PART A. FINANCIAL ANALYSIS
Financial analysis deals
with interpretation of financial information of an entity. Basically, it
involves 3 stages,
- Preparation (identify users and needs)
- Computation (applying suitable analysis techniques)
- Evaluation (interpreting the analyzed results)
It serves differently for
different people. There are various classifications[1]
of financial analysis techniques. However, the common way is to classify the
techniques into,
- Horizontal Analysis
- Vertical Analysis
- Ratio Analysis
These types of analysis look
into the financial health of an entity, each from different perspectives and in
different ways.
1. HORIZONTAL ANALYSIS
This technique involves making a line-by-line comparison of the company’s
account for each accounting period chosen. One variation of horizontal analysis
is the trend analysis. In this technique, the first set of account in the
series is given a weighting of 100. Subsequent accounts are then related to the
base of 100.
Purpose / Usage
It highlights the changes in
accounts balance in the financial statements. Further, it enables us to see
what changes have taken place much more easily than by inspecting absolute
amount.
The technique is usually
applied in charting the performance of a company over a period of time
2. VERTICAL ANALYSIS
A technique where all elements in income statement and balance sheet be expressed as % of a selected base number in the respective statements. A usual method people frequently use is called the common-size statement. Here, net sales would be the base number for analyzing income statement, whereas, the total of account balance would be the basis in the balance sheet.
Purpose / Usage
This technique, especially the common-size statement, allows user to make comparison of companies of various size more accurately.
3. RATIO ANALYSIS[2]
This technique attempt to relate one item to another item through ratio calculation. Thus, it does not restrict itself to a particular statement like in horizontal and vertical analysis. The reason is a financial ratio can be an expression of the relationship between two items within the income statement or the balance sheet or among the two statements.
Purpose / Usage
Ratio analysis helps you evaluate the weak and strong points of financial and
managerial performance whether in term of liquidity, profitability, efficiency, gearing and investment. Various ratios calculated can also be use to compare those competing firms of varying sizes. Comparing the firm's operating results with those of specific competitors or the industry as a whole helps identify relative strengths and weaknesses. In addition, comparing changes in a firm's ratios over time can highlight improvements in performance or problem areas needing attention.
PART B. HOME DEPOT INCORPORATED
Bernie Marcus and Arthur Blank founded The Home Depot Inc. in 1979. Today, it is the world’s largest home improvement retailer. The company offers services that cater to do-it-yourselfers, as well as home improvement, construction and building maintenance professionals. The company presently operates in the USA, Canada, Chile, Puerto Rico, and Argentina with more than 1,400 stores.
1. HOME DEPOT’S FORTUNE 500 RANKING[3]
For the current year (fiscal
year ended 31/1/2001), with revenue of $53,553 mil, the company ranked 18th
among FORTUNE 500 companies. This is a 5-step higher than in previous year,
representing a 17.1% increase in revenue.
In the Specialty Retailers
Industry[4],
the firm placed 1st among the 57 retailers. Clearly, Home Depot is
the industry leader in the home improvement retail market.
2. HOME DEPOT’S FINANCIAL HEALTH[5]
In Fortune’s 2002 Global Most Admired Companies, Home Depot scored 8.7 out of 10 in term of financial soundness[6]. From the data (of the financial year 2001), it can be inferred that Home Depot has a reasonably strong financial standing.
Revenue Analysis
From financial year 2000 to 2001, it sales have increased progressively by 17.1% to the current level of $53,553 million.
Gross Margin Analysis
In proportion of sales, the profit of the firm is going up by 5.7%.
Overall Analysis
With a market value of $113,300.30 million and ability to provide a return of 12.1% to investors, the firm is perfectly stable.
Furthermore, from ratio analysis[7] done, generally, the company has a moderate growth in term of efficiencies, profitability, and investments. This reflects an overall healthy financial standing.
3. HOME DEPOT’S INDUSTRY ENVIRONMENT
Compared To Its Main Competitor, Lowe’s[8],
Who Is More Profitable.
Lowe’s is the primary competitor of Home Depot Inc. However, Lowe’s ranked 3rd in the industry[9]. The following illustrates the financial performance of the two rivals for the financial year ended 31/1/2002[10].
Viewed from the above, there is almost no difference in the performance of the two competitors. Yet, in overall, Home Depot performed slightly better than Lowe’s as it able to generate more income with lower overheads.
In addition to that, following information gathered from FORTUNE[11] strengthens the fact that Home Depot has an upper hand position in term of profitability as compared to its competitor, Lowe’s.
|
|
HOME DEPOT |
LOWE’S |
|
1. RETURN FOR ITS SALES (profit as % of revenue) |
5.7 |
4.6 |
|
2. RETURN TO UTILIZING ITS ASSETS (profit as % of assets) |
11.5 |
7.4 |
|
3. RETURN TO ITS INVESTORS (profit as % of stockholders’ equity) |
16.8 |
15.3 |
Conclusively, Home Depot is more profitable than Lowe’s.
Company That Has The Greatest ‘Profits As % Of Revenues’
Ratio[12]
Abercrombie & Fitch (that ranked 51st in the industry) with the ratio of 12%.
‘Profit as % of revenues’ is referred to as sale margin in the study text.
Which Company Has The Greatest ‘Profits As % Of
Stockholders’ Equity’ Ratio[13]
TJX has the highest ‘profits as % of stockholders’ equity’ ratio, which is 37%.
The ratio is known as Return to Stockholders’ Funds in the study text.
4. HOME DEPOT’S TREND ANALYSIS
Following table and graph show the comparative trend of sales and its cost of merchandise sold[14].
|
|
FYE 31/1/2002 |
FYE 31/1/2001 |
FYE 31/1/2000 |
FYE 31/1/1999 |
||||
|
|
$ 000 |
% |
$ 000 |
% |
$ 000 |
% |
$ 000 |
% |
|
Net
Sales |
53,553 |
177 |
45,738 |
151 |
38,434 |
127 |
30,219 |
100 |
|
Cost
of Merchandise Sold (COGS) |
37,406 |
173 |
32,057 |
148 |
27,023 |
171 |
21,614 |
100 |
Net Sales Has Increased By What Percent Since The Base Year
?
For the current financial year end (31/1/2002), the sales has increased by 177% since the past four years (FY1998 to FY2001). This reflects a steady growth rate of the firm.
Which Account, Net Sales Or Cost Of Merchandise Sold
Increased At A Greater Rate ?
In the year 2000, COGS increased at a greater rate as compared to sales. This mean expenses raised at a much higher rate than that of its revenue. However, in 2001, both sales and COGS increased in equal proportion.
Is This Favourable Or Not ?
The generally stable increases in sales and COGS reflects the equally stable increases of expenses with revenue. This denotes that the firm has been able to maintain its level of expenses whilst generating sales There is no drastic increase or decrease in sales. Also, no significant surge or downward trend in costs figures. Signifying a stable expansion program, a stable growth in revenue. Overall, the trend shows that although costs rise (might be due to expansion of business), they are in line with the rise in sales. Conclusively, it safe to say that this is a moderately favorable pattern of growth.
5. HOME DEPOT’S FUTURE GROWTH
How Many Home Depot Stores Will Be Opening Within The Next 3 Months ?
From its website, Home Depot
announced that found that the company planned to open 39 new stores (34 in US
and 5 in Canada)[15] for coming
months (September to November 2002).
Do You Think Future Revenue
For Home Depot Will Be Increasing? Why?
The following is the
graphical analysis[16]
of revenue trend as compared to number of stores opened.
From the charts, it could be
inferred that sales increased in proportion with the increase in the numbers of
stores. Opening new stores means expansion. Expansion, in Home Depot’s case,
allows it to capture more market, resulted to more sales. Thus, it is
reasonable (ceteris peribus) to say
that the future revenue would be increasing with the opening of more stores.
This means to say that
through penetrating into new markets by the opening of new outlets, the company
enjoys growing revenue. Hence, its future growth lies in reaching to more and
more customers, serving them better with easy-to-access stores.
PART C. LIST OF APPENDICES
APPENDIX 1 On general
classification of financial analysis p.i
APPENDIX 2 On financial analysis
– illustrations p.ii
APPENDIX 3 On financial
ratios – detail explanations p.iii
APPENDIX 4 On financial
ratios – summary of financial ratios p.iv
APPENDIX 5 2002 Fortune
500 rank of companies p.v
APPENDIX 6 Home Depot’s
company information p.vii
APPENDIX 7 Detail
Financial Analysis – Home Depot p.viii
APPENDIX 8 Lowe’s company
information p.ix
APPENDIX 9 Further
information on Lowe’s p.x
APPENDIX 10 Detail financial
analysis – Lowe’s p.xi
APPENDIX 11 Specialty
retailers – industry snapshot p.xii
APPENDIX 12 Home Depot as
compared to the industry p.xvi
APPENDIX 13 Stores openings p.vii
APPENDIX 14 Home Depot
financial statements p.xix
APPENDIX 15 Additional
information on Home Depot p.xxiii
PART D. BIBLIOGRAPHIES
1. PRINT SOURCES
Atrill, P., & McLaney,
E. (2001) . Accounting and Finance for Non Specialists (3rd
ed.) Harlow, England: Pearson Education Ltd.
Baker, H. Kent (1987) . Financial
Management . Florida: Books for Professional Inc.
Dyson, J.R. (2001) . Accounting for Non
Accounting Students (5th ed.) . USA: Pearson Education Ltd.
Hoskin, Robert E. (1997) . Financial
Accounting: A User Perspective (2nd ed.) . Canada: John Wiley
& Sons Inc.
Huefner, Ronald J., &
Perstine, Robert P. (1988) . A Survey of Accounting . USA:
McGraw-Hill.
2. ELECTRONIC SOURCES
BIZ/ED (An Online Tutorial From The University Of
Bristol) : www.bized.ac.uk
To gather additional information on financial
analysis using ratios.
FORTUNE.COM : www.fortune.com
To review the ranking of Home Depot in Fortune 500.
To obtain snapshot of specialty retailers industry. To view Home Depot’s &
Lowe’s financial standings / in formations.
HOME DEPOT : www.homedepot.com
To review Home Depot’s
company information, financial statements, background/history, and future
stores openings.
HOOVERS ONLINE : www.hoovers.com
To obtain further information on Home Depot and
Lowe’s.
ZACKS INVESTMENT RESEARCH (by University Analyst Watch): www1.zacks.com
To obtained further details on Home Depot & Lowe’s financial data.