Use Home Depot financial statements to calculate profitability, liquidity, leverage, coverage, and efficiency ratios—and uncover the accounting relationships that connect the income statement, balance sheet, and cash flow statement.
Watch this short introduction before the lab. It explains how ratios turn financial-statement numbers into measures that help us evaluate performance, liquidity, leverage, and efficiency.
Video: 3 Minutes! Financial Ratios & Financial Ratio Analysis Explained & Financial Statement Analysis
Year ended January 30, 2011. Dollar amounts are in millions. Use these figures throughout the Chapter 4 ratio-analysis lab.
| Item | $m |
|---|---|
| Sales | 67,977 |
COGSCost of goods sold: the cost assigned to the products sold during the period. | 44,693 |
| Gross profit | 23,284 |
| Marketing, G&A | 15,885 |
DepreciationA noncash expense that allocates the cost of long-lived assets over their useful lives. | 1,616 |
EBITEarnings before interest and taxes: operating profit before financing costs and income taxes. | 5,783 |
| Interest expense | 530 |
EBTEarnings before taxes: EBIT minus interest expense. | 5,253 |
| Income taxes | 1,927.85 |
| Net income | 3,325.15 |
| Dividends | 1,569 |
| Item | $m |
|---|---|
| Cash | 545 |
Accounts receivable (A/R)Money customers owe the company for sales made on credit. It is a current asset. | 1,085 |
InventoryGoods held for sale. It is a current asset but usually less liquid than cash or receivables. | 10,625 |
| Other current assets | 1,224 |
Current assetsAssets expected to become cash, be sold, or be used within one year or the operating cycle. | 13,479 |
| Gross fixed assets | 38,471 |
Accumulated depreciationTotal depreciation recorded on fixed assets to date. It reduces gross fixed assets to net fixed assets. | 13,411 |
| Net fixed assets | 25,060 |
| Other fixed assets | 1,586 |
| Total assets | 40,125 |
Accounts payable (A/P)Money the company owes suppliers for purchases made on credit. It is a current liability. | 9,080 |
Short-term notesInterest-bearing borrowing that is due within one year. | 1,042 |
Current liabilitiesObligations normally due within one year or the operating cycle. | 10,122 |
| Long-term debt | 11,114 |
| Total liabilities | 21,236 |
| Common stock | 3,894 |
Retained earningsCumulative profits kept in the business rather than paid as dividends. It is not a cash account. | 14,995 |
| Total equity | 18,889 |
These equations are more useful than memorizing isolated line items because they let you solve for a missing number.
Enter a ratio as either a decimal or percentage when appropriate. Example: for 34.25%, you may enter 34.25% or 0.3425. For “times” ratios, enter the number only.
These require market data not provided in the 2011 Home Depot statements. For definitions, interpretation, FINVIZ screening examples, or questions such as “What does P/E mean?”, use Ask Maggie AI.
| Measure | Formula or meaning | What it helps you see |
|---|---|---|
| Price | Current market price per share | The price of one share; price alone does not tell you whether a stock is cheap or expensive. |
| Market capitalization | Price × Shares outstanding | The market value of the company’s common equity and its size category. |
| P/E | Price per share ÷ EPS | How much investors pay for each $1 of current earnings. It is not meaningful when EPS is negative. |
| Forward P/E | Price per share ÷ Forecast EPS | Valuation based on expected earnings rather than past earnings. |
| PEG | P/E ÷ Expected EPS growth rate | Relates valuation to expected growth. On screeners, a growth rate of 10% is normally entered as 10, not 0.10. |
| P/S | Market cap ÷ Sales | Price relative to revenue; useful when earnings are small or negative. |
| P/B | Price per share ÷ Book value per share | Market value relative to accounting equity. |
| Dividend yield | Annual dividend per share ÷ Price per share | Annual cash dividend as a percentage of the share price. |
| EPS growth next 5 years | Analysts’ expected annual EPS growth | A forecast used in PEG and growth screening; it is uncertain, not guaranteed. |
Screening reminder: compare each measure with the company’s industry, history, profitability, leverage, and growth. A low P/E or PEG is not automatically a good investment.
Use these as classroom starting filters, not automatic buy rules. A stock that passes a screen still needs company, industry, risk, and earnings-quality review. Open FINVIZ Screener ↗
Example classroom screen: P/E < 15 + PEG < 1 + positive EPS growth + ROE > 15%. Then compare the survivors with peers instead of treating the screen as a buy signal.
FINVIZ can help you narrow a large list of stocks by using financial ratios as filters. These are simple classroom starting points, not automatic buy rules.
| Ratio / filter | Simple example | Why look at it? |
|---|---|---|
| P/E | P/E < 15 | Looks for stocks with a relatively lower price compared with current earnings. |
| PEG | PEG < 1 | Adds expected earnings growth to the valuation question. A lower PEG may suggest the P/E is low relative to expected growth. |
| ROE | ROE > 15% | Looks for companies generating relatively strong profit compared with shareholders’ equity. |
| Current Ratio | > 1 | A simple liquidity check: current assets exceed current liabilities. |
| Debt / Equity | < 1 | A simple way to look for companies with relatively less debt compared with equity. |
| EPS Growth | Positive | Checks whether earnings are expected to grow rather than decline. |
Want to know more? Open Ask Maggie AI and ask: “Why P/E < 15?”, “Why PEG < 1?”, “How do I use ROE?”, or “How do I use ratios in FINVIZ?”
Margins use sales in the denominator. Returns compare profit with assets or equity. CPA-style problems may require average assets/equity.
Current ratio uses all current assets. Quick ratio removes inventory and other less-liquid current assets. Working capital is a dollar amount, not a ratio.
Debt ratios ask “how much is financed by creditors?” Coverage asks “how comfortably can earnings pay a fixed charge such as interest?”
| Category | Measure | Formula |
|---|---|---|
| Profitability | Gross margin | Gross profit / Sales |
| Profitability | Operating margin | EBIT / Sales |
| Profitability | Net profit margin | Net income / Sales |
| Profitability | ROA | Net income / Average total assets |
| Profitability | ROE | Net income / Average equity |
| Liquidity | Current ratio | Current assets / Current liabilities |
| Liquidity | Quick ratio | (Current assets − Inventory) / Current liabilities |
| Liquidity | Working capital | Current assets − Current liabilities |
| Leverage | Debt ratio | Total liabilities / Total assets |
| Leverage | Debt-to-equity | Total liabilities / Equity |
| Leverage | Equity multiplier | Total assets / Equity |
| Coverage | Times interest earned | EBIT / Interest expense |
| Efficiency | Total asset turnover | Sales / Average total assets |
| Efficiency | Inventory turnover | COGS / Average inventory |
| Efficiency | Fixed asset turnover | Sales / Average net fixed assets |
| Distribution | Payout ratio | Dividends / Net income |
| Market | Price | Current market price per share (not a ratio) |
| Market | P/E | Price per share / EPS |
| Market | Forward P/E | Price per share / Forecast EPS |
| Market | PEG | P/E / Expected EPS growth rate |
| Market | P/S | Market capitalization / Sales |
| Market | P/B | Price per share / Book value per share |
| Market | Dividend yield | Annual dividend per share / Price per share |