Case Study on Financials

Corporations monitor growth through the analysis of financial statements. Home Depot is a company that deals in the refurbishment of homes by offering construction tools and services. It is a multinational corporation with retail stores across the United States, Canada, and Mexico. A review of Home Depot’s 2020 fiscal year reports the vertical analysis on the current assets as at 40.35% as compared to the previous year which was at 38.66%, indicating a significant increase in the net asset value. The horizontal analysis of current and non-current assets was 37.74%. Home Depot’s current ratio on the balance sheet stands at 1.05 for the 2020 financial year.

Examining the cash flow statement for the trading period ending January 1^st, 2021, the vertical analysis where the gross sales are compared to the net sales amounts to 28.68%. In the previous year, the figure was 29.92%, using gross profit as the base of the net income line. Cash flow from operating activities realized a figure of 11.87% on the horizontal analysis using the net cash provided by the operating activities as the base and the line of net earnings that is between the 2019 and 2020 fiscal years. 2.15 is the current ratio on the cash flow statement. Do you need help with a case study assignment?

The value of vertical analysis on the statement of comprehensive income is 99.43% in the 2019 fiscal year. In the consequent year, the value of vertical analysis was slightly higher at 99.47%. The horizontal analysis value taking the 2019 fiscal year comprehensive income as the base value and net income as the line item is 14.36%. The return on equity of stakeholders was calculated and amounted to 0.99.

Vertical analysis on the profit and loss account where the gross profit or loss is the base and net profit or loss the line item obtains 71.31% in the 2020 fiscal year compared to the previous year at a figure of 70.08% (Shala , Prebreza , & Ramosaj, 2021). Horizontal analysis between 2019 and 2020 yields 4.32%. Consequently, the operating margin of the 2020 fiscal year is the positive value stated at 1.42.

Financial ratios enable a corporation to assess its performance in the business environment. Liquidity ratios assess the ability of a company to pay off its short-term financial obligations. Therefore, in this category, the main concern will be the current assets and liabilities. A positive figure above one indicates a satisfactory ability of a corporation to pay its debts. Home Depot’s current ratio for the 2020 financial year was 1.05 compared to Lowe’s, a corporation also in the home improvement industry, at 1.19. Both corporations have enough assets that can be liquidated to pay off short-term debts. The base number is usually one below that a company can be considered incapable of fully settling its near-future debt obligations.

Every corporation strives to increase its asset base and surpass the amount of liability it owes to the creditors. A company that has attained the aforementioned is said to be solvent. The best way to measure the solvency of a firm is by finding the ratio of total debt to total assets (Smith, Hillon, & Liang, 2019). Home Depot’s debt-to-asset ratio was 0.95 in the 2020 financial year, while Lowe’s ratio stood at 0.97. Lowe is at higher risk of not meeting its debt obligations, for the higher the number, the riskier it becomes to settle long-term debts.

Profitability is at the core of every business activity. All stakeholders require an analysis of the profitability ratios to ascertain the return attributable to the business investment. Taking into consideration the operating margin of Lowe in the 2020 fiscal year, the ratio was 1.65. Conclusively, Lowe’s operating margin is higher compared to Home Depot’s since the higher the number, the better the opportunity to increase the value of sales.

No enterprise is self-sufficient and operates without cooperation with other firms. The goods produced require transportation to the destination, there are raw materials required to make the end products. Also, the marketing department will require a financial investment. The operational cost incurred by Home Depot reduces the margin on the gross profit. The current ratio is at the risk of falling below the desirable levels which would be considered risky for business operations continually and uninterrupted. A lower figure would imply operating the business solely on borrowed funds. The shareholder’s dividends can be reduced to service and offset burdening loans.

It is impossible to avoid debt in business operations. Plans are laid out by the top executive and painstaking analysis to determine the best possible solution to existing challenges and their credibility asserted by the board of governance. However, there are unforeseen macroeconomic factors that can hinder the execution of the laid-out plans. The recent pandemic has forced people to adapt to the new working methodology by staying at home, improving the purchases of home equipment, and enabling Home Depot to meet some of its financial goals. Its solvency has been higher compared to the previous fiscal year.

Profits are the motivating factor to keep businesses in operation. Financial statements are prepared every year or quarterly to assess performance and mainly to strategize on the mechanisms of increasing profitability. Home Depot is a profitable corporation that can pay dividends to its shareholders and create more wealth for the owners. More stakeholders are attracted to a good-performing company. However, Lowe has also shown to be a profitable company even though its sales are less in amount compared to Home Depot.

In business, market trends can be volatile, and consumer purchasing patterns are altered through motivating factors such as greed and fear (Epstein, Buhovac, & Yuthas , 2015). Hence, the market can become very unstable, and prices fluctuate unexpectedly. The market share of a company such as Home Depot can be significantly reduced by shunning away investors, resulting in lowering the value of shares on the stock market. The top management needs to formulate pertinent trading strategies that will ensure the value of the assets surpasses the debts and accrual operating expenses of the business. This will be useful for maintaining the operation and perpetuity of the business incessantly.

According to the organization’s financial statements, an enormous chunk of the sales goes to the manufacturing of goods and services rendered. An initiative on the best method to reduce the cost of production can increase Home Depot’s margin. The methodology can include increasing business operations in lumbering for wood products or the transport industry to cut the cost of transportation of raw materials. Saving on the cost of production would imply more resources that can be put into improvement through research and development.

Attempts to contain the pandemic dictate that contact between persons should be minimized. The increase in devices that can connect to the internet has encouraged companies, including Home Depot, to develop an online marketplace for buyers to safely purchase their desired products in the comfort of their homes. Also, the delivery incorporates a technician who can provide expertise on the installation of a product when required. After-sale services increase customer loyalty and overall customer satisfaction.

It can be difficult to assess one corporation against another and accurately deduce the performance advantage one has over another. Not all companies use the GAAP that is commonly used in the preparation of financial statements. The preparation of financial statements provides reliable information to investors and analyzes a corporation’s appraisal effectively.

References

Epstein, M. J., Buhovac, A. R., & Yuthas, K. (2015). Managing social, environmental and financial performance simultaneously. Long range planning, 48(1), 35-45.

Shala , B., Prebreza , A., & Ramosaj, B. (2021). Horizontal and Vertical Analysis of SAMSUNG Enterprise for the Years 2015-2016 and 2017-2018. Journal of Economics and Management Sciences, 4(1), 50.

Smith, W. L., Hillon, Y. C., & Liang, Y. (2019). Reassessing measures of sustainable firm performance: A consultant’s guide to identifying hidden costs in corporate disclosures. Business Strategy and the Environment, 28(2), 353-365.

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