The Financial Position of Home Depot - Case Study Example

Financial ments of the of the Introduction Home Depot is a retail company based in the United s of America. The company operates in the industry of home improvement and construction products and services. Home Depot has its headquarters in Cobb Country, Georgia in Greater Atlanta. The company has its stores in more than 40 locations across the United States of America. Home Depot is one of the largest companies in this industry in terms of revenues and profitability. The main competitor of Home Depot is Lowe’s. However, Home Depot has always remained a step ahead of Lowe’s according to the overall financial performances as reported in the United States Securities and Exchange Commission. This project aims at studying and analyzing the annual report of Home Depot as submitted to the United States SEC in the year 2008. The basic financial statements including the income statement, the balance sheet and the cash flow statements of the company are studied and mapped against the managerial decision making processes of the company in the specific year under study. Consolidated Statement of Earnings The consolidated statement of earnings of Home Depot indicates that the company has been extremely proficient in generating revenues in 2008. The total revenue in 2008 was USD 77349 million. The operating expenses of the company were USD 18755 million. This indicates that the company was much efficient in generating high revenues while being able to maintain much lower operating expenses. The net earnings of Home Depot in 2008 were USD 4395 which is favorable when mapped against the industry requirements. In overall, as per the consolidated statement of earnings of Home Depot, the company was performing at a standard level in the year 2008 (Home Depot Inc., 2008, p.4). The consolidated statement of earnings or the income statement of a company summarizes the revenues that a company has earned during the period of reporting through the sale of its products and services. Also, it includes the expenses that a company has made to produce the revenues during the same period. These expenses may include the selling expenses, overheads, general expenses and depreciation of the assets. The comparison of the revenues and the expenses of a company show the net operating profit of a company. After the deduction of various statutory deductions like taxes and interest expenses, the consolidated statement of earnings of a business represents the net earnings of the company over a specific period of time. The key business decisions like how the return on investment for the company can be improved are taken by studying the income statement for a particular period. The management of a company often takes significant business decisions like how to manage the operating expenses, gross profits and net earnings after studying the income statement for the specific period. The income statement helps the managers of a company to compare the financial position of the business as compared to the other companies functioning in the same industry. Balance sheet The balance sheet of Home Depot in the year 2008 establishes the strong financial health of the company. The balance sheet indicates that Home Depot is a cash rich company with high level of investments in fixed assets. The company has both short term and long term investments which takes care of its credibility. The business has a small amount of short debt along with less number of creditors. Home Depot also maintains a very favorable debt equity ratio of more than 1. The net receivables of Home Depot are on the higher side due to the large stock of inventories that the company has to maintain. However, the financial position of Home Depot as gauged by the balance sheet is as per the industry expectations of the home improvement sector. A balance sheet of any company represents the financial position of a company as measured at a particular date. The balance sheet shows the asset and liability position of a company and thus, helps the investors to assess the financial condition of the same. A balance sheet is a primary financial statement that is of much importance from the point of view of investment. The balance sheet gives an idea about how much assets and debts a company has on a particular date. Also, the balance sheet contains information about the equity position of the company. A balance sheet is not only important for the investors but it is also equally significant for the business owners. The management of a company often uses the balance sheet to determine whether the company is earning enough revenues and take effective decisions regarding the improvement of the financial condition of the business. Key business decisions like budget cuts, line of credit management, revenue management, liquidation and investment decisions can be taken by the business owners based on the balance sheet of the company. Cash flow statement The cash flow statement of Home Depot records the net cash flows from three types of activities which are operating activities, investing activities and financing activities (Brigham and Ehrhardt, 2014, p.144). The net cash inflow from the operating activities of Home Depot is highest. This indicates that the company is highly proficient in generating cash flows into the company through its functioning. The net cash flow in Home Depot from the financing activities is negative in the year 2008. This is because, in 2008, Home Depot had repurchased its common stocks which made the cash inflows from the financing activities into the company to be much reduced. There was a decrease in the cash and cash equivalents. The net result of which was that the cash flow of the company was not in an impressive state in the financial year of 2008. A cash flow statement of a company provides information related to the inflows and outflows of cash in the business for a specific time period which is usually 1 year. Cash flow statement is important for a business because it helps to identify the sources of cash inflow and the different activities in which the cash of the firm was utilized. It shows the efficiency of the company in generating cash flows from the regular operating, financing and investing activities. Cash flow statements are significant financial statements which are more than often used by the management of a company for evaluating the cash management of the same. Key corporate and business decisions like cash planning, evaluation of cash inflows and cash outflows, purchase of fixed assets, issuing of shares and debentures, taking long term loans etc. can be made by understanding the financial position of the company as represented by the cash flow statement. Since the cash flow statements provide specific insights related to the cash position of a company, which is not provided by the other financial statements like the balance sheet and the income expenditure statements, therefore the cash flow statements are used as valuable and insightful reporting tools by the business owners as well as the creditors and investors. Information available for managerial decision making Each of the financial statements provides different types of financial and operational information that may be used individually or collectively by the different levels of decision makers of the company. For example, a balance sheet provides information about the assets, liabilities and equities available in the company. These are essential information for a manager to decide whether the company should aim to improve its equity, assets or liability position. The income statement depicts the revenues earned by the company in comparison with the expenses incurred directly or indirectly in earning that revenue. It also shows the cost of the goods which are sold along with the various expenses related to it. The net result of sales revenue, cost of goods and expenses shows the net profit or loss incurred by the company. This statement is important to assess the profitability of the company. Altogether, the three basic financial statements that are published by the companies in their annual reports act as important information sources for making managerial decisions which are directly or indirectly related to the financial management of the company. However managerial decision making is a more holistic approach that needs to take into consideration the financial as well as non-financial information. The ancillary information like the details related to the products, customers, product lines, operations and departments are not available in the financial statements. Conclusion The financial position of Home Depot as evaluated by analyzing the annual report of 2008 seems to be much favorable and at par with the industry standards. The information from the financial statement of Home Depot in the year 2008 is much significant for making the managerial decisions regarding the financial and operational aspects of the company. The leadership position of the company in the home improvement sector is supported by the financial and operational performances reported in the United States Securities and Exchange Commission. This report helps to identify the critical role of financial statements in business decision making. Also, it can be concluded that all the three types of financial statements have their own significance in the process of managerial decision making. References Brigham, E.F. & Ehrhardt, M.C. (2014). Financial management (14th Ed.). Mason, OH: South-Western Cengage Learning. Home Depot Inc. (2008). Annual report-2008. Retrieved from http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY4Nzl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1. Read More