This information presents the different says in which the company is financed while also showing how capital structure choices affect a company’s return on investment and its risk profile. Home Depot (HAD) is the largest home improvement store in the industry and so far has been able to stay afloat despite the recent downfall of the economy. One of the methods that will be used to analyze He’d capital structure Is ratio analysis. Ratio analysis, which is a calculation that uses information from the company’s balance sheet and income statements, is compared to either previous years or to other companies in the industry.
There are many ratios that can be calculated from he financial statements that Interpret a company’s performance, financing and liquidity. Therefore, the ratios are analyzed by management, Investors and lenders throughout the year or at certain times during the company’s fiscal year. The ratios are presented in a financial report that is accompanied by the balancing statements used in calculating the different ratios. The results then show whether the company is financed mainly through debt or through equity, or a balanced combination of both.
A sound capital structure Is one that shows a low level of debt accompanied by a high level of equity Indicating a good sign of Investment quality. History of Home Depot Not too long ago in June 2009, the Home Depot proudly celebrated its 30 year anniversary. For a company that we are all so familiar with, it comes at a surprise that the business is only 30 years young. After being fired in 1978 from executive positions, Bernie Marcus and Arthur Blank Joined forces to design the concept of, ” … A service” (Blank & Marcus, 1999).
Tom Sternberg, founder and former CEO of Staples, reveres Bernie Marcus and Arthur Blank as , “… The two greatest entrepreneurs in American business history,” and felt that they had, “built the single best culture of any business… N extremely people-focused business in regard to both Home Depot’s customers and, even more important, its employees” (Goldstein, 2007). Today, the business has expanded to all fifty states, Canada, Mexico, and China. Yet, headquarters still remains located in the North American southern city of Atlanta, Georgia.
The founders have since retired and current CEO, Frank Blake, now runs the business. In 1999 the Home Depot had established 775 stores, acquired 160,000 associates, and made $30 billion in sales (Rough, 1999). In 2008, Home Depot sales totaled $ 71. 88 billion and the number of stores representing Home Depot allied up to 2,193 (homestead. Com, 2009). Home Depot was started with the help of an investor who formally worked for the company that initially fired both Bernie Marcus and Arthur Blank. Bernie had always talked about his dream of a store with great service and low prices but didn’t have the money to make it happen.
Only days after these two were fired from their Jobs Bernie called the investor Ken Lange who then agreed to help raise $2 million dollars to start Home Depot. For the next ten years Ken Lange counseled Bernie and Arthur, giving personal and business advice. Business Risks A firm’s business risk represents the uncertainty of the firm’s return on its assets or the risk of doing business. The business risks that HAD is exposed to are competition within the industry, “we compete principally based on customer services, price, store location and assortment of merchandise” (Homeopathic, 2010).
In addition, Home Depot faces demand variability, because their financial performance depends on the stability of the housing markets and the ability of consumers to purchase or have a need for their products their business risk will increase or decrease with the level of demand for their products. Any factor that affects the Meany’s net income affects its business risk as well. Financial Risks A firm’s financial risk represents the impact of a firm’s financing decision (or capital structure) on its ROE. The Home Depot has taken many financial risks that can and have affected their financial standings.
The decline in economic activity in the United States and other regions of the world in which they do business has affected demand for some of their products and services, if this continued it could reduce their revenue and earnings. Their success depends substantially on the stability of the housing markets and the construction markets in addition to nonusers and their ability to pay for new projects and home improvement tasks. U. S. And global credit and equity markets experienced significant disruption beginning in late 2008, making it difficult for many businesses to obtain financing on acceptable terms.