se, it can be deduced that Home Depot is more profitable from its competitor, Lowe’s.

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This is because Home Depot has recorded profits amounting to $3,044 millions, almost tripled the profit figure recorded by Lowe’s, $1,023 millions. But, looking at different angle, in terms of performance, Lowe’s has the advantage over Home Depot, in the sense that Lowe’s has recorded a higher percentage of profit increase than Home Depot’s, which is 26.3% compared to 17.9%.

b) Home Depot has the greatest “profits as % of revenues” and “profits as % of stockholder’s equity” with figure of 5.7% and 16.8%, respectively. “Profits as % of revenues” or known as “Gross profit margin” in the text refers to the degree of profitability in producing and selling goods before taking into account any other expenses. As such, the figure indicates that Home Depot managed to maintain higher profitability than Lowe’s.

“Profits as % of stockholder’s equity” measures the profits that can be generated from the amount invested into the company by the stockholders. High percentage means that the investment made is being used effectively that the company managed to generate higher profit, i.e. its worth the money invested. Low percentage indicates that the investment is not quite favorable in the sense that the money invested is not being able to generate much profit. This term is referred in text by the name of Return On Stock Fund (ROSF) which is the percentage of the profits generated against the stockholder’s equity.

A4: Trend percentage for ‘Net Sales’ and ‘Cost of Merchandise’ for the last four years (please refer to the attached printout of Home Depot’s 10 year summary of financial and operating results). The ‘Cost of Merchandise’ can be interpreted as the ‘Cost of Goods Sold’ which can derive from the following equation: Gross margin = Sales – Cost of Goods Sold Cost of Goods Sold = Sales – Gross Margin. From the analysis tabled above, it can be deduced that the growth rate for both accounts is quite similar. The range is between 23% – 27%. However, the ‘Net Sales’ has recorded a higher growth rate compared to ‘Cost of Merchandise’. The growth for ‘Net Sales’ is 27% (from 1998 to 1999), 24% (from 1999 to 2000) and 26% (from 2000 to 2001).

Considering the fact that Home Depot receives quite a stiff competition from the other competitors, it can be said that the growth rate is favorable, very promising, and quite consistent. This would probably attracted other investors to invest into this company thus enabling Home Depot to expand the business. A5: The number of stores that will be opened in the next month is eight stores (please refer to the attached printout titled ‘Stores Opening Soon’ from the Home Depot web site). Out of these, seven stores will be opened in the United States the one remaining will be opened in Canada. Besides for the next two months or so, Home Depot will also expanding the business aggressively in both countries. This might indicate that in the future, the business will be much better and an increase in revenues is expected.

The increase in revenue can be expected if there is no other dramatic changes in economic environment. Besides that, the revenue that could be generated is also depending on other circumstances, such as the law policy in the Canada that might increase the amount of expenses (i.e. more tax for foreign company), high or low spending power in the Canada, economic downturn in the US, any many other external factors. Although these factors should have been taken into account before Home Depot expands the business, but looking at the opportunities, Home Depot could generate a much higher profit than the previous years.

Bibliography

1. Peter Atrill & Eddie Mclaney, “Accounting and Finance for non-specialist”, pg 146-149.

2. Biz/ed, “Financial Ratios – General Information on Ratios”, www.bized.ac.uk/stafsup/options/ratio/rahome.htm

3. Home Depot, “10-year summary of Financial and Operating results”, www.homedepot.com

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