Home Depot Case
Growth in Sales – Home Depot has experienced a rapid growth in sales. Revenues have nearly doubled every year the past five years. Aggressive store expansion has attributed to this rapid sales growth.
Growth in Total Assets – Total assets have experience the same rapid growth in sales as the company has purchased significant inventory to accommodate the aggressive expansion effort.
Change in Net Income – Net income was on a consistently increasing pace until the last year. Net income declined due to aggressive expansion.
Growth in Long-Term Debt – Huge increase in long-term debt was caused by opening of new stores and purchase of inventory. This large increase attributed to the decline in net income. As the stock decline banked financing became a more attractive option.
2. Return on sales has decreased due to rapid expansion and costs associated with that expansion. Inventory carrying costs and debt service were major contributors to the decline in net income.
3. Cash flow from operations is negative due to significant purchases of inventory. Purchase of additional inventory results in cash outflow leading to a negative cash position. The majority of the cash to fund this expansion has come from debt while a smaller portion has come from sale of common stock. Should the company continue this trend an increase in leverage on the balance sheet is likely to occur.
Debt Ratio = .70:1 in 1981
.44:1 in 1982
.38:1 in 1983
.68:1 in 1984
.77:1 in 1985
In 1984 the company began issuing massive amounts of long-term debt instead of relying on short-term debt. This has likely allowed the company reduced debt payments. This change has likely impacted the liquidity of the company favorably.
5. An increase of $75 million in financing will not put the company in violation of covenant, so long as the convertible subordinated debentures are included in TNW. This increase would result in a 1.45:1 D/TNW, well...