Financial Statements Part II - Research Paper Example

The Home Depot is the world’s largest home improvement store in terms of sales. In fiscal year 2008 which ended in February 1, 2009 the company generated $71,288 million dollars (Annual Report, 2008). The most important report that is released by public corporations regarding the operating and financial status of the company during a period of time is the annual report. In the annual report the managerial staff of the company provides an overview of the financial condition of a company. This paper analyzes the managerial assessment of the financial condition of the company.

In order to determine whether the managers are being truthful about the situation ratio analysis will be used. In the 2008 annual report the managers admit that 2008 was a down year, but they claim that the firm made improvements to its operation and that considering the recession the firm is happy with the results. The managers are telling the truth in regards to the negative effects that a recession has on the retail industry. In the annual report it claims that the company reduced its revenues by 7.

8% and that operating earnings per share was reduced by 22%. The managers are insinuating that the profitability of the company was weak. In accounting there is a principle called the conservatism principle. This principle states that when in doubt; choose the method that will be least likely to overstate assets and income (Weygandt & Kieso & Kimmel, 2002). Three ratios that provide information regarding the profitability of the company are the gross, operating, and net margin. The metric results for Home Depot for these three financial ratios respectively in fiscal year 2008 were 34%, 6%, and 3% respectively.

Financial analysis evaluate whether a financial metric is good or not is by comparing it to the industry ratio. The gross margin, operating margin, and net margin industry standards are 26.85%, 5.11%, and 3.18%. The company outperformed the industry in two of the three profitability ratios and in the one that it was below the industry it was only by 0.18%. In the annual report the company claimed that the firm’s generated over $5.5 billion in cash which help the firm reduce its debt obligations.

A financial ratio that can help a person determine the validity of the manager’s statement is the current ratio. The current ratio is a financial metric that test the ability of a company to pay off its short term debt (Garrison & Noreen, 2003). The current ratio of Home Depot in fiscal year 2008 was 1.20. A current ratio is normally regarded as good if it is above 1.0. The current ratio of Home Depot at 1.20 is also above the industry norm of 1.15. Another statement the manager claim in the annual report is that the firm had accumulated a very solid $41 billion in assets.

Having a lot of assets is good, but it is more important to generate income off those assets. A financial metric that test how efficient a company is at utilizing its assets to generate income is the return on assets (ROA) metric. The return on assets of the company in 2008 was 5%. The figure is good when you compare to the industry standard of 3.9%, but the firm’s ROA was reduced by 100% in comparison with the previous fiscal year. There were other operational decisions of significance mentioned in the 2008 annual report such as the fact the company closed down 15 stores, it