BTE 302 Assignment 10 Jennifer Rolfes Staying Power Current

Bte 302 Assignment 10jennifer Rolfesstaying Power Current Ratio Fo

BTE 302 - Assignment 10 Jennifer Rolfes Staying Power – Current ratio for the Home Depot is at 1.36 which is slightly down from the 2014 rate of 1.42 and slightly up from 2013 which was 1.34. Industry average is 1.21 so Home Depot runs above the industry standard which means there could be only slight concern about their liquidity as compared to others. Their debt to equity saw a spike from 2.24 in 2014 to 3.29 in 2015. 2013 was only 1.31 so it should be noted that this ratio is steadily increasing. Industry average is only 1.27.

In reviewing the balance sheet, this increase is due to a significant increase in long term debt over the last three years and a decrease in stockholder’s equity, most of which is due to treasury stock. Earning Power – Home Depot’s gross margin has remained steady at 34.8, 34.8, and 34.6 which is slightly lower then the industry average of 36.17. Home Depot’s operation profit margin and net margin have both seen a steady increase year over year and both are above industry average. Being above the industry average in this situation is good. 2015 operating profit margin was 12.6% compared to the industry average of 11.59% and the net margin was 7.6% compared to the industry average of 6.96% so Home Depot did an excellent job in these two categories.

Overall Efficiency Ratios – Based on Home Depot’s efficiency ratios, they appear to be a well managed company. Their Return on Assets has increased from 11% in 2013 to 15.9% in 2015. This is 2% higher than the industry average of 13.31. Their return on equity far beats the industry average at 68.1% in 2015 up from 25.5% in 2013. This is 20% higher than the industry average of 47.35%.

It is because of this ratio that I believe Home Deposit stock is rated as a buy by most analysts. Their ROA means good news for stockholders. Working Capital Cycle Ratios – Home Depot is at industry average standards on inventory turnover. They have remained steady at 5 days for three years as compared too the industry average of 4.31. While there is no average to compare their accounts payable turnover to, they seem to do an excellent job of paying back their debt with an average of 5.5 days that has remained steady over the last three years. They do run quite a bit above industry standard on collecting their receivables though. For year 2015 it took an average of 56 days for Home Depot to collect as compared to an industry average of 35.99. Home Depot seems to run consistent on this number as well.

Paper For Above instruction

The financial analysis of The Home Depot reveals a company exhibiting strong staying power and solid earning power, evidenced by key liquidity, profitability, and efficiency ratios. Despite minor fluctuations, Home Depot maintains a favorable liquidity position, with a current ratio of 1.36 in 2015, slightly below the 2014 figure of 1.42 but still above the industry average of 1.21, suggesting relatively sound short-term financial stability. However, the increasing debt-to-equity ratio from 2.24 in 2014 to 3.29 in 2015 raises concerns about the company’s rising leverage, primarily driven by increased long-term debt and decreased shareholder equity, mainly due to treasury stock repurchases. This trend warrants monitoring as it could impact future financial flexibility.

In terms of earning power, Home Depot’s gross margin has remained steady around 34.8%, marginally below the industry average of 36.17%. Nonetheless, the company’s operating profit margin and net profit margin have improved consistently from 2013 to 2015, surpassing industry norms. The operating margin increased from approximately 11.59% to 12.6%, and net margins grew from below industry averages to 7.6%, reflecting effective cost management and revenue generation capabilities. These margins demonstrate the company's ability to convert sales into profits efficiently, which is an indicator of robust operational performance.

Efficiency ratios further attest to Home Depot’s management effectiveness. The return on assets (ROA) has increased significantly from 11% in 2013 to 15.9% in 2015, outperforming the industry average of 13.31%. Similarly, return on equity (ROE) skyrocketed from 25.5% to 68.1%, far exceeding the industry average of 47.35%. These ratios highlight the company's exceptional ability to utilize its assets and equity to generate profits, affirming its strong financial health and attractiveness as an investment.

Analyzing working capital cycle ratios provides insights into the company’s operational efficiency. Home Depot maintains an inventory turnover of five days, comparable to industry standards, indicating efficient inventory management. Similarly, the company's accounts payable turnover and average payment period are consistent over several years, with an average of about 5.5 days to pay suppliers, which illustrates effective cash flow management.

However, the accounts receivable collection period is notably above industry averages, with Home Depot taking an average of 56 days to collect receivables compared to the industry’s 35.99 days. While this may suggest leniency in credit policies or slower collection processes, it could also impact working capital. Despite this, the company’s overall financial actions and ratios support its position as a robust, well-managed enterprise with promising growth prospects.

Based on these financial indicators, investors are likely to perceive Home Depot as a stable and potentially high-return investment. Its strong profitability, increasing efficiency, and manageable liquidity position justify the stock being rated as a buy by many analysts. However, investors should keep an eye on the rising debt levels to ensure they do not compromise long-term financial flexibility.

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