Ratios used within the world of business - Free Essay Example

Current, Quick Cash Ratio CURRENT RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 1.20 1.15 1.39 INDUSTRY AVERAGE 1.18 1.07 1.08 QUICK RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.13 0.14 0.30 INDUSTRY AVERAGE 0.44 0.40 0.40 CASH RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.05 0.04 0.05 INDUSTRY AVERAGE 0.18 0.16 0.14 Liquidity ratios depict the companys ability to pay its current obligations. Home Depot liquidity ratios show a strong liquidity position that is it can pay its bills on time with its additional capital. Current ratio measures the ability of the firm to pay its short-term obligations. Home Depot Inc. has its current ratio above the market average; this indicates that the company has excess money in cash or safe investments that could be invested in the business for better use. Quick ratio is defined as the companys ability to make payments on current obligations. Home Depot has a comparatively low quick ratio in recent years which indicates that the company relies heavily on its inventory to meet its short term obligations. Cash ratio depicts the availability of cash to cover short term debt and other obligations. The company has lower ratio compared to industry average in the last three years. ASSET MANAGEMENT RATIOS: Inventory, A/C Payable A/c Receivable Turnover INVENTORY TURNOVER: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 6.68 6.59 7.08 INDUSTRY AVERAGE 10.36 10.11 10.02 ACCOUNTS RECEIVABLES TURNOVER: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 73.34 61.44 28.18 INDUSTRY AVERAGE 26.06 24.52 23.94 ACCOUNTS PAYABLE TURNOVER: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 14.78 13.49 12.35 INDUSTRY AVERAGE 13.79 12.84 12.65 Home Depot has a higher inventory turnover ratio but it is much lower than the industry average. This shows that Home Depot is not managing its production, ware-housing and distribution of its product considering its present volume of sales. The company might be overstocking or carrying obsolete products compared to other firms in the same industry. Accounts receivable turnover gives a measure of how quickly credit sales are turned into cash. Home Depot has maintained a much higher accounts receivable ratio than its industry average indicating the company uses its credit, inventory and assets efficiently to conduct business better. It is collecting money from its credit sales much quickly than the other firms in the same industry. Management should maintain on the Home Depot credit terms and should continue managing its purchasing effort in an efficient manner. Similarly the accounts payable turnover ratio is increasing over the years and it exceeded the industry average. This indicates that the firm is paying off the suppliers at a faster pace compared to its competitor, which is a good sign. DEBT MANAGEMENT RATIOS: Debt-to-Equity, Debt-Capital Interest Coverage DEBT- EQUITY RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.64 0.76 0.47 INDUSTRY AVERAGE 0.52 0.63 0.51 DEBT- CAPITAL RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.39 0.43 0.32 INDUSTRY AVERAGE 0.34 0.38 0.34 INTEREST COVERAGE RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 6.75 10.51 24.74 INDUSTRY AVERAGE 9.26 6.22 10.34 Debt to equity ratio depicts the relative combination of the companys investor-supplied capital. Home Depot debt to equity ratio increased over time from 2007 to 2009 and its also above the industry average; this means that a higher proportion is not of owner-supplied capital and this is not indicated as safe. A high leverage ratio indicates greater exposure to risk and business downturns, but along the danger comes the possibility for higher returns. Debt should be between 50 and 80 percent of owne rs equity for the firm. Home Depot had a very high interest coverage ratio in 2007 which marks that company can handle its interest payments comfortably. Its interest coverage ratio dropped significantly by 2009 but it is still above the market average. A higher interest coverage ratio indicates that Home Depot is able to take on additional debt. Debt to capital ratio computes the companys capital that is generated by borrowing. Home Depot has been successful in maintaining its debt to capital ratio close to the industry average over the last three years hence sustaining its worth. The company depended upon borrowing to finance its operations. PROFITAB LITY RATIOS: EBIT Margin, Net Profit Margin, ROA ROE OPERATING PROFIT MARIN RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 6.11 9.36 10.65 INDUSTRY AVERAGE 7.37 5.66 8.72 NET PROFIT MARGIN: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 3.17 5.68 6.34 INDUSTRY AVERAGE 4.34 2.87 5.03 RETURN ON EQUITY (ROE): FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 12.71 24.81 23.02 INDUSTRY AVERAGE 14.67 9.43 14.75 RETURN ON ASSETS (ROA): FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 5.49 9.92 11.02 INDUSTRY AVERAGE 6.85 4.11 6.90 Operating profit margin ratio for the company dropped over the years this means that the proportion of a companys revenue left after paying for variable costs of production such as pays, raw materials, etc has decreased over the years. Home Depot is earning less per dollar of sales than its competitors.Net profit margin ratio for Home Depot decreased over the last three years and reached below the industry average in 2009. This indicates weak net profitability; hence there lies a problem with indirect operating expenses or non-operating items, such as interest expense. Decrease in net profitability shows the declining effectiveness of management. Return on equity ratio of Home Depot Inc. decreased drastically from 2008 to 2009 and now it is above the industry average. A high return on equity comparing to its competitors indicates that the company is spending intelligently and is likely to be profitable. High returns on equity results in higher stock prices. Return on assets ratio decreased significantly over the recent years and in 2009 it was below the industry average. This means that the company is not effectively converting the money it has into net income. Home Depot should intelligently utilize its assets to fund its operations. MARKET BASED RATIOS: P/E, P/S and P/B Multiples PRICE TO EARNINGS RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 18.59 11.24 12.59 INDUSTRY AVERAGE 15.06 22.07 16.60 PRICE TO SALES RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.59 0.64 0.80 INDUSTRY AVERAGE 0.65 0.63 0.83 PRICE TO BOOK VALUE RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 2.36 2.79 2.90 INDUSTRY AVERAGE 2.21 2.08 2.45 For Home Depot Inc. price to earning ratio increased over years and it was above the industry average in 2009. In general it suggests that investors going to expectÂÂ  higher earningsÂÂ  growthÂÂ  in the future than its competitors. Home Depot price to sales ratio decreased over the recent years and it is now below the industry average. A low P/S ratio characterize Home Depot Inc. with the potential for an important turnaround because sales are already being completed and t here is only need for improvement in the margin the company is able to earn on each unit of sales. There is a small change in Home Depot price to book value ratio over the last three years and it is constantly above the industry average. A higher P/B ratio compare to the industry could mean that the stock is overvalued. The DuPont identity combines ROA ROE into a three part analysis: ROE = Net Income x Sales x Total Assets Sales Total Assets Owners Equity Home Depot Inc.s total assets declined from over the last years. Revenues also represented a declining trend 2008 to 2010. Home Depot Inc.s net income (loss) declined from 2008 onwards but then slightly increased from 2009 to 2010. Home Depot Inc.s total stockholders equity increased over the last three years from 2007 to 2010. Hence using the DuPont equation it is computed that Home Depot Inc.s ROE deteriorated from 2008 to 2009 but then slightly improved from 2009 to 2010. Home Depot Inc.s ROA also depicted the simila r trend which deteriorated from 2008 to 2009 but then slightly improved from 2009 to 2010. APPENDIX 1 LIQUIDITY RATIOS CURRENT RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 1.20 1.15 1.39 INDUSTRY AVERAGE 1.18 1.07 1.08 QUICK RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.13 0.14 0.30 INDUSTRY AVERAGE 0.44 0.40 0.40 CASH RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.05 0.04 0.05 INDUSTRY AVERAGE 0.18 0.16 0.14 ASSET MANAGEMENT RATIOS: INVENTORY TURNOVER: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 6.68 6.59 7.08 INDUSTRY AVERAGE 10.36 10.11 10.02 ACCOUNTS RECEIVABLES TURNOVER: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 73.34 61.44 28.18 INDUSTRY AVERAGE 26.06 24.52 23.94 ACCOUNTS PAYABLE TURNOVER: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 14.78 13.49 12.35 INDUSTRY AVERAGE 13.79 12.84 12.65 DEBT MANAGEMENT RATIOS: DEBT- EQUITY RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.64 0.76 0.47 INDUSTRY AVERAGE 0.52 0.63 0.51 DEBT- CAPITAL RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.39 0.43 0.32 INDUSTRY AVERAGE 0.34 0.38 0.34 INTEREST COVERAGE RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 6.75 10.51 24.74 INDUSTRY AVERAGE 9.26 6.22 10.34 PROFITABILITY RATIOS: OPERATING PROFIT MARIN RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 6.11 9.36 10.65 INDUSTRY AVERAGE 7.37 5.66 8.72 NET PROFIT MARGIN: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 3.17 5.68 6.34 INDUSTRY AVERAGE 4.34 2.87 5.03 RETURN ON EQUITY (ROE): FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 12.71 24.81 23.02 INDUSTRY AVERAGE 14.67 9.43 14.75 RETURN ON ASSETS (ROA): FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 5.49 9.92 11.02 INDUSTRY AVERAGE 6.85 4.11 6.90 MARKET BASED RATIOS: PRICE TO EARNINGS RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 18.59 11.24 12.59 INDUSTRY AVERAGE 15.06 22.07 16.60 PRICE TO SALES RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 0.59 0.64 0.80 INDUSTRY AVERAGE 0.65 0.63 0.83 PRICE TO BOOK VALUE RATIO: FEBRUARY 2009 FEBRUARY 2008 FEBRUARY 2007 HOME DEPOT Inc. 2.36 2.79 2.90 INDUSTRY AVERAGE 2.21 2.08 2.45