Home Depot Credit Rating

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Evaluation of credit rating Memorandum: Credit Rating assignment: Home Depot, Inc. After analysing the financial statements of Home Depot, we have allocated a “C” rating of credit risk. The proposal is to start with the “C” rating and then to either upgrade to a “B” rating or to be down graded to a “D” rating. The reason for such a decision is discussed below. Home Depot has a current ratio of 1.19 to 1 which means that it’s current assets covers it’s current liabilities by 1.19 times. This is the lowest that it had been for the last 10 years against an average of 1.61. A current ratio of 2 or higher would usually be a qualifier for good credit risk. The low current ratio of Home Depot will increase the credit risk. Working…show more content…
Gross Profit Rate: The average year on year increase in gross profit rate over the past 10 years was 19.85% (Annexure 2, Table). This indicator peaked in 1999 at 32.54% and gradually reduced over the past 6 years and ended at 11.83% for the 2005 financial year which is the lowest over the last 9 years. This is of major concern as it seams that the company can’t stop the deterioration in the gross profit rate. Net income as a percentage of sales: The average year on year increase in net income as a percentage of sales over the past 10 years was 5.91% (Annexure 2, Table). This is the one indicator that Home Depot has managed to keep stable for the past 10 years. It had shown steady growth over the years and the 7.20% achieved in 2005 is the highest in the 10 year window period. ii Conclusion After calculating and analyzing the ratios and their trends the following conclusion regarding the profitability of Home Depot can be made: • Growth in Net Sales reduced with 1.3% between 2004 and 2005 while cost of sales increased with 1.4% over the same period resulting in a reduction in the gross profit rate. • In order to conclude on the net earnings, a trend was calculated with regards to the return on invested capital (assets). The trend, as computed from the table and graph in annexure 2, shows

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