2008 Annual Report of The Home Depot Inc - Research Paper Example

 Financial Statements Paper 1. Introduction This paper seeks to study the 2008 annual report of The Home Depot, Inc. (or “HDI”) for purposes of answering some given questions. The 2008 financial statements of HDI ended as of February of each year; hence, 2009 data which cover also 2008 transactions are compared with 2008 data which cover 2007 transactions. 2.1 What does the Consolidated Statements of Earnings tell about the company? Why is it this statement important? What business decisions could be made using the income statement? The income statement tells about the result of operation of HDI. It is important because it will tell whether the company is earning or not from operations and whether there is reason to continue with the business. If not earning, a company would just be wasting resources and this would mean also wasting the money of the owners or shareholders of the company. To illustrate, HDI’ profitability in the last two years from 2008 to 2009 is evident with its average return on equity (ROE) at 19%. Said rate can show a clear advantage over competitors regarding its past performance for the past two years is clear if compared with the industry average of 7.64% as per Reuters (2011). See Appendix A for more details. To expect a 19% return on equity (ROE) sounds encouraging when other businesses were producing lower profitability given the situation in the economy in 2008 which appeared to have been affected by the financial crisis of 2007 to 2009. Such level of high profitability would seem to show that company had been above the economic recession (Samuelson, P. and Nordhaus, 1992) that the financial statements do confirm what happened in 2008. Viewed differently, an investor is just like putting his or $100 in investment with HDI while expecting $19 in return every year which should be high enough. See Appendix A for more details. Calculated by dividing net profit to the total stockholders’ equity or shareholders’ funds, ROE should tell any right thinking investor on whether it should invest, continue investing or find another (Johnson, et al, 2003). Return on assets (ROA) measures how the management makes use of assets is another way to evaluate HDI in terms of management’s profitability. The same can also be used to check efficiency in the utilization of resources. HDI exhibited a two-year ROA average of 8% which may be again compared against the industry average of 3.9%, thus indicating better efficiency. See Appendix A. Given the more profitable and efficient operation than competitors, there is basis to continue operation of the company. 2.2 What does the balance sheet tell you about the company? Why is the balance sheet important? What business decisions could be made using the balance sheet? The balance sheet tells about the financial condition of the company as of given date. Generally financial condition should tell about the liquidity and solvency of the company. Liquidity is the capacity to meet maturing obligations in the short term while solvency is for the long-term (Johnson, et al, 2003). Companies that lack liquidity face the risks of bankruptcy or control of the business by creditors. Companies which cannot meet their currently maturing obligations would not be able pay the salaries its employees. They will have unmanned office, they would have no suppliers to deliver goods on account because the latters are not paid on time due to lack of liquidity. When bankruptcy is chosen, closing shop or giving in control of the business to the said creditors can be expected. HDI’s average current ratio for 2009 and 2008 registered at 1.18, which is quite higher than industry average of 1.15, should indicate the company’ s acceptable financial condition. Its quick assets ratio may also further its liquidity. As differentiated from current ratio, its quick ratio is a stricter measure as inventories, prepaid expenses and other current assets are out from the current assets before dividing the same amount of current liability. HDI however a lower quick ratio at an average of 0.13 than the industry at 0.44, yet the company was still liquid enough due to absence of bankruptcy. See Appendix A. Another way to look at financial condition is through solvency from how DI was financed as in terms of the long-term debt in relation to equity. By comparing the company’s debt to equity for the last two years, it is possible to get a deterioration or improvement. HDI’s case improvement from 1.50 in 2008 to 1.32 in 2009. An improvement in capital structure of the company may mean a choice of gearing or financial leverage as a matter of a strategy (Pearson, 1999) that should point to a company’s long-term capability to sustain its strength over the long term (Johnson, et al, 2003). Good gearing should assure investors that a company can survive the short term long term challenges. HDI appears to have higher leverage at average 1.41 than industry average of 0.58 (Reuter, 2011). This is however offset by higher profitability. In other words, companies may choose to have higher leverage in order to have better profitability because the business is wealth for more wealth that may come closer to more profit (Pearson, 1999). 2.3 What does the statement of cash flows tell you about the company? What business decisions could be made using the statement of cash flows? Statement of cash flows tells about how the company generated and used cash in the business. The cash could come and be used in operating activities, financing activities and investing activities (Johnson, et al, 2003). Operating activities refer to the main business of the company whether as manufacturer or trader or provider of service. The financing activities would refer to the how the company raises funds for the operation of the business. Source could come from the investment of the stockholders or creditors and uses could refer how cash are used to pay dividends to owners and pay debts to creditors. Investing activities on the other hand would refer to how the company will make use of generated funds. This would refer therefore to the acquisition of non-cash assets and other investment with the aim of generating benefits from. Also part of the investing activities include disposing of these investments and noncurrent assets when the proper time comes for the decision makers to do so in relation to defined business objectives (Johnson, et al, 2003). The decision that could be made become therefore obvious is based on the nature of activities as described. The decision as to whether operation should be continued can be determined also in the cash flows as the net income from the income statement is normally made starting point in preparing the statement of cash flow. The decision of what investment should be acquired and what investments should be disposed could also be made based on cash flow together with the balance sheet and income statement. The decision on whether additional capital should come from owners or creditors could also be determine using the cash flows from investing activities. Further the decision on whether dividends should be paid and whether reacquisition of shares should be done is also part of the cash flow statement decisions. 2.4 What information is provided in the statements that will assist you in making these business decisions? What information is not provided that could assist in managerial decision making? The accounting information from the statements could indeed be used on making decision. As already explained the profitability, efficiency, liquidity and solvency are information that requires evaluation from time to time and compare them with certain benchmarks as standards like the industry averages. If the company is performing lower than average competitors, something must be wrong and must be corrected. The kind of people that HDI has may not be clearly provided in the financial statements except as implication of good management if their good results of operation. But as to whether employees are loyal to the company cannot be seen in the financial statements cannot be found since these are not valued or covered in the financial statements. If employees are loyal to the company, the same can be considered as strength or a competitive advantage that may help to company to adopt long-term strategy as the company would have a better chance of support from its people because of the latter’s loyalty. 3. Conclusion This paper found that different kinds of financial statements have their own purposes that could help decision makers as basically whether there is basis to continue operating the business. Whether decision makers like it or not, there are implied alternative courses of action for a company because of the concept of opportunity cost in economics (Samuelson and Nordhaus, 1992). Rather than putting one’s money to HDI, shareholders can always choose to have risk-free investments where they do not have to do anything except to wait for the return of their investments are guaranteed by the government. However, HDI was profitable than average competitors in the industry, why look for another to invest? Appendix A: Summary of Financial Data and Ratios: Source: (Home Depot, 2011, Reuter, 2011.) References: Home Depot, Inc. (2011). 2008 Annual Report. Retrieved 11 June 2011 from < http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY4Nzl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 > Johnson, et al (2003). Financial Accounting. Tata McGraw-Hill Pearson, G. (1999). Strategy in Action. Prentice Hall Financial Times Reuters (2011). Industry ratios. Retrieved 11 June 2011 from < http://www.reuters.com/finance/stocks/financialHighlights?symbol=HD.N> Samuelson and Nordhaus (1992). Economics, London: McGraw-Hill, Inc., 1992 Read More