Home Depot Financial Analysis

Brief Description
Home Depot is one of the prominent and successful retailing companies in the United States. In particular, the company deals with the provision of home improvement supplies including tools, construction merchandises, kitchen appliances and the like. One of the key elements impelling Home Depot’s success is its financial strategy. The main financial strategy of the company is cost minimization. On the basis of the cost leadership generic strategy, the company’s financial goal is cost minimization. Moreover, the strategic goal and objective of Home Depot encompassing the development of close and special affiliations with suppliers aid the firm in accomplishing cost minimization (Smithson, 2017).
Total Assets, Total Liabilities and Total Stockholders’ Equity Comparison
In accordance to the balance sheets for the two financial years, the total assets of the company decreased from $41,164 to $40,877 whereas the total liabilities also declined from $23,387 to $21,484. I believe that the change of each category is larger because it is linked to a significant decline in the net property and equipment amount. In comparison to other companies within the industry, Home Depot’s financial performance is poorer.
Income Statement Comparison
Compare the following income statement accounts between 2009 and 2008. How does a change for each account impact net income?
1. Net sales
A change in the net sales of the company without doubt influences the generated net income. An increase in the net sales implies that the net income will increase whereas a decline in the net sales implies that the net income will also decline. For instance, in the case of Home Depot, the net sales decreased from $77,349 to $71,288, which caused a decline in the net income from $4,395 to $2,260.
2. Cost of goods sold
A decrease in the cost of goods sold causes a decline in the gross profit generated, which causes a decline in the net income. On the other hand, an increase in the cost of goods sold causes a decline in the gross profit and therefore a decline in the net income. For instance, in the case of Home Depot, the cost of goods sold declined from $51,352 in 2008 to $47,298 in 2009 and this is reflected in decline in the net income from $4,395 to $2,260.
3. Gross profit
The gross profit is the level of returns generated by a company prior to expenses and taxes deducted. The inference of this is that an increase in the gross profit causes an increase in the net profit whereas a decline in the gross profit causes a decline in the net income. The can be perceived in Home Depot’s financial statements with the amount declining from $25,997 in 2008 to $23,990 in 2009 and therefore causing decline in the net income from $4,395 to $2,260.
4. Interest expense
An organization’s interest expense depicts the interest that is payable on any borrowings including loans, bonds or credit granted. Being a non-operating expense item in the income statement, it implies that an increase causes a decrease in the net income whereas a decline causes an increase in the net income.
Balance Sheet Comparison
Compare the following balance sheet accounts for two years, and briefly describe how the change of each account impacts assets, liabilities, and stockholders’ equity. Do you think such changes would have positive or negative impact to business? Why?
1. Cash and cash equivalent
A change in cash and cash equivalent causes an impact on assets. An increase in cash and cash equivalent leads to an increase in current assets whereas a decline causes a decrease in current assets and therefore a decrease in total assets. An increase would have a positive impact on the business because it implies that the business becomes more liquid and therefore it becomes possible to cater for short term obligations.
2. Receivable net
Receivables encompasses the amount of money that debtors are yet to pay the organization. An increase in the receivables causes an increase in the current assets and therefore an increase in total assets. A change in this is both positive and negative for the business. On the one hand, it is positive because the business increases its level of liquidity and therefore is able to meet its obligations that are short term. On the other hand, a significant increase in the receivables implies that the company is taking a long time to collect its money and therefore can hamper business in terms of procuring new inventory.
3. Merchandise inventories
An increase in merchandise inventories causes an increase in the total current assets and therefore an increase in the total assets. On the other hand, a decline in the same, causes a decrease in the amount of the total assets. An increase in the inventory amount can have both a negative and positive impact on the business. From a positive standpoint, it implies that the company has increased its business operations and consumers. However, an increase in inventories could also mean that the business is not able to quickly sell its stock and therefore can cause a decline in cash and cash equivalents.
4. Property and Equipment (total cost, accumulated depreciation, and book value)
Changes in property and equipment impact both the assets and the liabilities. An increase in the total cost of property and equipment leads to a general increase in the total assets amounts. However, this also leads to an increase in the accumulated depreciation amount and therefore also causes an increase in total liabilities. Notably, this can both be positive and negative for the business. An increase in property and equipment implies that the total valuation of the company goes up. However, an increase in the total accumulated depreciation amount implies that the assets of the company are becoming old and losing their value.
Significant Accounting Policies
Three significant accounting policies for Home Depot include revenue recognition, merchandise inventories, and impairment of long-lived assets. With respect to revenue recognition, Home Depot recognizes such amounts at the time when the customer receives the merchandise or services rendered. This implies that the amounts are recorded in the financial statements when they are rendered regardless of when the amount is paid by the consumer. On the other hand, with respect to the merchandise inventories accounting policy, the assets are stated at the lower cost, through the first-in, first-out method or market value. The implication of this is that the first inventories that are purchased are the first ones that are disposed of by the company. Lastly, Home Depot evaluates its long-lived assets every financial quarter to ascertain any indicators of potential impairment. The assets of Home Depot’s retail stores have indicators of impairment that are assessed by making comparisons of the undiscounted cash flows against their carrying value.
Summary
In summary, it can be perceived that the financial performance of Home Depot has not been significantly strong. The net sales of the company in the past three financial years has deteriorated from $77,349 in 2008 to $71,288 in 2009, and further down to $66,176. The financial performance of the company can be perceived through the net earnings. In particular, the net earnings decreased from $4,210 in 2008 to $2,260 but then increased to $2,620. The total assets of the company also declined from $41,164 in 2009 to $40,877. An analysis of the company also indicates that the company’s financial strategy is to be cost-effective in its business operations.



References
Smithson, N. (2017). Home Depot’s Generic Strategy, Intensive Growth Strategies. Panmore Institute.