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Based on your analysis, please answer the following questions: 1) Why did shareholder equity shrink in 2017 and is this a concern to you as

image text in transcribedimage text in transcribedimage text in transcribed

image text in transcribedimage text in transcribedBased on your analysis, please answer the following questions:

1) Why did shareholder equity shrink in 2017 and is this a concern to you as a financial analyst?

2) What if Home Depots dividends were zero? What would this tell you about Home Depots investment opportunities?

3) On the statement of cash flows, Home Depots cash provided by operations for 2017 was $11.8 billion. Suppose net income was unchanged but cash flow from operations was only $6 billion. What could explain the decline and what implications does this have for Home Depots financial strength?

4) Free cash flow in 2017 was $10.9 billion as shown on slide 6 of the attached PowerPoint. How does this compare to the uses of free cash flow in terms of dollars? Is this a concern in terms of cash flow available and what recommendation would you make?

The Balance Sheet Home Depot's Balance Sheet (December 31, 2017) $ Millions End of fiscal End of fiscal 2017 2016 Liabilities and shareholders' equity 2017 2016 Assets Current assets Cash and marketable securities 3,595 2,538 Current liabilities Receivables 1,952 2,029 2,761 1,252 Debt due for repayment Accounts payable Inventories 12,748 12,549 11,628 11,212 Other current assets 638 608 Other current liabilities 1,805 1,669 18,933 17,724 16,194 14,133 24,267 22,349 2,614 2,151 41,413 40,426 19,339 18,512 43,075 38,633 22,075 21,914 2,275 2,093 9,715 9,010 1,246 1,235 39,935 35,517 (48,196) (40,194) 1,454 4,333 44,529 42,966 44,529 42,966 Total current assets Tangible fixed assets Property, plant, and equipment Less accumulated depreciation Net tangible fixed assets Intangible asset (goodwill) Other assets Fixed Assets Total Assets Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders' equity: Common stock and other paid-in capital Retained earnings Treasury stock Total shareholders' equity Total liabilities and shareholders' equity Home Depot's Income Statement (December 31, 2017) $ Millions $ Million % of Sales 100,904 100.0% Net sales Other income 325 0.3% Cost of goods sold 66,548 66.0% Selling, general & administrative exper 17,864 17.7% Depreciation 2,062 2.0% Earnings before interest and income ta 14,755 14.6% Interest expense 1,057 1.0% Taxable income 13,698 13.6% Taxes 5,068 5.0% Net income 8,630 8.6% Allocation of net income Dividends 4,212 4.2% Addition to retained earnings 4,418 4.4% Home Depot Statement of Cash Flows (December 31, 2017) $ Millions Cash provided by operations: Net income 8,630 Depreciation 2,062 Changes in working capital items Decrease (increase) in accounts receivable 139 Decrease (increase) in inventories (84) Decrease (increase) in other current assets (10) Increase (decrease) in accounts payable 352 669 Increase (decrease) in other current liabilities Total decrease (increase) in working capital 1,066 Cash provided by operations 11,758 Home Depot Statement of Cash Flows (December 31, 2017) continued) $ Millions (1,897) 47 (105) (1,955) 850 2,448 (4,212) (7,745) (211) (8,870) 933 Cash flows from investments: Capital expenditure Sales (acquisitions) of long-term assets Other investing activities Cash provided by (used for) investments Cash provided for (used by) financing activities: Increase (decrease) in short-term debt Increase (decrease) in long-term debt Dividends Repurchases of stock Other Cash provided by (used for) financing activities Net increase (decrease) in cash and cash equivalents The Statement of Cash Flows Home Depot Statement of Cash Flows (December 31, 2017) (continued) $ Millions Cash provided by operations 11,758 (1,955) Cash provided by (used for) investments Cash provided by (used for) financing activities (8,870) Net increase (decrease) in cash and cash equivalents 933 The Balance Sheet Home Depot's Balance Sheet (December 31, 2017) $ Millions End of fiscal End of fiscal 2017 2016 Liabilities and shareholders' equity 2017 2016 Assets Current assets Cash and marketable securities 3,595 2,538 Current liabilities Receivables 1,952 2,029 2,761 1,252 Debt due for repayment Accounts payable Inventories 12,748 12,549 11,628 11,212 Other current assets 638 608 Other current liabilities 1,805 1,669 18,933 17,724 16,194 14,133 24,267 22,349 2,614 2,151 41,413 40,426 19,339 18,512 43,075 38,633 22,075 21,914 2,275 2,093 9,715 9,010 1,246 1,235 39,935 35,517 (48,196) (40,194) 1,454 4,333 44,529 42,966 44,529 42,966 Total current assets Tangible fixed assets Property, plant, and equipment Less accumulated depreciation Net tangible fixed assets Intangible asset (goodwill) Other assets Fixed Assets Total Assets Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders' equity: Common stock and other paid-in capital Retained earnings Treasury stock Total shareholders' equity Total liabilities and shareholders' equity Home Depot's Income Statement (December 31, 2017) $ Millions $ Million % of Sales 100,904 100.0% Net sales Other income 325 0.3% Cost of goods sold 66,548 66.0% Selling, general & administrative exper 17,864 17.7% Depreciation 2,062 2.0% Earnings before interest and income ta 14,755 14.6% Interest expense 1,057 1.0% Taxable income 13,698 13.6% Taxes 5,068 5.0% Net income 8,630 8.6% Allocation of net income Dividends 4,212 4.2% Addition to retained earnings 4,418 4.4% Home Depot Statement of Cash Flows (December 31, 2017) $ Millions Cash provided by operations: Net income 8,630 Depreciation 2,062 Changes in working capital items Decrease (increase) in accounts receivable 139 Decrease (increase) in inventories (84) Decrease (increase) in other current assets (10) Increase (decrease) in accounts payable 352 669 Increase (decrease) in other current liabilities Total decrease (increase) in working capital 1,066 Cash provided by operations 11,758 Home Depot Statement of Cash Flows (December 31, 2017) continued) $ Millions (1,897) 47 (105) (1,955) 850 2,448 (4,212) (7,745) (211) (8,870) 933 Cash flows from investments: Capital expenditure Sales (acquisitions) of long-term assets Other investing activities Cash provided by (used for) investments Cash provided for (used by) financing activities: Increase (decrease) in short-term debt Increase (decrease) in long-term debt Dividends Repurchases of stock Other Cash provided by (used for) financing activities Net increase (decrease) in cash and cash equivalents The Statement of Cash Flows Home Depot Statement of Cash Flows (December 31, 2017) (continued) $ Millions Cash provided by operations 11,758 (1,955) Cash provided by (used for) investments Cash provided by (used for) financing activities (8,870) Net increase (decrease) in cash and cash equivalents 933

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