Week 3 Financial Statement Paper II - SAMPLE.docx
Week 3 Financial Statement Paper II - SAMPLE.docx PRG211
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Financial Statement Report Paper 1 Week 3 Financial Statements Paper II Todd Schweikert ACC 497 October 22, 2012 Linda Tovar Morella Financial Statement Report Paper 2 Financial Statements Paper II Home Depot is a major national retail chain that operates in the home improvement industry. The company sells building materials and home improvement products. The second part of the Financial Statements paper will look at the financial statements of Home Depot to ascertain how effective the company’s management is in achieving its goals and mission statement to the stakeholders. The analysis will include the use of vertical analysis, trend analysis, and ratio analysis to achieve to support the findings. A vertical analysis is a report that reports each amount on a financial statement as a percentage of another item. In performing the vertical analysis we need to look at the economic conditions of 2008. Mortgages started failing in the early months of 2008. Several guarantee’s of mortgage loans were placed under governmental conservatorship including Fannie Mae and Freddie Mac, which resulted in the U.S. Treasury Department supplying funds to help stabilize these companies, raising the national debt ceiling in the process (Stock Market Crash of 2008). As a retail company in the home improvement and home building materials industry, Home Depot was hit hard by the economic condition resulting in the company’s retail sales declining by 7.8 percent and its adjusted earnings per share declining by 22 percent in 2008. Financial Statement Report Paper 3 In the 2008 Home Depot Annual report, the company Chairman and the Chief Executive Officer, Francis S. Blake, advised that he viewed this year as not being a very ordinary year, with very poor results. The Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the report reported the necessity of closing additional 14 underperforming stores and the removal of approximately 15 stores from the company’s new store opening pipeline, the continued focus on the company’s core retail business sustained with $1.8 billion in capital expenditures, the renovation and upgrading of existing stores to more actively engaging both customers and employees, the transformation of the company’s supply chain to improve product availability, a continued effort on debt reduction, and the return of $1.5 billion in dividends to shareholders. Despite the pervasive economic downturn of 2008, Home Depot outperformed the Dow Jones and S&P 500 indexes. The economic downfall of 2008 can be seen when viewing the vertical analysis of the consolidated income statement, balance sheet, and statement on Home Depot’s gross profit and net earnings for the year. Home Depot did show, however, a significant increase in cash and cash equivalents during 2008, which the company used to reduce both, its short and longterm debt obligations. |Vertical Income Statement Analysis | Financial Statement Report Paper 4 (Depot, 2008) From the ratios that can be calculated on the Home Depot financial report, it can be determined that even though the company experienced financial difficulties due to the economic recession of 2008 which significantly impacted the net profitability of the company, Home Depot did manage to operate its business in an effective manner. In terms of Home Depot’s current ratio, it remained about the same for 2008 as it was for the previous year 1.15 to 1.19. Normally, a low current ratio is a signal that a company might experience difficulty quickly raising necessary cash in the event that such a need arose. However, for a large volume, high inventory firm such as Home Depot, a 1.15 current ratio is Financial Statement Report Paper 5 normal, especially in light of the company’s relatively low inventory turnover ratio, which serves as a sign that the company does not keep a significant amount of cash tied up with slow moving inventory items. Home Depot’s low days sales outstanding ratio is a sign that the company has been efficient at its account management, reducing the number of days necessary for the collection of money owed from a high of 14.7 days in 2006 to a low of 4.9 days for 2008. The company’s declining asset turnover ratios, both fixed and total, can be seen as a signal that the company has been increasing its effective use of its assets to generate profits. Home Depot’s fouryear low times interest earned ratio is an indication that the company, while having managed its debts more effectively, needs to seek a higher return on its investments, which have decreased from a high of a 21.7% return in 2006 to a threeyear low of 5.8% in 2008. While Home Depot’s profit margin percentage decreased over the previous year’s results due to the recent economic downturn, the company’s basic earning power ratio for 2008 was 26.9%. Combined with the company’s previously discussed low asset and inventory turnover ratios, a 26.9% basic earning power ratio reinforces the idea that although its profitability for 2008 was lower than the previous few years, the company was very effective in utilizing the available assets to return value to its shareholders. Home Depot’s return on asset and return on equity ratios, being highly dependent on net sales (profitability), would be expected to be low during a slow year such as 2008 has proven to Financial Statement Report Paper 6 be for the company. However, with a return to normalcy in the marketplace, along with increased consumer confidence, and the accompanying upswing in homebuilding and home renovation, Home Depot poised for growth with an inventive and eyecatching marketing plan, motivated staff and increasingly efficient cost controls, will once again become the highly prized, dividend producing company that we all know Home Depot can be, and visit when it comes to home repair. After reviewing the Home Depot’s operations for the fiscal year in 2008, the question of did the company’s management team stay true to the company’s mission statement and address the issues raised in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the company’s 2008 Annual Report can be answered. The answer would have to be positive, as the company reduced its expenses, closed unproductive stores and underutilized properties, reduced its debt load, managed and improved its asset base through investment in capital improvement, initiated new staff training and development programs, and continued to pay quarterly dividends to its shareholders, even though they were in the middle of an economic downturn that many financial experts have deemed the worst recession since the Great Depression in the early 1930’s. Having built a firm foundation for the future, Home Depot appears to have been strengthened by the economic adversity of the past few years, and is well poised for growth in the future. Financial Statement Report Paper 7 Bibliography Depot, T. H. (2008). 2008 Annual Report. Stock Market Crash of 2008. (n.d.). Retrieved from Money Zine: http://www.money zine.com/Investing/Stocks/StockMarketCrashof2008/
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