FIN - Home Depot, Inc. Financial Analysis

Home Depot, Inc.
ANALYSIS OF THE FINANCIAL STATEMENTS OF A PUBLICLY OWNED
CORPORATION
(K)

This Comprehensive Problem is to acquaint you with the content of the 2007 financial
statements of Home Depot, Inc., reproduced in Appendix A of this textbook. (The 2007
financial statements are for the fiscal year ended February 3, 2008.) The problem contains
three major parts, which are independent of one another: Part I is designed to familiarize
you with the general contents of a company's financial statements; Part II involves analysis
( of the company's liquidity; and Part III analyzes the trend in its profitability.

K)

If you work this problem as a group assignment, each group member should be prepared to discuss the
group's findings and conclusions in class.
A good starting point for understanding the financial statements of a company such as Home Depot, Inc.,
is to understand the accounting policies used in preparing those statements. The first note accompanying
the financial statements provides a brief description of the major accounting policies the company used.
Most of the areas discussed in this note have been covered in this text.

Part I
Annual reports include not only comparative financial statements but also other sources of information,
such as:
A multiyear summary of financial highlights, a summary of key statistics for the past 5 or 10 years.
Several pages of Notes that accompany the financial statements.
Reports by management and by the independent auditors in which they express their respective
responsibilities for the financial statements.

Instructions
Answer each of the following questions and briefly explain where in the statements, notes, or other
sections of the annual report you located the information used in your answer.
a. How many years are covered in each of the primary comparative financial statements? Were all of
these statements audited? Name the auditors. What were the auditors' conclusions concerning
these statements?

b. Home Depot, Inc., combines its statement of retained earnings with another financial statement.
Where are details about changes in the amount of retained earnings found?

c. Over the three years presented, have the company's annual net cash flows been positive or
negative from (1) operating activities, (2) investing activities, and (3) financing activities? Has the

company's cash balance increased or decreased during each of these three years?

Part II
Assume that you are the credit manager of a medium-size supplier of building supplies. Home Depot
wants to make credit purchases from your company, with payment due in 60 days.

Instructions
p. 689
a. As general background, read the first note to the financial statements, Summary of Significant
Accounting Policies. Next compute the following for the fiscal years ending February 3, 2008, and
January 28, 2007 (round percentages to the nearest tenth of 1 percent, and other computations to
one decimal place):
1. Current ratio.
2. Quick ratio.
3. Amount of working capital.
4. Percentage change in working capital from the prior year.
5. Percentage change in cash and cash equivalents from the prior year.

b. Based upon your analysis in part a, does the company's liquidity appear to have increased or
decreased during the most recent fiscal year? Explain.

c. Other than the ability of Home Depot to pay for its purchases, do you see any major
considerations that should enter into your company's decision? Explain.

d. Your company assigns each customer one of the four credit ratings listed below. Assign a credit
rating to Home Depot, Inc., and write a memorandum explaining your decision. (In your
memorandum, you may refer to any of your computations or observations in parts a through c,
and to any information contained in the annual report.)

Possible Credit Ratings
A OutstandingLittle or no risk of inability to pay. For customers in this category, we fill any
reasonable order without imposing a credit limit. The customer's credit is reevaluated annually.
B GoodCustomer has good debt-paying ability but is assigned a credit limit that is reviewed every 90
days. Orders above the credit limit are accepted only on a cash basis.
C MarginalCustomer appears sound, but credit should be extended only on a 30-day basis and with
a relatively low credit limit. Creditworthiness and credit limit are reevaluated every 90 days.
D UnacceptableCustomer does not qualify for credit.

Part III
As general background, study the 10-Year Summary of Financial and Operating Results.

Instructions

a. Compute the following for the fiscal years ending February 3, 2008, and January 28, 2007 (round
percentages to the nearest tenth of 1 percent):
1. Percentage change in net sales (relative to the prior year).
2. Percentage change in net earnings.
3. Gross profit rate.
4. Net income as a percentage of sales.
5. Return on average total assets.
6. Return on average total equity.

b. Write a statement that describes your conclusion(s) concerning trends in Home Depot's
profitability during the period covered in your analysis in part a above. Justify your conclusion(s).