Career Opportunities Research and Report

Running head: HOME DEPOT 1

Research Project Part 1

HOME DEPOT 2

Research Project Part 1

Home Depot was created in 1978 and has developed into one of the most well-known

home improvement stores in the world, since 1990 (Home Depot Product Authority, 2018). It has

grown over the past 40 years into handymen and contractors go-to place to complete their work.

Do-It-Yourselfers have fallen in love with the ability to walk into a warehouse type store to find

everything they need to complete any home improvement project. Home Depot also provides

highly-trained employees in each department to give guidance on any project that they specialize

in. There are now DIY clinics, customer workshops, and one-on-one sessions offered for Home

Depot customers (Home Depot Product Authority, 2018). With Home Depot’s “whatever it

takes” philosophy, customers are guaranteed the best products, prices, and customer service

whenever they shop at Home Depot. Their stock went public on NASDAQ on September 22,

1981, and raised $4.093 million (Home Depot Product Authority, 2018). With Home Depot

constantly improving their work efficiency and expanding into the Canadian and Mexican

regions, they are increasing their sales positively affects their net margin, return on assets,

financial leverage, and return on equity. Throughout this report, we dive into Home Depot’s

common size analysis, trend analysis, financial ratio analysis, and return on equity to provide

recommendations on how to improve their financial stability.

Common Size Analysis

The following is the common-size analysis for Home Depot and its competitor Lowe’s

Company Inc. for the years 2014 through 2018.

Ratio 2014-01 2015-01 2016-01 2017-01 2018-01 2018-

Lowe’s

Cost of

Goods Sold

65.25% 65.19% 65.81% 65.84% 65.95% 65.89%

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Gross Profit 34.75% 34.81% 34.19% 34.16% 34.05% 34.11%

Total

operating

expenses

23.12% 22.22% 20.89% 19.97% 19.50% 24.52%

Operating

income

11.63% 12.59% 13.30% 14.19% 14.53% 14.53%

Net income 6.83% 7.63% 7.92% 8.41% 8.55% 9.60%

Total current

assets

37.71% 38.31% 39.94% 41.25% 42.52% 36.19%

Total non-

current

assets

62.29% 61.69% 60.06% 58.75% 57.48% 63.81%

Total current

liabilities

26.53% 28.21% 29.44% 32.89% 36.37% 34.28%

Total non-

current

liabilities

42.57% 48.45% 55.72% 57.02% 60.37% 49.08%

Total

liabilities

69.10% 76.66% 85.16% 89.92% 96.73% 83.36%

Total

stockholder’

s equity

30.90% 23.34% 14.84% 10.08% 3.27% 16.64%

HOME DEPOT 4

From the common-size financials above, we conduct a financial analysis. For Home

Depot, the cost of goods sold as a percentage of revenue remained fairly consistent from 2014 to

2018 with only slight variations between the years; this may suggest that the company made

deliberate efforts to keep its cost of goods constant per revenue fairly constant. The same trend

was seen in its competitor, Lowe’s Companies Inc; the ratio remained at around 65%. This

suggests that the cost of goods sold as a percentage of revenue was the same for both companies.

We can predict that this ratio will remain at similar levels for the next few years.

The gross profit as a percentage of revenue also remained fairly constant over the period

for both companies at around 34% for each of the years considered. This also means that both

companies had identical policies. It may also mean that since the two companies are in the same

industry, the gross margin is the same because their cost of operations is nearly the same. We

may project that the gross margin is likely to remain almost at the same level in the next few

years.

For Home Depot, the total operating expenses as a percentage of revenue have been

reducing slightly over the years; therefore, the company has also been experiencing an increase

in their operating income over the same period. Lowe’s expenses as a percentage of revenue

have also been reducing slightly over the years. However, we note that the operating expenses of

Lowe’s are at a higher level than Home Depot, suggesting that Home Depot is doing a greater

job at managing its operating expenses compared to Lowe’s, therefore having greater operating

income as a result. The net income margin has also been increasing for both companies, although

Home Depot has performed better in this regard. The current assets as a percentage of total assets

have been increasing steadily over the period for both companies. That means that non-current

assets as a percentage of total assets have been decreasing steadily over the same period for both

HOME DEPOT 5

companies. This means that the companies may have made a deliberate decision to increase their

current assets to meet their short-term obligations. However, we notice that Home Depot has

more current assets relative to total assets as compared to Lowe’s Company. This may mean that

Home Depot had more short-term obligations to meet.

For both companies, the current and non-current liabilities increased over the period.

Therefore, the total stockholder’s equity has been declining over the same period; this means that

the companies may have preferred to raise capital in other ways, such as debt over the period

than through equity. The debt/equity ratios of both companies increased, thus increasing the

financial leverage for both companies; the trend was more pronounced for Home Depot, which

had a greater reduction in the stockholder’s equity.

Trend Analysis

HOME DEPOT 6

Home Depot

Lowe’s

2014 2015 %Change 2016 %Change 2017 %Change 2018 %Change

Revenue $53,417 $56,223 4.99% $59,074 4.83% $65,017 9.14% $68,619 5.25%

Net

Income

$2,286

$2,698 15.27% $2,546 -5.97% $3,093 17.69% $3,447 10.27%

Total

Assets

$32,732

$31,827 -2.84% $31,266 -1.79% $34,408 9.13% $35,291 2.50%

2014 2015 %Change 2016 %Change 2017 %Change 2018 %Change

Revenue $78,812 $83,176 5.25% $88,519 6.04% $94,595 6.42% $100,904 6.25%

Net

Income

$5,385 $6,345 15.13% $7,009 9.47% $7,957 11.91% $8,630 7.80%

Total

Assets

$40,518 $39,946 -1.43% $42,549 6.12% $42,966 0.97% $44,529 3.51%

Total

Liabilities

$27,996 $30,624 8.58% $36,233 15.48% $38,633 6.21% $43,075 10.31%

Earnings

Per Share

$3.78 $4.74 20.25% $5.49 13.66% $6.47 15.15% $7.33 11.73%

Costs of

Goods

Sold

$65.25 $65.19 -0.09% $65.81 0.94% $65.84 0.05% $65.95 0.17%

HOME DEPOT 7

Total

Liabilities

$20,879

$21,859 4.48% $23,612 7.42% $27,974 15.59% $29,418 4.91%

Earnings

Per Share

$2.14

$2.71 21.03% $2.73 0.73% $3.48 21.55% $4.09 14.91%

Costs of

Goods

Sold

$65.41

$65.21 -0.31% $65.18 -0.05% $65.45 0.41% $65.89 0.67%

Home Depot is one of the largest home improvement stores in the United States with its

closest competitor being Lowes Inc. The same financial data is provided for both organizations,

therefore a comparison and contrast can be added to the 5-year trend analysis. This will help to

explain where one organization is able to hold its competitive advantage over its main competitor

and where its financial decisions are helping it hold its dominance over the other. Over the last

five years, Home Depot has been able to increase its annual revenue by at least 5.25% and as

high as 6.42%, whereas Lowes increased 4.83% and 9.14% comparatively during the same time

period. Increases in revenues can be caused by multiple factors such as a strong economy or a

sudden increase in home development, which can be a contributing factor for Home Depot and

Lowes. However, a strong economy could cause a sudden spike, then a leveling out, which is not

the case for Home Depot. Home Depot has focused on the Do-It-Yourself homeowner, but more

so on the contractor market. Home Depot has also worked with its suppliers to create innovative

and exclusive products for their stores, such as tools that use universal lithium-ion batteries or

time-saving tools which customers are more inclined to buy (Trefis Team, 2017). In addition to

its innovative and exclusive products, Home Depot has integrated online ordering, and in-store

HOME DEPOT 8

pickup, for their customers. The addition of online ordering allows customers who are in rural

areas or living too far from a store to make purchases from home.

The next matric found in Home Depot’s Trend Analysis is the stores’ net income. Home

Depot’s net income has posted positive numbers in the five years analyzed, whereas Lowe’s has

posted a negative net income change in 2016. Net Income is equal to “net earnings (profit)

calculated as sales less cost of goods sold, selling, general and administrative expenses, operating

expenses, depreciation, interest, taxes, and other expenses (Kenton, 2018). As Home Depot has

managed to increase sales revenues, they too have managed to maintain or lower the Cost of

Goods Sold (COGS). In addition, by integrating online sales, Home Depot is able to sell to more

customers without incurring building and maintenance costs. With fewer stores being required,

they have a lower operating cost than their competitor does. Lowe’s, during the same time

period, lowed their COGS but incurred significant liability increases, which is an indicator of

how each company manages their financials.

Finally, the Earnings Per Share (EPS) is an indicator of the organization’s profitability.

“Earnings per share is of the most important variable in determining a share’s price” because it

allows investors to see the value of the stock (Kenton, 2019). For the same time period, Lowe’s

outperformed Home Depot with a 52% rise in their EPS to Home Depot’s 32%. Although

Lowe’s outperformed Home Depot overall, there is much volatility in Lowe’s numbers. It can be

seen that the organization experienced a 21.03% gain in one year and a 0.73% gain the following

period, whereas Home Depot was more consistent and less volatile than its competitor with a 7%

volatility at its max from one year to the next. Less volatility is more attractive to investors

because they can expect to gain gradually over time and the investment seems safer. More

HOME DEPOT 9

investors purchase the Home Depot stock because of its non-volatile nature that will create

greater profits for them in the long run.

Financial Ratio Analysis

In the Financial Ratio Analysis, we compare Home Depot (HD) and our closest

competitor Lowe’s Company Inc (LOW). The comparison is to find out the current strengths and

weaknesses of our company.

Liquidity

The liquidity displays how well we are meeting our short-term financial obligations. The

first ratio is the current ratio, which is the total current assets divided by the total current

liabilities; this shows if a company or business has the ability to repay the current liabilities.

Looking at the data for the current ratio, Lowe’s and Home Depot both had a flat line. For the

quick ratio, we maintained a higher value than Lowe’s, but still had a flat line. Our working

capital-to-sales had a major decrease as Lowe’s had an increase.

Current Ratio

Quick Ratio

1.36 1.25 1.17

1.01 1 1.06

0

0.5

1

1.5

2016 2017 2018

HD LW

HOME DEPOT 10

Net Working Capital-to-Sales Ratio

Operating Performance Ratio/Turnovers

We looked at the amount of inventory, and how long that it takes our business to turn it

over, including the days it takes to sell the inventory. Comparing Lowe’s and Home Depot, we

have a better turnaround time on our inventory by about 18 days. Our days of sales receivable

has decreased from 2017 to 2018, and Lowe’s was not even charted.

0

0.1

0.2

0.3

0.4

2016 2017 2018

HD LW

0

1

2

3

4

5

6

2016 2017 2018

HD LW

HOME DEPOT 11

Days of Sales in Inventory

Days of Sales in Receivable

Profitability Ratios

This includes the Gross Profit Margin, Operating Profit Margin, and Net Profit Margin.

This is to compare how profitable the companies are and how well they are performing. The

gross profit margin, in comparison with Home Depot and Lowe’s, the last three years has

displayed a decline for Lowe’s and an incline for Home Depot. In the operating profit margin,

both companies show an increase; however, Home Depot has a higher margin. Lowe’s and

60

65

70

75

80

85

90

2016 2017 2018

HD LW

0

1

2

3

4

5

6

7

8

2016 2017 2018

HD LW

HOME DEPOT 12

Home Depot’s net profit margin have both shown a steady increase, meaning the companies both

have profitability in the market.

Gross Profit Margin

Operating Profit Margin

33.2

33.4

33.6

33.8

34

34.2

34.4

34.6

34.8

35

2016 2017 2018

HD LW

0

2

4

6

8

10

12

14

16

2016 2017 2018

HD LW

HOME DEPOT 13

Net Profit Margin

Return on Investment Ratios

The return on investment ratio includes the basic earning power ratio, ROA, and ROE.

The return on assets (ROA) is the calculation of income and the total assets. Both Home Depot

and Lowe’s had a steady increase; with this the higher the ratio the better, because it measures

how effective they are earning profits. The return on equity (ROE) is the net income and

shareholders’ equity. As stated previously, the higher the ratio the better because this tells you

what the investees are earning on their investments. Lowe’s had a steady increase while Home

Depot had a significant jump from 149.44 to 298.25 from 2017 to 2018. The basic power earning

(BEP) for the companies have maintained steady growth since Lowe’s is about half of what

Home Depot is reporting.

ROA

0

2

4

6

8

10

2016 2017 2018 HD LW

HOME DEPOT 14

ROE

Basic Earning Power Ratio

0

5

10

15

20

25

2016 2017 2018

HD LW

0

50

100

150

200

250

300

350

2016 2017 2018

HD LW

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2016 2017 2018

HD LW

HOME DEPOT 15

Continued Analysis of Ratios

Looking at the data, Home Depot is showing effective operations in the industry, by

focusing on the Do-It-Yourself and contracting market. At Home Depot, we are building up our

total debt levels with a high level of generated cash from operations; this demonstrates our

current level of cash operations that is substantial enough to cover our debt. “Home Depot is

constantly displaying signs of operational efficiency as an alternative to return on assets

(Edmonds, 2018).” Our management is generating a substantial profit on Home Depot’s assets;

this is displayed by the continuous increase in our asset turnover rate, meaning our sales are

increasing too. If management would like to improve Home Depot’s financial performance, they

could recover outstanding debt, reduce expenses, sell assets, offer markdowns, increase prices,

and change marketing strategies (Department of Industry, 2018).

Return on Equity

HOME DEPOT 2016 2017 2018

Return on Equity 89.64% 149.44% 298.25%

Net Profit Margin 7.92% 8.41% 8.55%

Asset Turnover 2.14 2.21 2.31

Financial Leverage 6.74 9.92 30.63

Debt to Equity Ratio 3.37 5.45 18.59

Lowes Home Improvement 2018

Return on Equity 55.84%

Net Profit Margin 5.01%

Asset Turnover 1.97

HOME DEPOT 16

Financial Leverage 6.01

Debt to Equity Ratio 2.89

Home Depot’s ROE has increased over the last 3 years. This tells us that the company

is heading in the right direction and they know how to reinvest their earnings. Their sales are

steadily increasing, which increases the company’s total assets and the shareholder’s equity.

In the last 3 years, the book value is steadily decreasing, meaning the true value of the

company is decreasing. All of Home Depot’s ratios are higher than its peer competitor

Lowe’s. If the management wanted to improve their ROE, they should increase their financial

leverage by increasing their debt. They could also strive to improve their asset turnover by

increasing their sales which will display operating efficiency. Home Depot is doing a

phenomenal job at staying ahead of Lowe’s and increasing the ratios that will positively

impact their company. ROE is important to keep an eye on considering it could also mean

there is an increase in debt, resulting in less equity. Home Depot should continue generating

new ideas to help improve our sales to increase our asset turnover ratio.

Recommendations

We use different aspects of the ratios in giving recommendations. With respect to

financial leverage, the debt/equity ratio for Home Depot has been increasing over the years. If

the trend continues, it means that the company may have more debts relative to stockholder’s

equity, which may increase the risks for shareholders. The company may need to review its

financing policies to minimize taking too much debt to reduce the risks to shareholders.

Operating expenses have been reducing over the period; this means that the company is on the

right path because this leads to an increase in profits for the company. The company should

HOME DEPOT 17

maintain its cost-reduction policies and ensure that its operating expenses are at a minimum; this

way, the profits are guaranteed to increase over the years. The company should continue

increasing current assets relative to non-current assets to ensure that it meets its short-term

obligations in the upcoming years. We can observe that the net income ratio has been increasing

over the period; therefore, if the trend continues, the company may expect to continue posting

more profits in the future. In this regard, it means that the company has a positive outlook for the

future and may continue growing because of this key metric. Overall, the company seems to be

on the right trajectory going forward. It should strive to explore more markets to increase its net

income. The company should also strike a balance between debt and equity in its financing

requirements.

Home Depot is doing the right things because its revenues are consistently increasing by

at least 5%. In addition, Home Depot continues to increase its net income annually which

indicates that they are healthy financially and are making the right decisions in terms of

reinvestment and innovation in the types of products they sell to their customers. Although they

are outselling their main competitor, they are not improving their Cost of Goods Sold (COGS).

Lowe’s has successfully managed to reduce their COGS for two of the last five years, while

Home Depot has only managed to do this one year at a .09% reduction. In order to achieve this,

the inventory needs to be analyzed on how it is purchased and sold. They should look to reduce

the quantity of the least popular goods and increase the number of the most popular.

Furthermore, they need to look at Wal-Mart’s model and see if they can apply Wal-Mart’s bulk

ordering practices into their operations. Even if Home Depot fails to achieve a reduction in

COGS, they are still on track to surpass their closest competitors.

Reflection

HOME DEPOT 18

From this assignment, I learned that Home Depot is doing a phenomenal job at staying

ahead of Lowe’s and increasing the ratios that will positively impact their company. They

have maintained a steady increase in their net profit margin, meaning the amount of profit

they are obtaining, after all the expenses have been deducted, is increasing. Home Depot is on

the right track in terms of beating their competition and staying ahead competitively. Their

impressive rise in ROE tells me this company’s work efficiency is allowing them to produce

more income with a decrease in capital. In my workplace, ROE would be a good thing to keep

an eye on considering it could also mean there is an increase in debt, resulting in less equity. I

could also generate new ideas to help improve our sales to increase our asset turnover ratio.

HOME DEPOT 19

References

Department of Industry. (2018, July 16). Improve your business’ financial position. Retrieved January

25, 2019, from https://www.business.gov.au/finance/accounting/cash-flow-and-

budgeting/improve-your-business-financial-position

Edmonds, A. (2018, June 24). Does The Home Depot Inc’s (NYSE:HD) Debt Level Pose A Problem?

Retrieved January 25, 2019, from https://simplywall.st/stocks/us/retail/nyse-hd/home-

depot/news/does-the-home-depot-incs-nysehd-debt-level-pose-a-problem/

Home Depot Product Authority. (2018, January 16). The Home Is Where Our Story Begins. Retrieved

January 21, 2019, from https://corporate.homedepot.com/about/history

Kenton, W. (2018, June 28). Net Income – IN. Retrieved from Investopedia:

https://www.investopedia.com/terms/n/netincome.asp

Kenton, W. (2019, January 15). Earnings Per Share – EPS. Retrieved from Investopedia:

https://www.investopedia.com/terms/e/eps.asp

Morningstar. (2019, January 17). HD The Home Depot Inc Stock Quote Price | Morningstar. Retrieved

January 20, 2019, from https://www.morningstar.com/stocks/xnys/hd/quote.html

Morningstar. (2019, January 17). LOW Lowe’s Companies Inc | Morningstar. Retrieved January 20,

2019, from https://www.morningstar.com/stocks/xnys/low/quote.html

Trefis Team. (2017, May 30). A Closer Look At Home Depot’s Growth Strategy. Retrieved from Forbes:

https://www.forbes.com/sites/greatspeculations/2017/05/30/a-closer-look-at-home-depots-

growth-strategy/#26b96ca72e76

https://www.business.gov.au/finance/accounting/cash-flow-and-budgeting/improve-your-business-financial-position
https://www.business.gov.au/finance/accounting/cash-flow-and-budgeting/improve-your-business-financial-position
https://simplywall.st/stocks/us/retail/nyse-hd/home-depot/news/does-the-home-depot-incs-nysehd-debt-level-pose-a-problem/
https://simplywall.st/stocks/us/retail/nyse-hd/home-depot/news/does-the-home-depot-incs-nysehd-debt-level-pose-a-problem/
https://corporate.homedepot.com/about/history
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https://www.investopedia.com/terms/e/eps.asp
https://www.morningstar.com/stocks/xnys/hd/quote.html
https://www.morningstar.com/stocks/xnys/low/quote.html
https://www.forbes.com/sites/greatspeculations/2017/05/30/a-closer-look-at-home-depots-growth-strategy/#26b96ca72e76
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