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Brian_1234
HomeDepot-FinancialHealthDarrylEllis.pptxHome Depot Financial Health
Darryl Ellis
Business Finance 330
Professor Ann Laramy
This Presentation Has 9 Slides
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Company Overview
Financial Trends
Financial Ratios
Operating Performance
DuPont Analysis
Recommendations
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Agenda
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Home Depot’s Company History
2021 Fortune 500 Rank: 18/500
Headquarters: Atlanta, Georgia
State of incorporation: Delaware
Publicly traded since 1981
~1.04 billion shares outstanding
Market cap in excess of $365 billion
415,000 full-time employees
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Financial Trends
Net Income Growth
Positive trend overall, especially considering the difficult economic conditions brought on by the COVID-19 pandemic
Sales Growth
Between 2017 and 2020, sales increased by more than 71%; this positive trend for Home Depot reinforces the organization’s financial stability moving forward.
Interest Expense Growth
Neutral trend; Home Depot has the opportunity to leverage increased sales to pay off outstanding debt and lower its interest expense growth rate.
| Net Income Growth | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Net Income (in billions) | $7.96 | $8.63 | $11.12 | $11.24 | $12.87 |
| Net Income Growth | - | 8.46% | 28.86% | 1.09% | 14.45% |
Derived from https://www.marketwatch.com/investing/stock/hd/financials
Derived from https://www.marketwatch.com/investing/stock/hd/financials
| Interest Expense Growth | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Interest Expense (in billions) | $972 | $1.06 | $1.05 | $1.2 | $1.35 |
| Interest Expense Growth | - | +8.74% | -0.57% | +14.27 | +12.16 |
Derived from https://www.marketwatch.com/investing/stock/hd/financials
| Sales/Sales Growth | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Sales (in billions) | $94.6 | $100.9 | $108.2 | $110.23 | $132.11 |
| Sales Growth | - | +6.67% | +7.23% | +1.87% | +19.85% |
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Financial ratio analysis
Liquidity
Home Depot meet dept obligations, overall low quick ratio highlights the substantial impact of inventory.
Profitability
Slight decreases in all three profitability ratios, but deviations are not outside the standard range.
Return on Investment
Shareholder equity has experienced wild fluctuations, resulting in a drastic change in return on equity over the last three years.
| Liquidity | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Current ratio | 1.30 | 1.09 | 1.08 | 1.36 | 1.13 |
| Quick ratio | 0.39 | 0.28 | 0.28 | 0.72 | 0.37 |
Derived from https://www.macrotrends.net/stocks/charts/HD/home-depot/quick-ratio
| Profitability | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Gross Profit Margin | 34.16% | 34.04% | 34.34% | 34.09% | 33.95% |
| Operating Profit Margin | 14.19% | 14.55% | 14.58% | 14.37% | 13.84% |
| Net Profit Margin | 8.41% | 8.55% | 10.28% | 10.20% | 9.75% |
Derived from https://www.morningstar.com/stocks/xnys/hd/performance
| Return on Investment | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| ROA | 18.61% | 19.73% | 25.12% | 23.61% | 21.12% |
| ROE | 149.44% | 298.25% | -709.24% | -910.85% | 782.14% |
Derived from https://www.macrotrends.net/stocks/charts/HD/home-depot/roe
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Operating Performance
| Operating performance | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Days of Sales in Inventory | 71.37 | 69.37 | 68.52 | 71.48 | 65.17 |
| Receivables Turnover | 48.28 | 55.55 | 66.71 | 65.26 | 61.62 |
| Inventory Turnover | 5.11 | 5.26 | 5.33 | 5.11 | 5.60 |
| Total Assets Turnover | 2.21 | 2.31 | 2.44 | 2.31 | 2.17 |
Derived from https://www.morningstar.com/stocks/xnys/hd/performance
Home Depot’s operating performance ratios are all trending in a positive direction.
Inventory turnover increased.
Days of Sales in Inventory decreased.
Total assets turnover also decreased.
Reduced the timeline for receivables.
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Days of Sales in Inventory 2017 2018 2019 2020 2021 71.37 69.37 68.52 71.48 65.17 Receivables Turnover 2017 2018 2019 2020 2021 48.28 55.55 66.709999999999994 65.260000000000005 61.62 Inventory Turnover 2017 201 8 2019 2020 2021 5.1100000000000003 5.26 5.33 5.1100000000000003 0 Total Assets Turnover 2017 2018 2019 2020 2021 2.21 2.31 2.44 2.31 0
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DuPont Analysis
Home Depot and Lowe’s both experiencing extraordinarily high ROE.
Home Depot has a dramatic shift reporting in ROE; in 2019, ROE was -709.24%, growing to over 782% in 2021.
Lowe’s experienced an increase in ROE from 67.59% in 2019 to 483.11% in 2021
Debt/equity ratio stabilizing for Home Depot, but Lowe’s remains relatively unstable.
Net Profit Margin trending positively for both companies.
| Home Depot DuPont analysis | |||
| 2019 | 2020 | 2021 | |
| ROE | -709.24% | -910.85% | 782.14% |
| Net Profit Margin | 10.28% | 10.20% | 9.75% |
| Asset Turnover | 2.44 | 2.31 | 2.17 |
| Debt/equity ratio | -49.35 | 42.60 | 69.56 |
| Lowe’s DuPont analysis | |||
| 2019 | 2020 | 2021 | |
| ROE | 67.59% | 217.25% | 483.11% |
| Net Profit Margin | 3.51% | 7.10% | 7.38% |
| Asset Turnover | 2.04 | 1.95 | 2.08 |
| Debt/equity ratio | 14.42 | 10.88 | -238.31 |
Derived from https://www.macrotrends.net/stocks/charts/HD/home-depot/roe
Derived from https://www.macrotrends.net/stocks/charts/HD/home-depot/roe
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Recommendation
Overall, Home Depot is a financially stable organization. Three recommended actions would increase stability over the next two to three years.
Home Depot’s Interest Expense grew almost every year from 2017 through 2021. As this non-operating expense continues to climb, the organization hemorrhages funds that could be applied to other vital areas. It is recommended that further analysis be conducted to reduce the organization’s debt, reducing or stabilizing its Interest Expense.
The organization’s quick ratio portrays a low ability to meet short-term obligations. Decrease current liabilities would increase Home Depot’s Quick ratio. This should signal lower overall risk and attract new investors.
Home Depot’s ROE is too volatile. The organization’s Shareholders’ equity was negative in 2019 and 2020, further adding to the unpredictability. To improve ROE, the organization should either buy back shares (increasing treasury stock) or decrease liabilities. While both have inherent risks, stabilizing ROE would increase financial stability over the next three years.
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References
Home Depot performance. (2022). Morningstar. https://www.morningstar.com/s tocks/xnys/hd/performance
Home Depot. (2022). Macrotrends. https://www.macrotrends.net/stocks/charts/HD/home-depot/quick-ratio
Home Depot. (2021, July 30). Fortune. https://fortune.com/company/home-depot/fortune500/
Home Depot. (2021) Form 10-K: Annual report for year ending January 31, 2021. https://www.sec.gov/ix?doc=/Archives/edgar/data/0000354950/000035495021000089/hd -20210131.htm
Lowes Companies Inc. (2021). Form 10-k: Annual report for year ending January 29, 2021. https://www.sec.gov/ix?doc=/Archives/edgar/data/60667/000006066721000026/low-20210129.htm
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