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The performance of a company can be successful in terms of its operations in the form of optimization of capital allocation. This is usually based on better customer services, sales associates, and improvement on the supply chain. The management of such enterprises can reduce operations of its stores, especially to those that are underperforming to ensure that they do not run at a loss. Performance of such can furthermore be analyzed through management assessment and financial reports that are presented in the form of financial ratios, vertical analysis and the trend of such ventures. This essay elaborates on the extent to which the management assessment of the financial conditions agrees with the financial statement paper 1. It also addresses the various management concerns from the annual report, weaknesses that have not been addressed, and the recommended courses of action.
Financial Ratios Analysis of Home Depot
Management of various companies uses information from income statements to give more information on the performance of the business in terms of profits or losses. These statements give clear and detailed information about gross profits, expenses, income and earnings from various operations (Brigham & Houston, 2011). For example, Home Depot has been experiencing an increment in sales in the previous years. The gross profit margin has been high to boost revenues that are used to cover the operating expenses.
Improvement in the operating profit margin has also been noted recently due to the improvement in revenue against the ever-reducing operating income. Although a reduction in the income has been noted due to the fact that the company closed 15 underperforming stores, an increase in the operating profit margin has been realized in both the financial year of 2013 /2014 and 2014/ 2015 (Epstein et al., 2015).
Home Depot Inc. currently enjoys an ever-increasing profitability ratio due to the improvement indicated in the net profit margins. The company registered a net profit of 7.63% in the year 2014/2015, which was an improvement from a 6.83% registered in the financial year of 2013/2014. Other improvements have been noted in the returns of equity (ROE) and returns on assets (ROA) (Epstein et al., 2015).
The management of companies uses the summary of asset, liabilities, and shareholders’ equity to determine the debts and money invested by the company and the shareholders (Brigham & Houston, 2011). For example, balance sheets from Home Depot Inc. indicate that the company currently has larger total assets, earnings from the retails that are noted to be higher than the paid-in-capital. The information obtained from such show how well the business operates in terms of clearing the debts and making profits at the same time (Epstein et al., 2015).
Cash flow statements give information about investments, operational activities, and supplementations among others. Furthermore, Home Depot Inc.’s managerial accounts help the management to make quick decisions on finances (Brigham & Houston, 2011).
Trends and Vertical Analysis
The trend analysis of Home Depot Inc. is based on its price changes, percentage changes, moving averages, and new highs or lows in its operations. The trends of Home Depot have been categorized in to long-term, intermediate, and short-term trends. The long term and midterm trends of the company are currently showing a downwards since January this year at 114.71 and December 2015 at 130.21 respectively while the short term trend is up since this February 12th 2016 at 116.16 (Epstein et al., 2015).
Vertical analysis is crucial for the management especially when the shareholders need to verify the current investment positions among others. The management assessment of the financial condition is therefore agreed with the financial statement part 1. Vertical analysis also embraces an integration system. The implementation of this approach is seen where management of the enterprise closed about 15 retail stores to optimize the allocation of capital (Epstein et al., 2015).
Concerns from Management on the Home Depot’s Annual Report
The management of the Home Depot recently has faced criticism on the transparency of the management system since quite a number of shareholders and staff was not informed of the closure of 15 underperforming stores (Epstein et al., 2015). Although such information was yet to be released to the public, the image of the management was tainted. The CERES later rated the company worse, a company that promotes sustainable cooperate leadership. The company management realized a drawback in the year 2014 where it was ranked low on greenhouse gas emissions, human rights, supply chain policy, and energy efficiency because of poor management.
Another problem of concern is the missing information concerning policies and practices that are aimed at addressing the ESG repercussions on the company’s operations. Therefore, many investors have minimal understanding of the risks and opportunities regarding the entity. Other weaknesses include water, waste management, and various environmental as well as social impacts (Epstein et al., 2015).
Conclusion: Possible Solutions
The management should provide information on the annual report that contain clear information about the company’s short and long term responses on ESG concerns, and the progress that have been made by the company concerning on the claims (Epstein et al., 2015). Furthermore, the company’s management should address the sustainability of the supply chain system clearly. It should outline what is in place for employees who lost their jobs because of the closure of the 15 retail stores. Lastly, the Home Depot Inc. should use the Global Reporting Initiative (GRI) guidelines when providing reports on environmental issues, human rights, and labor guidelines.
Brigham, E., & Houston, J. (2011). Fundamentals of Financial Management. Boston, Massachusetts: Cengage Learning.
Epstein, M., Buhovac, A., & Yuthas, K. (2015). Managing Social, Environmental, and Financial Performance Simultaneously. Long Range Planning, 48(1), 35-45.