Debt and price-earnings ratios The Home Depot, Inc. (HD) operates over 2,200 home improvement retail stores and is a competitor of Lowe's (LOW). The following data (in millions) were adapted from recent financial statements of The Home Depot. Year 2 Year 1 Total assets $39,946 $40,518 Total liabilities 30,624 27,996 Total stockholders’ equity 9,322 12,522 Earnings per share $4.74 $3.78 1. Compute the debt ratio for Years 1 and 2. Round to one decimal place. Year 2 Year 1 Debt ratio __________ % __________ % 2. Given your answer to part (1), what is the ratio of stockholders' equity to total assets? Round to one decimal place. Year 2 Year 1 Ratio of stockholders' equity to total assets __________ % __________ % 3. Compute the ratio of liabilities to stockholders' equity. Round to one decimal place. Year 2 Year 1 Ratio of liabilities to stockholders' equity __________ % __________ %
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Debt and price-earnings ratios
The Home Depot, Inc. (HD) operates over 2,200 home improvement retail stores and is a competitor of Lowe's (LOW). The following data (in millions) were adapted from recent financial statements of The Home Depot.
| Year 2 | Year 1 | ||||
| Total assets | $39,946 | $40,518 | |||
| Total liabilities | 30,624 | 27,996 | |||
| Total |
9,322 | 12,522 | |||
| Earnings per share | $4.74 | $3.78 |
1. Compute the debt ratio for Years 1 and 2. Round to one decimal place.
| Year 2 | Year 1 | |
| Debt ratio | __________ % | __________ % |
2. Given your answer to part (1), what is the ratio of stockholders' equity to total assets? Round to one decimal place.
| Year 2 | Year 1 | |
| Ratio of stockholders' equity to total assets | __________ % | __________ % |
3. Compute the ratio of liabilities to stockholders' equity. Round to one decimal place.
| Year 2 | Year 1 | |
| Ratio of liabilities to stockholders' equity | __________ % | __________ % |
4. A high ratio of liabilities to total assets may indicate all of the following except: ________
a. Total assets exceed liabilities.
b. The company is financing its operations with a high percentage of debt.
c. If operating performance declines, the company may face increased risk that it will not be able to pay its liabilities.
d. The company's ability to borrow additional funds would be difficult for new expansion opportunities.
5. Comparing Years 1 and 2, should creditors feel more or less safe in Year 2? __________
a. More safe
b. Less safe
6. With a market price of $104.43, compute the price-earnings ratio for Year 2. Round to one decimal place. _____________
7. With a market price of $75.09, compute the price-earnings ratio for Year 1. Round to one decimal place. ____________
8. The price-earnings ratio has _________ (increased, decreased) by __________ (19.9, 10.6, 22.0) percent during Year 2. This _________ (increase, decrease) in the price-earnings ratio implies that the market has changed its expectation for earnings growth, and that in year 2 it expects future earnings to __________ (grow faster, grow slower) than it did in Year 1.
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