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Home Depot “You can do it, we can help”. Company Background Founded by Bernie Marcus and Arthur Blank First store opened in 1979 in Atlanta, GA The Home.

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Presentation on theme: "Home Depot “You can do it, we can help”. Company Background Founded by Bernie Marcus and Arthur Blank First store opened in 1979 in Atlanta, GA The Home."— Presentation transcript:

1 Home Depot “You can do it, we can help”

2 Company Background Founded by Bernie Marcus and Arthur Blank First store opened in 1979 in Atlanta, GA The Home Depot grew to encompass stores in Georgia, Florida, Louisiana, Texas, and Alabama within the first five years. The growth continues today with more than 2000 stores in the US, Canada, and Mexico “The Home Depot has a proud past and an even brighter future”

3 What does Home Depot Do? The Home Depot offers a wide range of home improvement products at affordable prices. The Home Depot offers many services like its roof, carpet, or cabinet installation services. Commercial services for contractors including commercial credit programs In additon to these services, the Home Depot also offers tool rentals, truck rentals, home improvement loans, delivery services, and free how-to clinics

4 Where is Home Depot going? What is the prospects for stockholders? –Home Depot’s return on equity has gone up about 1% per year for the past five years As per the Extended DuPont Equation How would we rate Home Depot’s prospects for providing a high rate of return for its stockholders? –We would rate Home Depot as moderately good- 7.5.

5 How Risky is Home Depot to its Shareholders? Home Depot has had 52-week high of 43.94 and a low of 32.85 which suggest some volatility. Currently the stock has been declining and is sitting around 36 dollars a share. Although the stock has been somewhat volatile, there are reasons to believe that overall profitability has been strong and Home Depot will continue to be an industry leader, at least for the short term. We would rate Home Depot as a 7 out of 10.

6 Ratio Analysis Liquidity –In the past five years the current ratio (current assets/current liabilities) has declined. A declining current ratio is a sign of possible trouble because current liabilities are rising faster than current assets. Asset Management –The total asset turnover indicates that the denominator (inventories or assets) is rising faster than the numerator (sales). This causes a lower asset turnover ratio meaning that Home Depot is holding on to too much inventory. They are not managing their inventories effectively. Debt Management –The ratio of total debt to total assets, or the debt ratio, measures the percentage of funds provided by creditors. Creditors prefer a lower debt ratio because the lower the ratio, the greater the cushion against creditor losses. Home Depot has a debt ratio of 9.18%. This is a relatively low debt ratio. Therefore their capital structure is essentially good. Profitability –The net profit margin of Home Depot has gone up from 5.68% in 2001 to 7.16% in 2006. This is above the industry competition. Since the net profit margin is going up, Home Depot, despite their problems in liquidity and asset management, has been profitable.

7 Return on Equity Home Depot’s ROE is higher than the industry average which is a good thing because this is one thing investors are looking for. How achieving The ROE trend for Home Depot for the past few years has increased.

8 MVA and EVA Difference between MVA and Book Value –The difference between MVA and Book Value is 50,149.72-26,909.00= 23,240.72M MVA is the difference between the market value of the firms equity and the book value as per the balance sheet (total assets-total liabilities). This MVA of 26M shows the amount that Home Depot stockholders have invested in the company since its founding in 1979 including the retained earnings against the cash they could get if they sold the company. Typically the higher the MVA, the better management has done. MVA is often a measure of how well management has done when it comes time for bonuses. However, since stock prices will tend to rise in a rising stock market, MVA may not always be the best measurement of strong management. Difference between EVA and Net Income –EVA is an estimate of a business’s true economic profit in a given year. It differs tremendously from accounting net income. This discrepancy is due primarily to the fact that accounting net income has no deduction for the cost of equity where EVA does deduct this cost. IN the case of Home Depot, their accounting net income is 5,838.00. This is compared with an EVA of -3,256.32. Traditionally, a positive EVA means that after-tax operating income exceeds the cost of the capital needed to produce that income. This means that management’s actions are adding value for stockholders. Therefore a negative EVA could have the opposite effect. However, it is important to note that sometimes a negative EVA is simply reflective of company expenditures of new equipment, property, etc.. So not in all cases is a negative EVA bad.

9 Net Income vs FCF Free cash flows is lower than net income because FCF is the actual cash available to investors, after the company has made investments in fixed assets and new products to sustain ongoing operations. There is a high correlation between net income and FCF, because the more income available the more money available for investments.

10 Improvements/Concerns Home Depot can better improve their financial performance by improving their asset management, and liquidity. This could be achieved by decreasing current liabilities. To further improve asset management Home Depot can decrease inventories relative to sales. Although Home Depot is the industry leader there are some concerns about their financial numbers, this could lead to competitors gaining market share. However, they are still the industry leader and have been increasingly profitable over the past several years.

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