Home Depot : A Home Improvement Retailer Essay

Home Depot : A Home Improvement Retailer Essay

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For this analysis we have chosen Home Depot Incorporated a home improvement retailer. It primary clients are professional “professional remodelers, general contractors, repairmen, small business owners, and tradesmen” (Yahoo Finance, 2015). In addition Home Depot sub contracts installations to third parties (Yahoo Finance, 2015). Home Depot has 2,270 stores in the US and international stores located in Mexico and Canada (Yahoo Finance 2015).
For our analysis, we will use the following ratios:
1-Current Ratio
2-Return on Investments Ratio
3-Debt Ratio
4-Inventory Turnover Ratio
5-Cost of Goods to Sales
6- Cash Flow to Debt Ratio
7-Gross Profit Margin Ratio
The Current Ratio is calculated by taking the current debt and dividing it by the current liabilities. It is the measurement on how a company can meet its short term liabilities with liquid assets (Loth, Rihar, 2015a).A higher ratio indicates favorable activity. A company should be able to meet it responsibilities with its assets. It is important to analyze liquidity for several reasons. For example, If a company were to experience a sudden loss in revenue it would need time to recover. Having a ratio that indicates that a company can not meet its immediate obligations with its current assets can result in major losses. Unforeseen events may occur that require access to immediate assets. However, it is also important to to take some risk. Having a low score may indicate a lack of growth and missed opportunities to utilize credit resources. Furthermore, this score may be a little misleading because it does not evaluate the entire situation. For example, accounts payable is not as liquid as cash but they are both represented as current assets (Loth, Richard, 2015a). Even though a c...

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...ood used to make the revenue This calculation requires us to take Cost of Good Sold and Divide it by revenue/sales (Accounting Equation, 2015). By using this percentage, we can demonstrate what portion of each dollar is spent on COGS. By comparing our two companies, Home Depot at 65.19% and Lowes at 65.21% we can see that both have almost identical COGS on each sale.
Finally, we have the Gross Profit Margin Ratio that is easily calculated by taking the Cost of Goods to sales and subtracting it from 1. This is possible because Gross Profit Margin Ratio is the complement of Costof Goods to Sale. In our result we observe Home Depot has a 34.81% GPMR and Lowes has a 34.79%. Once again, they are very similar in how they distribute their GP. Both companies have a similar performance when it comes to providing sufficient profits to cover the expenses of staying in business

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