Understanding Financial Statements

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Have you ever stared down a company’s financial statements and felt like you were trying to decode ancient scrolls? You’re not alone! But fear not, fellow finance explorer! Let’s crack the code on Home Depot’s 2019 report, using financial ratios like a treasure map to unearth the secrets hidden within the numbers. Buckle up, because we’re about to take a short, but thrilling, dive into the world of Home Depot’s financial health using 5 different financial ratios!

You can find the annual reports here

1. Current Ratio: This measures a company’s short-term liquidity.

• Current assets ($ millions) = 19,810

• Current liabilities ($ millions) = 18,375

Current Ratio = Current assets / Current liabilities

= 19,810/18,375

= 1.07

2. Debt Ratio: The debt ratio calculates how much of an organization’s assets come from debt in relation to its assets.

• Total liabilities ($ millions) = 54,352

• Total Assets ($ millions) = 51,236

Debt Ratio = Total Liabilities / Total Assets

= 54,352/51,236

= 1.06

3. Gross Profit Margin: This shows the profit made on products after accounting for their cost.

• Gross profit ($ millions) = 37,572

• Net sales ($ millions) = 110,225

Gross Profit Margin = Gross profit / Net sales

= 37,572/110,225

= 0.34 (or 34%)

4. Operating Margin Ratio: This also referred to as the return on sales ratio, assesses an organization’s operating efficiency by comparing its operating income to its net sales:

• Operating income ($ millions) = 15,843

• Net sales ($ millions) = 110,225

Operating margin ratio = Operating income / Net sales

= 15,843 /110,225

= 0.14

5. Return on Asset Ratio: This indicates how efficiently the company uses its assets to generate profit.

• Net income ($ millions) = 11,242

• Total Assets ($ millions) = 51,236

Return on assets ratio = Net income / Total assets

= 11,242/51,236

= 0.22

But what do all these numbers mean? From one set of numbers to another.

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Let’s go ahead to interpret them

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Home Depot’s numbers are kind of all over the place. Their short-term situation seems a little shaky like they might struggle to pay some bills coming due soon. A good current ratio typically falls between 1.5 and 3.0 (Kibet, 2022) while Home Depot’s current ratio is 1.07 falling short of the minimum threshold. But hey, on the bright side, their debt ratio is awesome! They’re not drowning in loans, which is a good sign for the long haul. The company isn’t dependent on a lot of debt to finance its operations.

Profit-wise, they’re making a decent chunk of cash on each product they sell (a 34% gross profit margin). But listen to this: a very big slice of that profit seems to be disappearing into thin air with other expenses. The operating margin of 14% indicates a sizeable portion of the gross profit is consumed as operating expenses. Maybe they can tighten their belts a bit and squeeze more juice out of those sales.

The last ratio is interesting. It shows how well they’re using their stuff, like stores and equipment, to make a profit. A return on assets ratio of 0.22 says, that for every dollar of assets owned by Home Depot, they generate 22 cents in profits. Looks like they’re pretty good at converting those assets into cash.

So, overall, Home Depot seems financially okay, but they could still do better. They must fix that short-term shakiness and get a handle on those expenses to really crank up the profits.