Financial Analysis (key strengths and weaknesses) of Home De
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Here are the requirements of the assignment. "Select a publicly traded organization. Locate the financial section of the organization's most recent annual report. Perform a financial analysis on your selected organization to include liquidity, efficiency, and profitability ratios, asset management, debt management, and market returns. Based on your analysis, prepare a paper in which you identify the key strengths and weaknesses of the organization's financial position. Include in your paper a recommendation of how the organization's future financial plans can be modified in order to improve its financial performance."
I have chosen Home Depot for this assignment and will attach the ratios that I have thus far. However, I am having trouble finding Home Depot's asset and debt management and market returns. Also, I am not sure how to determine Home Depot's strengths and weakenesses as well as recommendations about how their future financial plans can be modified in order to improve their performance.
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Response explains the steps to do the Financial Analysis (key strengths and weaknesses) of Home Depot
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Liquidity Ratios
Liquidity Ratios are acknowledged as "a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations;" therefore, "the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts" (Investopedia, 2008, para. 1). Since liquidity measures a firm's ability to meet its current obligations, the net working capital, and the current, quick and cash ratios are used.
Credit Research Foundation (1999) stated that "working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties" (para. 4). The working capital formula is acknowledged as follows:
Current Assets
- Current Liabilities
Based on the formula above, Home Depot's liquidity for working capital is calculated as follows:
Net Working Capital
14,674
-12,706
$ 1,968
Net Working Capital
Total Assets
1,968 = 0.04
44,324
The current ratio provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities. The current ratio formula and Home Depot's current ratio are acknowledged and calculated as follows:
Current Assets = 14,674 = 1.15
Current Liabilities 12,706
The quick ratio; however, "is a measurement of the liquidity position of the business; which in turn, "compares the cash plus cash equivalents and accounts receivable to the current liabilities" (Credit Research Foundation, 1999, para. 5). The quick ratio formula is acknowledged as follows:
Cash + Marketable Securities + Accounts Receivable
Current Liabilities
Home Depot's liquidity for the quick ratio is calculated as follows:
445 + 12 + 1,259 = 1,716
12,706 12,706 = 0.14
The cash ratio; however, indicates a conservative view of liquidity such as when a company has pledged its receivables and its inventory, or the analyst suspects severe liquidity problems with inventory and receivables. The cash ratio formula is acknowledged as follows:
Cash Equivalents + Marketable Securities
Current Liabilities
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