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Ratio analysis for Home Depot

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At the time that of its 10-Q filing of financial statements for the first half of its January 2002 fiscal year, Home Depot's shares traded at $50 per share. The following are summaries from those financial statements.

Balance Sheet, July 29, 2001
(in millions of dollars)

Financial liabilities 1,320
Operating assets 23, 457 Operating liabilities 6,709
Financial assets 1,221 Common equity
(on 2,336 million outstanding shares) 16,649
24,678 24,678

Statement of Earnings, Six Months Ended, July 29, 2001
(in millions of dollars)

Net sales 26,776
Cost of Merchandise Sold 18,795
Gross Profit 7,981

Operating Expenses:
Selling and Store Operating 4,963
Pre-Opening 59
General and Administrative 436
Total Operating Expenses 5,458

Operating Income 2,523

Interest Income (Expense):
Interest and Investment Income 22
Interest Expense (11)
Interest, Net 11

Earnings Before Income Taxes 2,534
Income Taxes 978

Net Earnings 1,556

According to financial statement footnotes, Home Depot's statutory tax rate (combined Federal and State rates) is 39%. Other comprehensive income (not in net earnings above) is negligible. Use a required six-month return for operations of 4% in calculations below.
(a) Calculate the following from these statements:
1. Financial leverage
2. Operating liability leverage
(b) Home Depot earned a return on beginning net operating assets (RNOA) of 9.3% for the six months ending July 29, 2001.
1. What was the asset turnover during these six months?
2. What was the residual operating income over the six months?
(c) Calculate the free cash flow generated by operations during the six months.
(d) At the current market price of $50 per share, what growth rate for residual operating income does the market forecast for the future?
(e) Calculate Home Depot's price-to-sales ratio for trailing six-month sales.
(f) If both profit margin and asset turnover are expected to continue at their current levels in the future, what are the sales growth rate forecast implied in the price-to-sales ratio?

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Solution Summary

The expert examines ratio analysis for Home Depot.