Profitability analysis for The Home Depot The Home Depot, Inc. operates as a home improvement retailer primarily in the United States, Canada, Mexico. It operates The Home Depot stores, which sell building materials, home improvement supplies, and lawn and garden products to do- it-yourself customers, home improvement contactors, and building maintenance professionals The company also operates The Home Depot and EXPO Design Center stores that offer various installation service, which include products, such as carpeting, flooring, cabinets, countertops, and water heaters primarily to business-to- business customers. In addition, the company offers credit purchase programs through third-party credit providers. Meanwhile, The Home Depot has centralized purchasing and invested more than a billion dollars in state-of-the-art technology, including self-checkout aisles and in-store Web kiosks. Since 2003, Home Depot's return on invested capital has risen from below 16% to nearly 21% last year. This profitability increase is impressive when on considers the severe competition in the industry from other big box stores (e.g., Lowes), the well-known hardware coop Ace Hardware, lumber yards, and the host of other retailers who supply the products carried by Home Depot. Key profitability ratios for Home Depot for the last three years are shown below: ROIC NOPAT mar IC turnover A.R turnover Inventory turnover PP&E turnover COGS/sales ratio SGA/sales ratio Sales (in millions 2004 18.7% 6.6% 2.84X 67.0X 5.3X 3.6X 68.2% 19.6% 2005 19.7% 6.8% 2.88X 66.3x 5.3X 3.6X 66.6% 20.9% $73,094 2006 20.7% 7.2% 2.85x 54.3X 5.3X 3.6X 66.5% 20.2% $81,511 t1 millions Required a. Explain how Home Depot has achieved an increase in ROIC over the three years. Be as specific as the data allow. Give likely reasons for changes in specific ratios. b. Home Depot's accounts receivable turnmover is very high. How does Home Depot achieve this turnover? What is the benefit of the high accounts receivable turnover in terms of profitability, liquidity, and cash flows