Granados 1 Dalila Granados Professor Wallace Accounting 2301 August 11, 2010 The Home Depot A. Introduction Francis S.

Blake is the Chairman, CEO, and Chief Executive of The Home Depot. The Home Depot’s home office is based at 2455 Paces Ferry Road NW Atlanta, GA 30339. The ending fiscal year was January 31, 2010. The Home Depot stores sell building materials, home improvement supplies, and lawn and garden products to do-ityourself customers, do-it-for-me customers, home improvement contractors, trades people, and building maintenance professionals. The company manages The Home Depot and EXPO Design Center stores that offer numerous installation services, including products such as carpeting, countertops, cabinets, flooring, and water heaters primarily to business-to-business customers, including home builders, professional contractors, municipalities, and maintenance professionals. They also provide professional installation of many different products through its in-home sales programs, like generators, furnaces, and central air systems. Most of The Home Depot’s activity is primarily in the United States, Canada, Mexico, and they have recently broadened out to China. The financial statements of The Home Depot are audited by KPMG LLP, an independent registered public accounting firm. KPMG LLP states that The Home Depot is following all procedures required of them to provide adequate and precise financial statements. The responsibility of the financial statements lies with managers. The managers are

95. Blake.921. Financial Statements Income Statement • • • • • The format consists of a multi-step format.Granados 2 responsible for the effective control internally for the financials.000.000 Trend: The trend shows that from 2007 to 2009 there was a decrease in profit. as well as driving a high return on invested capital.4 Billion Income from Operations: $4. If this trend continues. Balance Sheet • Assets= Liabilities + Stockholders’ Equity . Francis S. revenue.com>. and continuing to provide even more customer focus.8 Billion Net Income for last 2 years: $4.homedepot. more consistent. B. 2010 will also show a decline.51. Industry Situation and Company Plans The management and leadership has been implementing changes in their stores to make customer experience simpler. investing in their employees. The Home Depot is traded on the New York Stock Exchange (NYSE) under Dow and its ticker symbol is ‘HD’. bringing outstanding products and services to consumers. Gross Profit: $22. Internet site address for The Home Depot is <http://www. and income. Chairman and Chief Executive Officer. while the dividend per share for the year is 0. and returning excess cash to shareholders. improving Home Depot stores. The closing market price as of 07/30/2010 is $28. knows that the key to success is to be focused on the retail business. C.

000+$17.871. When the Company receives payment from customers before the customer has taken possession of the merchandise or the service has been performed.041.170. The Company also records Deferred Revenue for the sale of gift cards and recognizes this revenue upon the redemption of gift cards in Net Sales. D.393.000) + ($19.000. The liability for sales returns is estimated based on historical return levels.000.000.Granados 3 ($40.387.000. net of estimated returns and sales tax. Accounting Policies The following information is taken from The Home Depot’s Form 10-K: Revenues “The Company recognizes revenue.000.000.000.000) $82.484. Cash Flow • The cash flow from operations is more than the income for each of the past two years.000. at the time the customer takes possession of merchandise or receives services. the amount received is recorded as Deferred Revenue in the accompanying Consolidated Balance Sheets until the sale or service is complete.777.000 for years 2009 and 2008.000+$23.000.041.000+$41.000 $82. • • Main Investing Activity (Cash Outflows): Capital Expenditures Most Important Source of Financing (Cash Inflow): Net Borrowing Overall cash has decreased over the past two years.000.041.000 = $44. Gift card breakage income is recognized based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by the customer is .877.164.000 + $37.000 = $82.000.000) = ($21.

” Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. $37 million and $36 million. The valuation allowance for Merchandise Inventories valued under the cost method was not material to the Consolidated Financial Statements of the Company as of the end of fiscal 2009 or 2008. money market funds and U. 2008 and 2007. Depreciation and Amortization . of gift card breakage income. respectively.Granados 4 remote. The Company evaluates the inventory valued using the cost method at the end of each quarter to ensure that it is carried at the lower of cost or market. government agency securities.S. The Company's Cash Equivalents are carried at fair market value and consist primarily of high-grade commercial paper. as determined by the cost method. the Company recognized $40 million. As the inventory retail value is adjusted regularly to reflect market conditions. and distribution centers record Merchandise Inventories at the lower of cost FIFO or market. These Merchandise Inventories represent approximately 11% of the total Merchandise Inventories balance. the inventory valued using the retail method approximates the lower of cost or market. This income is recorded as other income and is included in the accompanying Consolidated Statements of Earnings as a reduction in SG&A. including retail operations in Mexico and China. During fiscal 2009. as determined by the retail inventory method. 82% was approximately valued under the retail inventory method. Certain subsidiaries. Merchandise Inventories The majority of the Company's Merchandise Inventories are stated at the lower of cost FIFO or market.

Granados 5 The Company's Buildings. Fixtures and Equipment Leasehold Improvements Topics of Financial Statement Notes: • • • • • • • • • • • • Summary of Significant Account Policies Disposition and Acquisitions Staff Accounting Bulletin No. whichever is shorter. The Company's Property and Equipment is depreciated using the following estimated useful lives: Life 10-45 years 3-20 years 5-45 years Buildings Furniture. 108 Intangible Assets Debt Income Taxes Employee Stock Plans Leases Employee Benefit Plans Basic and Diluted Weighted Average Common Shares Commitment and Contingencies Quarterly Financial Data (Unaudited) . Leasehold Improvements are amortized using the straight-line method over the original term of the lease or the useful life of the improvement. Fixtures and Equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Furniture.

5%) 4. Financial Leverage = (Return on Equity – Return on Assets) 2009: 5.263) / 2) 3.8% = (14.45 = (5528 / 2260) 6. Profit Margin = (Net Income / Net Sales Revenue)* 2009: 4. Quality of Income = (Cash flow from Operating Activities / Net Income)* 2009: 1. Ratio Analysis Tests of profitability 1.3% – 8.3% = (2661/ ((19393 + 17777)/2)) 2.0% = (2661 / 66176) 2008: 3.32 = (2260 / 1707) 5.Granados 6 E.324 + 52. Return on Equity = (Net Income / Average Stockholders’ Equity) 2009: 14. Average Fixed Asset Turnover Ratio = (Net Sales Revenues / Average Net Fixed Assets) 2009: 2.2% = (2260 / 71288) 7.93 = (5125 / 2661) 2008: 2. Return on Assets = (Net Income + Interest Expense (net of tax) / Average Total Assets) 2009: 8.55 = (2661/ 1716) 2008: 1. Earnings per Share = (Net Income / Average Number of Shares of Common Stock Outstanding)* 2009: 1.5% = ((2661 + 821) / ((44.096 = (77349 / ((37345 + 36477) / 2) Tests of Liquidity .

047 = 519 / 11153 9.36 = ((13900 – 10188) / 10363)) 2008: 0. Inventory Turnover = (Cost of Goods Sold / Average Inventory) 2009: 8. Cash ratio = ((Cash + Cash equivalents) / Current liabilities)* 2009: . Debt-to-Equity Ratio = (Total liabilities / Stockholders’ equity) 2009: 1.Granados 7 8. Times Interest earned = ((Net Income + Interest Expense + Income Tax Expense) / Interest Expense)* 2009: 6.58 = (5125 / 676) 15.34 = 13900 / 10363 2008: 1. Current ratio = (Current Assets/ Current Liabilities)* 2009: 1. Quick ratio = (Quick Assets / Current Liabilities)* 2009: 0. Receivable turnover = (Net Credit Sales / Average Net Receivables) 2009: 68.11 = (21484 / 19393) Market Tests .95 = ((2661 + 676 + 1362) / 676) 2008: 6.39 = (43764 / ((10188 + 10673) / 2)) Tests of Solvency and Equity 13.67 = ((2260 + 624 + 1278) / 624) 14.20 = 13362 / 11153 10.14 = (65955 / ((964 + 972) / 2)) 12. Cash Coverage = (Cash flow from operating activities / Interest paid) 2009: 7.24 = ((13362 – 10673) / 11153)) 11.137 = 1421 / 10363 2008: .

51 / 1.000 54.Granados 8 16.4% = 0. Dividend Yield Ratio = (Dividends per share / Market price per Share) 3.698 17.000 29-Jan-06 81.352.349.000 28-Jan-07 90.95 / 28.000 61.054.79 = 28. Physical Statements Income Statements PERIOD ENDING Total Revenue Cost of Revenue 3-Feb-08 77.191. Price / Earnings Ratio 16.000 .511.000 51.837.51 F.

348.485.000 - - - Net Income Preferred Stock And Other Adjustments Net Income Applicable To Common Shares 4.547.000 1.000 $5.000 9.000 27.000 3.000 9.210.000 143.700.000 27.242.000 $4.000 185.000 - 16.000 - Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income From Continuing Ops Non-recurring Events Discontinued Operations Extraordinary Items Effect Of Accounting Changes Other Items 7.425.000 9.000 3.Granados 9 Gross Profit Operating Expenses Research Development Selling General and Administrative Non Recurring Others Total Operating Expenses 25.320.000 9.000 6.395.838.000 7.410.000 17.316.761.620.000 62.000 5.838.762.000 4.000 9.363.000 1.000 5.761.472.761.395.000 29.000 74.000 - 18.000 $5.000 5.702.000 2.308.838.000 1.000 392.673.000 9.282.053.997.783.444.000 5.000 .000 696.

047.000 977.634.000 2.023.474.000 15.346.757.931.605.000 44.000 1.000 11.000 12.341.000 12.Granados 10 Balance Sheet View: Annual Data | Quarterly Data PERIOD ENDING Assets Current Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total Current Assets Long Term Investments Property Plant and Equipment Goodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long Term Asset Charges Total Assets Liabilities Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges 3-Feb-08 All numbers in thousands 28-Jan-07 29-Jan-06 445.000 9.314.000 14.000 348.000 6.000 11.413.731.000 18.482.000 343.000 52.000 2.000 14.000 11.000 1.000 1.000 1.416.286.000 .000 11.731.000 523.324.000 1.000 44.000 27.822.833.000 3.000 1.000 12.901.706.901.000 1.279.000 12.401.000 601.000 223.000 1.209.000 600.000 793.000 1.396.672.643.000 14.000 9.000 24.000 688.000 2.000 1.000 12.000 742.000 342.000.227.259.674.000 3.476.000 1.243.000 11.000 778.223.000 1.263.000 100.000 26.000 18.383.185.

Cash Flows Provided By or Used In Depreciation 1.000 (16.000 253.938.000) 7.000 7.383.000 .000 5.233.579.000 $17.000) Changes In Other Operating Activities 32.712.000 96.000 17.000 Changes In Accounts Receivables 116.000 $16.909.000 17.000 Total Cash Flow From Operating Activities 5.030.000 1.000 33.000) 7.000 28.000 (314.000 6.714.000 (62.623.610.000 85.405.800.000) Changes In Liabilities (438.052.661.000 25.000 (47.000 Operating Activities.000 (358.388.000 297.000 120.000 310.727.000 Cash Flow View: Annual Data | Quarterly Data PERIOD ENDING Net Income All numbers in thousands 3-Feb-08 28-Jan-07 29-Jan-06 4.000) 205.000 27.395.000 (9.000) (563.761.000 $23.886.000 26.000 755.Granados 11 Minority Interest Negative Goodwill Total Liabilities Stockholders' Equity Misc Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets 26.906.943.000) (971.000 11.000 1.000 Adjustments To Net Income 207.000) 5.000 271.000) Changes In Inventories (491.000 121.000) 231.573.930.287.000 5.484.838.

000) 1. The Return on Equity ratio is lower than average which indicates that The Home Depot is less efficient than in previous years. which is 8.000 Other Cash Flows from Financing Activities (105.395.000) (1. Cash Flows Provided By or Used In Capital Expenditures (3.000) (3.639.72) is less than the average (which is 11.78) of the last five years of the company and slightly less than the industry. Cash Flows Provided By or Used In Dividends Paid (1.000) $287.000) Net Borrowings 1.000) Total Cash Flows From Investing Activities 4.000) (1.647.382.000) Investments (326.881.612.000) 7.000) (857.758.130.714.000) Total Cash Flows From Financing Activities Effect Of Exchange Rate Changes Change In Cash and Cash Equivalents G.70. (10.000) (6.871.000 ($155.000) (2.000 (31.526.000) (1.000) Sale Purchase of Stock (10.77.586. The average is 20.558. Another decline is the Return on Assets.000 Financing Activities.542. The current ROA (which is 8. Investing Recommendation In my own personal opinion.642.000) (2. The decrease in this ratio indicates that the company is not efficiently using its assets.000) (4.000) 25.000) ($193.83 while for the year of 2007 it reported a ROE of 19.000 1.677.626.000) (4.539.000 .000 1.000 Other Cashflows from Investing Activities 8.303.709.000) (3.000) (203.000 (4. Compared to the industry The Home Depot has less ROE than the five year average but is slightly above on the current year. I would not invest in The Home Depot because they are showing a steady decrease in many aspects of their company.Granados 12 Investing Activities.000) (7.

They might just jump up from their slump and prove everyone wrong.38. if not all.80 to 2. In Home Depot’s case.Granados 13 The most important reason for my opinion is due to the fact that the Earnings per Share ratio has also been going down. dropped from 2. as well as The Home Depot. including me. They have been around a long time. this means that their performance is lacking and their profitability is diminishing. You never know. during this time I feel that our economy is going through a recession and most. This is a great company but unless the economy changes you wont be seeing me investing in any company. . which means that they have seen bad times. companies are feeling the affects. The basic EPS ratio from 2006 to 2007. maybe The Home Depot has a few tricks up their sleeves. This ratio is used to evaluate the operating performance and profitability of a company. Basically.

us.asp?symbol=HD http://ir.com/EdgarDetail.yahoo.com/q/pr?s=HD .reuters.Granados 14 Works Cited http://stocks.homedepot.cfm? CompanyID=HD&CIK=354950&FID=1047469-08-4077&SID=08-00 http://finance.com/stocks/ratios.

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