HomeDepot Inc. is a retailer company involved selling home improvementproducts as well as building materials. It was founded on June 29,1978, by Bernard Marcus, Pat Farrah, Kenneth Gerald Langone andArthur M. Blank. The company operates the stores rendering full andwarehouse-style service. The retail stores deal in the sales of aconsortium of building materials, home face-lifting products as wellas service provision. Home Depot Inc. also carries out installationservices at national level through the help of pre-screenedcontractors for the products that include windows, floors, cabinets,water heaters, roofs as well as vinyl siding (Forbes, 2016). Thecompany offers its services to people concerned with professionalremodeling, general contractors, small business owners, repairers,and tradespeople. The retail shops offer support and special servicesto professional customers and remodel and repair contractors.
TheHome Depot Inc. has its headquarters at Atlanta Store Support Centerin Atlanta, Georgia. According to the U.S Securities and ExchangeCommission, Home Depot is a leading home improvement retailer withinUS, with their closest competitor being Lowe’s. The company hasretail stores that are distributed in all the 50 states in the US. Itoperates in large warehouse-type buildings of about 105,000 ft2,while the megastores, like the one in Vauxhall New Jersey operatingin larger stores. Outside the US, Home Depot also has operations inall the nine provinces of Canada, Mexico and China. As at May 2016,Home Depot Inc. had about 385,000 employees (Forbes, 2016).
HomeDepot Inc.’s revenues were 88.52B, 83.18B, and 78.81B in 2016, 2015and 2014 fiscal years respectively. The value of goods sold was58.25B in 2016, 54.22B in 2015 and 51.42B in 2014 fiscal year. As aresult, the company had a gross profit of about 30.27B in 2016,28.95B in 2015 and 27.39B in the fiscal year ending 2014.Additionally, there have been widerangesof expenses for the company, some of which entail development as wellas research, selling of general and administrative expenses,non-recurring expenses among others. The company’s pretax incomecameto about 11.02B in 2016, 9.98B in 2015 and 8.47B in 2014. Afterpaying the income tax, the company generated a net profit of 7.01B in2016, 6.35B in 2015 while 5.39B was generated in the fiscal yearending 2014 (Stock Analysis, 2016).
Fromthe above information onsales and profitability, itis evident that the company’s operating income increased from 2014to 2015 and also from 2015 to 2016. It can be noted that the earningsbefore the payment of income taxes increased throughout the period aswell. The improvement in working income and also the pre-tax incomeindicates that the company had an increase in the net earnings from2014 to date. While the company’s gross profit margins improvedduring the period between 2014 and 2015, and deteriorated between2015 and 2016, the operating profit margins improved throughout thefiscal periods. It is also evident that the net profit marginimproved during the same periods (NASDAQ, 2016).
Inventoryis a representation of the raw materials as well as items that areeither available for sale or are being prepared for selliing. Thesegoods are valued through individual means by the cost or currentmarket value or average cost method. Upon the sale of these goods,their values are transferred to the income statement and representthe cost of goods sold. Furthermore, a balance sheet is a set ofinformation that relates a company’s assets (what it owns),liabilities (debt) as well as the value of the business for thestakeholders at a particular time. Some companies do not includeinventory into its balance sheets because inventory the values aregeneral estimates and not the true values. Therefore, theseinventories can either be undervalued or overvalued and might notreflect the actual financial position of the company upon when thesegoods and services are sold (Rothman, 2015).
Inventoryturnover is another important factor in measuring the performance ofthe Home Depot Incorporation. Inventory turnover represents thenumber of times that inventory is sold within a specified duration.Therefore, this is a measure of efficiency rather than that ofprofitability. The ratio gives the investors the knowledge of howlong the inventory takes on the shelves before being cleared out. Incases where the turnover is low, it may mean that drastic measuressuch as discounts need to be incorporated in the future so as to movethe items and remove the shelf space. Home Depot Inc. has had itsinventory turnover improve steadily from the fiscal year ending 2014up to the fiscal year ending 2016. The turnover ratios for the lastthree years were 4.72 in 2014, 4.90 in 2015 as well as 5.09 in 2016.High inventory turnovers indicate that there is reduced cost onstorage. Therefore, the costs for inventory storage have beenreducing with increase in turnover rates in 2014, 2015 and 2016(Gurufocus, 2016).
Grossprofit margin represents the amount of money that the company canavailfor the purposes of covering operations among other expenditures.Operating profit margin is obtained by dividing operating income withthe revenue. Additionally, net profit margin is obtained throughmathematical manipulations by dividing net income by revenue. Overthe past three fiscal years, Home Depot has had a lot of changes inits profit margins. The gross profit margins were 34.19%, 34.81% and34.75% in the years 2016, 2015 and 2014 respectively. The operatingprofit margin was 13.30% in 2016, 12.59% in 2015 and 11.63% in thefiscal year ending 2014, while the net profit margin was 7.92% in2016, 7.63% in 2015 and 6.83% in 2014 (The Home Depot, 2016).
Asat May 2016 an apartment in Beijing China costs around 38,000 yuanper square meter. The piece of land on which such property isdeveloped would cost a developer around 18,870 yuan per square meter.With the price of land being about 50% of the final sales price ofthe property, the developer would obtain a profit margin of about35%. This is a slightly higher ratio compared to the gross profitmargin for Home Depot in 2016 34.75% (Shao& Qing 2016).
ROE,which is a measure of the net income divided by the shareholder’sequity, have also improved throughout the period. The return onequity (ROE) was 110.97% in 2016, 68.06% in 2015 and 43.0% in thefiscal year ending 2014. With ROE at 43.0% in 2014, it is evidentthat the net income for the company was far much less than theshareholders’ equity. The same scenario is evident in the ROE valuefor the fiscal year ending 2015 68.06%. However, the ROE in 2016fiscal year was different. The ratio at 110.97% indicates that thenet income value is much more than shareholders’ equity (StockAnalysis, 2016).
Thedebt to equity ratio is a solvency ratio that is obtained by dividingtotal debt by the net shareholders’ equity. The debt to equityratio for Home Depot has deteriorated over the years, especially from2014 to 2015 and from 2015 to 2016 fiscal years. Debt-capital ratiois the total amount owed divided by the total debt added toshareholders’ equity. The rate has also reduced from 2014 to 2016for the retail company. Interest coverage ratio is a solvency ratiothat is obtained by diving EBIT by interest payments. Home Depot hadits interest coverage ratio increase during the period from 2014 to2015 but then declined between 2015 and 2016 (The Home Depot, 2016).
HomeDepot Inc. has a borrowing strategy that entails commercial paperprograms that allow it to obtain up to $2.0B credit. The company hadall its short-term loans in the fiscal years 2014 and 2015 coveredunder these commercial paper programs. On top of these paperapplications, the company possesses a back-up credit facility withsome banks that allow a borrowing up to $2.0 billion. The primarycredit facility was to expire in July 2017, but the company was ableto replace it with a new one that expires in December 2019. As at thefiscal year ending 2016, the company had complied with all theagreements that it made with all the associated credit associates.Therefore, the company expects no impact from its debts on theliquidity as well as the capital resources (Stock analysis, 2016).
Currentand Quick Ratios
Acurrent ratio is a type of liquidity fraction that is obtainedthrough division of current assets by current liabilities. Thecurrent ratio in the past three fiscal years for Home Depot was 136%for both fiscal years 2015 and 2016 while it was as high as 142% in2014. The figure shows that the ratio deteriorated from 2014 to 2015and then remained constant all through the fiscal year ending 2016.Another form of liquidity ratio is the quick ratio, which is thedivision of the sum of the cash, marketable investments andreceivables by current liabilities. The company’s quick ratios were41% in 2016, 37% in 2015 and 39% in the fiscal year ending 2014. Thisshows that the quick ratio reduced between 2014 and 2015 fiscal yearsthen improved between 2015 and 2016 to a figure above that of the2014 fiscal year (NASDAQ, 2016). Additionally, cash ratio is aliquidity ratio as well and is obtained by dividing the sum of cashand short-term marketable investments by the current liabilities.With 18% in 2016, 15% in 2015 and 18% in 2014, it is evident that thecompany’s cash ratio deteriorated during the period between 2014 to2016 fiscal years (Stock Analysis, 2016).
Fromthe fiscal year ending 2007 up to 2016, the current ratios have beenas follows: 1.39, 1.15, 1.20, 1.34, 1.55, 1.34, 1.42, 1.36 and 1.36from 2007 to 2016 respectively. Therefore, we can place an averagefor the whole period at around 1.34. From this average ratio, itmeans that the past three ratios in 2014, 2015 and 2016 were animprovement from the average ratio (The Home Depot, 2016).
NWCand Fixed Asset Turnovers
Assetturnover is a measure of how efficient a company is in generatingrevenue from its assets. It is obtained by dividing revenue byaverage total assets. The Home Depot’s asset turnovers for the pastthree fiscal years are: 1.93 in 2014, 2.07 in 2015 and 2.15 in 2016.From the asset turnover values, it is important to note that thefigures have improved during the period between 2014 and 2016. Netfixed asset turnover is an activity ratio that is obtained bydividing total revenue by the net fixed assets. The net capital forthe company has also improved over the three fiscal years in question(Gurufocus, 2016).
Workingcapital is a measure of a company’s capability to take care of theshort-term liabilities, also known as the company’s short-termliquidity. It is obtained by determining the difference betweencurrent assets and current liabilities that a company possesses. Cashflow statements contain changes in the working capital of a givencompany. This is because it is one of the best ways to which the netincome of a company can differ from the operating cash flow. It isobtained by adding up the entire category that changed in theoperating assets and liabilities within cash flow statements. HomeDepot had a change in the working capital of about $258 million in2014, $209 million in 2015 and 401 million in 2016 fiscal year. Fromhere, it is evident that the amount deteriorated from 2014 to 2015fiscal years while improving from 2015 to the fiscal year ending 2016(The Home Depot, 2016).
Thefixed asset turnover ratios of Home Depot Inc. from 2012 to 2015 are2.88, 3.11, 3.38, and 3.66 respectively (Stock Analysis, 2016). Theincrease in the fixed asset turnover ratio is a good indication ofthe improvement in the company’s business capacity due to improvedcash availability. It shows that there is reduced amount of moneythat is tied up in the assets, translating to more of the money beingavailable for business expansion. The home improvement industry hadfixed asset turnover ratios of 3.90, 3.96, 4.00 and 4.20 from 2012respectively. Therefore, Home Depot Inc.’s fixed asset turnoverratio has been lower than that of the industry in during the periodbetween 2012 and 2015 (Stock Analysis, 2016).
Thecompany’s current stock price stands at $134.54, with a marketvolume of about 3,122,618 and a market capital of about $168.57billion. The stock price ranges from a day high of about $134.79 to aday low of about $133.83. In the fiscal year ending 2014, thebeginning stock price for a home depot share was $61.85 and theending price $82.34. Therefore, there was an average profit of about$20.49, translating to a gain ratio of 33.13%. In the fiscal yearending 2015, the average starting price was $82.34 while that of theending price was $104.97. Hence, there was an average gain of about$22.63, a gain ratio of about 27.48%. Additionally, in the fiscalyear ending 2016, the average opening price was $104.97 while theending price was $132.25.Therefore, there was a profit margin ofabout $27.28, representing a 25.99% gain (The Home Depot, 2016).
Figure:a graph showing the trend on stock price for the past three years
Fromthe above values on stock pricing and as evident in the graph, therehas been a general increase in the stock price for Home Depot sharesover the years. Though there are fluctuations of the stock price,there has been an increase in the average annual stock price from thefiscal year ending 2014 to 2016. Consequently, there has been gaingenerally across these financial periods, considering the opening andclosing prices of the shares. However, there has been a drop in theprofit margin across these years. From the previous data on profitmargins ($20.49 in 2014, $22.63 in 2015 and $27.28 in 2016), it isevident that there has been an increase in the profit margins for thecompany regarding cash flows. Therefore, it is appropriate to assertthat the stock price follows the profit trends.
Earningsper share ratio (EPS) is a standard rate in the financial world, andit refers to the portion of the profit that a company allocates to ashare of stock. Therefore, this ratio is a major indicator of acompany’s profitability. It is a major consideration of the primaryvariables that determine the value of stock. It is calculated asfollows (MyAccounting Course, 2016):
ForHome Depot, taking the net income as $7.01B, preferred dividends paidover the year as $6.5B and outstanding shares as 90 million, we cancalculate the company’s EPS as below:
EPS= [(7.01-6.5)*109]/ (90*106)= 5.67
Fromthe calculation above, it is evident that for every share that thecompany sells, there is a profit of $5.67 that the company earns.
PriceEarnings ratio is an important tool that helps the investors knowwhether it would be profitable for them to buy shares in a givencompany or not. PE ratio is the fraction of the stock price over theearnings per share of the same stock. It is obtained by taking thecurrent market value of a stock and dividing by the EPS value of thecompany. For instance, knowing the Home Depot EPS value of the fiscalyear ending 2016 as $5.67 while the stock price for the same periodas $132.25, we can calculate the P/E as follows:
P/E= 132.25/5.67 = 23.32
EBITDA(also known as enterprise value EV), which represents the amountthat a company earns before exclusion of the amounts on interest,taxes, depreciation as well as amortization, measures the profitwithout considering factors such as accounting practices, financingcosts as well as tax tables (NASDAQ, 2016). For the fiscal yearending 2016, Home Depot had a net income of $7.01B, interest expensesof $919M, revenue of $4.10B and shares outstanding of about $1.35B.From the above data, we can obtain as the sum of all the aboveamounts of money, that is:
EV/EBITDA= $(7.01+0.919+4.1+1.35) B = $13.38B (Bloomsbury, 2012)
Fromthe above example, we sum up the various deductions to the net profitin order to arrive at the same value that the company ought toreceive before such deductions.
Source:Bloomsbury. (2012). Goodsmall business guide 2013: How to start and grow your own business.London: Bloomsbury, page 199
Theownership summary of the Home Depot Inc. gives a clear line of theshareholdings that are held by different groups that are part of thecompany. There are three major types of shareholders within thecompany institutional holdings, mutual fund holders and directholders. Institutional holdings make the majority of the shareholdingin terms of percentage worth, and the major institutions includeCapital World Investors (6.91%), Vanguard Group Inc. (6.08%), StateStreet Corporation (4.43%), FMR, LLC (3.23%), BlackRock InstitutionalTrust Company, N.A. (2.75%) and JP Morgan Chase & Company(1.85%), among others. Top mutual fund holders, which come second inthe ownership stake include Washington Mutual Investors Fund (2.07%),Vanguard Total Shock Market Index Fund (1.96%), Growth Fund ofAmerica Inc. (1.92) and Vanguard Index Fund (1.29%) among otherholders (NASDAQ, 2016).
Directholders make the least percentage concerning shareholding. Some ofthe major direct shareholders include Blake Francis S. (754,477),Tome Carol B. (577173), Crow Timothy M. (200,551), Ellison Marvin R.(182,902) and also Menear Craig A. (142,622), among other players(YahooFinance, 2016).
Regardingfinancial standing currently, it is evident that Home Depot Inc. isdoing tremendously well. This is as a result of the financialposition and projections that were released for the first quarter offiscal 2016. With a sale of $22.8 billion for the same period, therehas been an increase of 9% during the same period. While thecomparable store sales had an increase of 6.5%, computer sales wereup by 7.4% in the US stores. The net earnings increased to $1.8B in2016 from $1.6B in 2015, while the diluted earnings per single sharewere up by 19%. From these projections, it would be correct to saythat everything seems to be running smoothly for the company, andthere are no agency problems that should worry the shareholders aswell as the investors out to buy the shares (The Home Depot, 2016).
14,2016 from www.homedepotar.com
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