Accounting: The Home Depot Analysis, Case Study Example

1. Growth in Sales: The sales of Home Depot’s have been increasing over the years with sales records of $51.5, $117.6, $256.2, $432.8 and $700.7 in millions from 1981 to 1985 this is a growth of 1360% over the five years.

Growth in Total Assets: The total assets grew from a value of $16.9 Millions to $380.2 Millions over the five years. This is a growth of 2249.7% which is slightly higher than the growth of sales.

Change in Net Earnings: Earning in 1981 was $1.4 M, $5.3, $10.3, $14.1 and finally $8.2 Home Depots had registered an increase of $14.1 M from $1.4M in 1984 which has an increase of 1007.14%. The net earning later dropped to $ 8.2M in 1985 this was a decline of 58.15%.

Growth in Long-term Debt: The company long term debts of the company in 1985 was $118,229,000 and in 1986 it was $210,325,000 hence the company registered an increase of 56.21% on its long term debt in that one year.

2. Return on sales was 4.0% in 1993 while in 1985 it was at 1.2% this decline was registered due to the decrease of Earnings before income taxes which reduced from 7.4% to 1.7% and Income taxes which like wise reduce from 3.4% to 0.5%. The factors which would likewise influence on percentage of sales despite the increase in sales value would be an increased cost of operations and cost of materials and labor which is much more in 1985 than 1983.
3. Home Depot’s cash flow from operations is negative because although the company got net earnings of $8,219 M, $14,122M and $10,261M for the years 1986, 1985 and 1984 respectively. However, the company increased on its inventory, receivables and prepaid expenses which were negative and more than positive. The company is able to get money to finance acquisition of its stores from financing activities such as proceedings from long term debt and increase on current portion of LT Debt. If the transactions of the fiscal year of 1986 were exactly the same of 1985 the company would have recorded an increase on its cash provide by operations, cash used on investing activities and cash from financial activities.
4. Home Depot will need approximately $75 million to finance its 1986 expansion plans. The company will be able to borrow $75 M all of it without violating debt covenant’s.
   • The company has been able to fulfill the tangible net worth covenant of $ 150,000,000 Million because in fiscal year ended at 1984 the company realized Net Sales worth $ 274,660,000 and $ 482,752,000 in 1985.
   • The company had only fulfilled the covenant of maintaining minimum interest coverage of 2% to 1% in 1885 which it recorded Earning before income taxes at 1.7%, Income taxes at 0.5% and net earning of 1.2%. However, it was not able to full it in 1984 and 1983 which it has a recording of 6.1% and 7.4% in Earning before income taxes, 2.8% & 3.4% in income taxes and a net earning of 1.2% 3.3% and 4.0% respectively.
5. Home Depot would use leasing to circumvent the debt covenant restrictions by leasing it out for an interest. The company should also lease it out following the guidance of operating leases as it has been stipulated by the lease agreement.
6. a. The advantages of building a new store will expand the company operations while its disadvantages is that it will strain the company financially such that the company will end up incurring a lot in its expenditure.
7. Issuing of stock to finance the construction of the stores will benefit the company as it will eventually have the stores while, its disadvantage is that the company will have its stock reduced with an equal value which will be spent to build the store.
8. Lease of stores from someone else will provide an immediate solution to their problems and will be cheap in long run. However, in long run leasing of the stores will end up being very expensive and not a prudent financial management decision.
9. Slowing down on its growth will make the company not to incur a lot of debts as it tries to meet its financial needs hence being profitable and self substance. However, if its growth will be very slow chances of it being very slow in its growth as real and would end up not be competitive enough in the market.
10. The other available option is getting a partner to franchise with for the company to offer it with stores while home depot will be providing other services and goods which the company needs. By doing so both companies will benefit on the strengths of each other.

Work Cited

Palepu, Krishna. (1985). The Home Depot, Inc.