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2009-01-18_044615_Home_Depot

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					                            The Home Depot   1




The Home Depot Evaluation
                                                                       The Home Depot        2


        The Home Depot is a home improvement and construction retailer in America.

Home Depot employs a vast number of employees which total an estimated 331,000

people and operates 2,268 stores all over the United States. With all that said, the Home

Depot is the second largest home improvement retailer in the United States. Home Depot

is also the second largest general retailer in the United Stated. Home Depot is second

only to Walmart. Home Depot was founded by Bernie Marcus, Arthur Blank, Ron Brill,

and Pat Farrah in 1978. In order to start this store, which had a proposition to build home

improvement warehouses that were larger than any of their competitors, they needed

capital. Luckily, there was an investment banker by the name of Ken Langone that helped

Marcus and company to get the capital they needed. According to Wikipedia, Bernie

Marcus was quoted in saying that, “Bernie and I founded [The Home Depot] with a

special vision -- to create a company that would keep alive the values that were important

to us. Values like respect among all people, excellent customer service and giving back to

communities and society”(Wikipedia) Throughout the years, The Home Depot Aircraft

has stayed strong and is still finding creative ways to stay at the top for many years to

come.

        Just looking at the numbers for 2007 and 2006 it is obvious that this company has

done a decent job despite a crumbling economy and gas prices. There was an increase in

positive areas in comparison to each year. The economic crisis that is happening in the

United States has put the retail industry in a difficult predicament. This is especially

because of the rise in gas and oil prices. Although The Home Depot makes home

improvement parts and items, which is not directly related to gas and oil prices, they are

still affected by the economic slump because people are trying anything to cut back on
                                                                          The Home Depot        3


costs. This causes a problem for any operations dealing with any industry. Nonetheless,

profit numbers have increased fairly well in comparison to the previous years profits.

Compared to 2006, The Home Depot has gained 7 million dollars in net income. In 2007

The Home Depot had earned 238 million dollars in net income compared to 2006 where a

total of 231 million dollars were earned. The Home Depot sales and revenue went up as

well from 4.6 billion in 2006 to 4.8 billion in 2007. Of course with these increases, the

shareholder’s value went up as well from a 52 week low of 17.05 per share in 2006 to

31.08 per share in 2007. Although this company operated only in the United States, the

financial numbers are fairly well even though the US is experiencing a recession. For the

Home Depot it was definitely a good year overall. Although the 2008 numbers are not out

yet, it is safe to say that because of the current economic slump and gas price increases

that we can expect the numbers for 2008 to be even or slightly better than 2007.

        In comparison to 2006, 2007 was a good year for the Home Depot. In comparing

the current assets to the current liabilities, the current ratio, it shows that the current ratio

is 1.37 to 1 with the current assets being 1.7 billion and the current liabilities being 1.2

billion for 2007. The same analysis for 2006 shows that the current ratio is 1.45 to 1 with

the current assets being 1.6 billion compared to the liabilities being 1.1 million. The

quick ratio, which considers a more reliable indicator of the Home Depot’s ability to

meet its short-term financial obligations, for 2007 was also .13 to 1 which included the

current inventory of 1.5 billion. This number was created using the actual value of the

inventory of 1.5 million with no depreciation value. For 2006 the quick ratio was .10 to 1

which included the current inventory of 1.5 million. This number was also created using

the actual value of the inventory of 1.5, and no depreciation value. This information
                                                                       The Home Depot        4


shows how the Home Depot was able to better handle their short-term obligation in 2007

compared to 2006 when they were close to being even with the current and quick ratios

but were still not as ready to handle those obligations as they were in 2007. In comparing

the inventory turnover ratio it is also clear that both years were pretty equal in holding

their inventory. The ratio for 2006 was 1.69% compared to 1.69% in 2007. The Net sales

for 2006 was 4.6 billion and the total inventory was 1.5 billion compared to the 2007 net

sales which was 4.8 million and the inventory which was 1.5 million. This shows me that

The Home Depot was holding on their inventory just as much in 2006 as they were in

2007. This is obviously because of the near equal financials in sales because of the

economic slump that we are in and were in then. Compared against the industry averages,

there truly are not too many differences because the whole industry has had a decent year

because the demand for the services that these companies provide is usually steady

although the economy is not. Other companies in this industry acknowledged the change

in gas prices and oil prices as a factor for lower demand, but are not too concerned about

it. This demand being pretty balanced has balanced out the supply as well. Because the

2007 ratio was decent, it implies that Home Depot had strong sales; on the other hand, the

even ratio for 2006 implies that the sales for that year were even as well, not preventing

too much inventory being left over.

       The Home Depot relies partly on debt to help execute their everyday sales. In

analyzing the debt that they are using, it was seen to be more debt used in 2007 in

comparison to 2006. The total debt for 2006 was 477 million compared to 505 million in

2007. The Debt to Asset ratio for 2007 was 30% compared to 30% for 2006. This does

tell us plenty about the debt management in comparison to each year. The ratio did not
                                                                       The Home Depot       5


change at all in the two years although the number is different by almost 30 million. This

tells us that there was a need to take on more debt, and that plenty of debt had to be

acquired. This also tells us that in comparison to the 2007 year that the company held

steady in terms of assets compared with debt since the assets increased as well. This can

be somewhat deceiving since the debt did increase by less than 30 million dollars.

Although the debt did increase, this is a great trend for any company. As this company

does well, it is obvious that this number should continue to go down in order to implicate

that the company is doing well. Since creditors look at these ratios in order to see if a

company will make good on their business loans and obligations, it is imperative that The

Home Depot starts to bring those numbers down each year.

       The ratios and numbers for the calculations that use the total net income for the

Home Depot were easy to determine because of the gains that were recorded for the 2007

year in comparison with the 2006 year. The Net Profit Margin was 4.9% for the 2007

year because the net income was 238 million, and the total revenue was 4.8 billion. The

net profit margin ratio for 2006 was 5.0%. This ratio is important for investors because it

tells how much profit is made per $1 of revenue. Because the income was good in 2006

and 2007, it is obvious that the profit that was generated was a positive profit. The ROI

was also positive for 2007 because of the net income. The return on assets ratio was .14

to 1 for 2007 compared to .14 to 1 in 2006. The ROI is used to show how well the

management at The Home Depot is doing to generate income. It is obvious that in 2006

this job was done slightly better than 2007. For any investor it is important to know how

the management of the company is doing, and it is obvious that the management at The

Home Depot needs to continue the things that they are doing because it is yielding
                                                                     The Home Depot         6


excellent profits. The ROE for The Home Depot was also slightly better. For the 2007

year the return on equity was great at 23.3% compared to the ROE for 2006 which near

the same at 22.4%. In comparison, the 2007 year was much better than 2006 because of

the net profits, although 2006 was also great financially. This comparison shows that the

2007 shareholders earned a decent amount of return on their investments compared to the

2006 shareholders who earned a little more in 2007. This is also a great indicator that the

same 2006 investors were still investing in this company in 2007. The current price per

share as of 01/16/2009 for the Home Depot (HD) is $23.20 with the earnings per share

currently being $1.80. This makes the price per earnings ratio, or P/E, 12.90. This shows

how much a shareholder can expect to earn per share, which is a fairly decent amount

currently. Also in terms of the weighted average cost of capital (WACC) for both years

the numbers are also pretty similar. The 2007 WACC is 7.33%. This is a decent number

overall.

       Overall, the Home Depot is an admirable and customer-worthy business. They

have been in business for over 30 years, and have continued to improve with every year.

The Home Depot has survived the changes in trends and times, successfully surviving the

previous and current economic conditions. The economy has made it difficult for any

company in this industry to make a decent profit because of numerous reasons including

gas and oil prices. Nonetheless, The Home Depot has found different ideas towards

trying to overcome this slump. Some of those ideas include creating price efficient and

user-friendly products every year. The current stock price for The Home Depot is $23.20

with the 52 week low being $17.05 and the 52 week high being $31.08. The 2007 year

has shown positive changes and increases in comparison to 2006. Since the current price
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of the stock is near the 52 week low, it would not be too risky to invest in this stock

because of how well The Home Depot has done in recent years. If the economy starts to

get better, this stock would be an exceptional investment. Moreover, with 2007’s

numbers being even or better than 2006, which was also great, and the constant demand

for products and services in this industry, I would have to suggest that an investor

purchase this stock.
                                                                 The Home Depot      8




                                     References

The Home Depot (2008). Wiki. Retrieved November 25, 2008 from

      http://en.wikipedia.org/wiki/Advance_Auto_Parts

The Home Depot Annual Reports 2007 (2008). Financial. November 25, 2008

      http://media.corporate-ir.net/media_files/irol/13/130560/reports/2007_AR.pdf

				
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