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Module 4 Assignment - Ratio Analysis

The document presents a financial statement analysis of Home Depot for the year-end 2019, focusing on key ratios related to liquidity, solvency, profitability, and activity. It highlights the need for management to improve inventory management and equity investments to mitigate financial risks, while noting that the company is performing reasonably well overall. The analysis emphasizes the importance of comparing these ratios with industry averages for a more accurate assessment of Home Depot's performance.

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Abimbola Oluwaseun
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4 views4 pages

Module 4 Assignment - Ratio Analysis

The document presents a financial statement analysis of Home Depot for the year-end 2019, focusing on key ratios related to liquidity, solvency, profitability, and activity. It highlights the need for management to improve inventory management and equity investments to mitigate financial risks, while noting that the company is performing reasonably well overall. The analysis emphasizes the importance of comparing these ratios with industry averages for a more accurate assessment of Home Depot's performance.

Uploaded by

Abimbola Oluwaseun
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Module 4 Assignment

Ratio Analysis

Abimbola Oluwaseun Adeola

MBA, Nexford University

ACC 6050: Accounting and Financial Reporting

Dr. Damian Dunbar

January 31, 2024


Home Depot

Financial Statement Analysis for the 2019 Year-End

S/N Ratios Workings


Liquidity:
1 Current Ratio = 18,529
Current Assets 16,716
Current Liabilities = 1.11
2 Quick Ratio = 18,529 – 13,925
Current Assets – Inventories 16,716
Current Liabilities =0.28
Solvency Ratio:
3 Debt-to-Equity Ratio = 45,881
Total Liabilities (1878)
Total Equity = -24.4
Profitability Ratio:
4 Net Profit Margin = 11,242 x 100
Net Profit x 100 110,225
Net Sales =10.2%
5 Gross Profit Margin = 37,572 x 100
Gross Profit x 100 110,225
Net Sales = 34.1%
Activity Ratio:
6 Inventory Turnover = 72,653
Cost of Sales 13,925
Inventories = 5.2times

Ration Analysis Interpretation (StrategicCfo, 2021) (CFI Team, 2022)

The management of Home Depot needs to look into inventory management, the company's

gearing level, and its liquidity position in order to prevent bankruptcy and other potential
financial problems. Overall, the performance of the company's 2019 financial statement

(Depot, 2021) study indicates that it is doing reasonably well.

A few ratio techniques have been used to examine the financial statement within the

categories of liquidity, solvency, profitability, and activity ratios. The profitability ratio

shows that the business is successful in keeping costs under control and turning a profit.

Home Depot's ability to employ labor and raw resources effectively throughout production is

explained by its 34.1% gross profit margin. If inventories are included, Home Depot will be

able to convert its current assets into cash to cover its current liabilities obligation, according

to the liquidity ratio, which was calculated using the current ratio and quick ratio. If not,

Home Depot won't be able to manage its current liabilities using its current assets. Home

Depot's high gearing, as indicated by the solvency ratio, indicates that management must

increase equity investments to offset the company's current deficit.

The inventory turnover rate was used to assess and analyse the company's activity

performance. Although Home Depot's turnover rate of 5.2 times is low, an accurate

comparison requires knowledge of the industry average.

In order to assess Home Depot's performance in relation to its industry, management must

acquire the industry average for useful comparison.


References

Andrew Bloomenthal. (2021, February 20). Ratio Analysis. Investopedia.

https://www.investopedia.com/terms/r/ratioanalysis.asp#:~:text=Ratio%20analysis

%20is%20a%20quantitative

CFI Team. (2022, November 28). Ratio Analysis. Corporate Finance Institute.

https://corporatefinanceinstitute.com/resources/accounting/ratio-analysis/

Franklin, M., Graybeal, P., & Dixon Cooper. (2018, July 24). Financial Statement Analysis.

Opentextbc.ca; OpenStax .

https://opentextbc.ca/principlesofaccountingv1openstax/back-matter/financial-

statement-analysis/

Home Depot. (2021). Recent. Homedepot.com.

https://ir.homedepot.com/financial-reports/annual-reports/recent

StrategicCfo. (2021, September 24). Financial Ratios - The Strategic CFOTM.

Https://Strategiccfo.com/. https://strategiccfo.com/articles/accounting/financial-ratios/

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