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ACC 6050: ACCOUNTING AND FINANCIAL REPORTING

MODULE 4: RATIO ANALYSIS ASSIGNMENT

MBA LEARNER

NEXFORD UNIVERSITY

MARCH 2022

A review of the financial statement of the Annual Report of The Home Depot was carried out for this

assignment. The ratios calculated are Gross Profit Margin, Net Profit margin, Asset Turnover Ratio,
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Working capital turnover Ratio and current Ratio. See below the calculations of the

different ratios and their results.

CALCULATION OF RATIOS
1) Net Profit Margin = Net Income x 100%
Sales
= 11242 x 100%
110225

= 10.2%

2) Current Ratio = Current Asset x 100%

= 1.08:1
3) Working capital Turnover Ratio = Net Annual Sales
Average Working Capital
(Working Capital =Current Assets – Current Liabilities)
= 110225
19810-13875

= 76.8

4) Gross Profit Margin = Gross Profit x 100%

= 37572 x 100%
110225

= 34.09%

5) Asset Turnover Ratio = Sales

= 110225
51326

= 2.1:1
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Interpretation and Analysis

1. Gross Profit Margin: This ratio is used to assess the financial health of a company, which is calculated

by subtracting the cost of goods sold from net sales (Bloomenthal, 2021), this is then divided by net sales

and multiplied by 100% to get the percentage value . A high gross profit margin is an indication that a

business is thriving, doing well and making sales which translates into profit. The gross profit margin shows

the amount of profit made before the deduction of general, selling and administrative costs which is the

firm’s net profit margin. This ratio maybe high due to higher selling prices versus cost prices or lower cost

prices to selling price. It could also be due to increased sales volume of high profit margin goods.

From the above calculated ratio, The Home Depot has a low gross profit margin of 34.09% which

shows that the business is making low profits on sales.

2. Net Profit Margin: This is the ratio of net profits to revenue for a company (Murphy, 2022) and it

reflects how much of the revenue translates into profit. It is also known as the ratio of net profit after tax to

net sales. Net profit is the balance of profit and loss account which is arrived at after considering all non-

operating income and operating expense. Net Profit Margin shows the owners of a business if the company

is generating profits from its sales and whether overhead costs and costs of operating activities are well

contained. The ratio is used to measure the overall profitability of a business.

The calculated ratio above indicates that The Home Depot has a low net profit margin of 10.2%, this

explains that the company’s overhead costs, and operating costs are not well contained. The company is

generally not doing well, as it is expending most of its revenue on running the business, as such their current

practices have to be reviewed to either bring down running costs or increase sales in order for the company

to get financially stable.

3. Current ratio: This is also known as Working Capital Ratio. The current ratio maybe defined as the ratio

of current assets and current liabilities and is obtained by dividing current assets by current liabilities. The

current ratio measures the short-term liquidity position of the firm. This is a liquidity ratio that measures the

ability of a company to pay up its short-term obligations o obligations due to be paid up in one year

(Fernando, 2021). It indicated the availability of current assets to meet its current liabilities. It gives an

overview of how a company can maximize its current assets in order to satisfy its debt and other payables. A
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current ratio that is below 1 indicates that the company’s debts that are due in less than a year is greater than

its assets and would struggle to pay its liabilities and might go bankrupt. Whereas a current ratio of between

1.5 and 3 is considered healthy and its indicates that the company is able to pay up its debts and obligations

(Seth, 2022).

The Home Depot has a current ratio of 1.08 which is slightly above 1, which shows that the company is

facing difficulty in meeting its maturing liabilities. struggling to pay its liabilities due within a year or less.

4. Asset Turnover Ratio: This is the ratio of net sales to net fixed assets. This ratio measures the value of a

company’s sales in relative to the value of its assets, it measures the ability of the company to efficiently

make sales (AccountingTools, 2021). It is a measure of the efficiency of utilization of fixed asse A high

asset turnover ratio indicates that the company is efficient at generating revenue from its assets, while a low

asset turnover ratio indicates that the company is not efficiently utilizing its assets to generate revenue

(Hayes, 2022).

With a 2.1 asset turnover ratio, it can be deduced that The Home Depot is not utilizing its assets to the

maximum in order to generate more revenue.

5. Working Capital Turnover Ratio: This ratio indicates whether or not the working capital, which is

excess of current assets over current liabilities, has been effectively deployed to make sales. It measures how

a company is effectively able to utilize its working capital (which is a subtraction of current liabilities from

current assets) to drive sales. This relationship shows the relationship between the funds a company uses to

finance its operations and the revenue it generates (Hayes, 2021). A high turnover ratio indicates that the

company’s management is efficiently utilizing their short-term assets and liabilities to drive sales.

Alternatively, a low ratio shows that the company might be investing in too many receivables and

inventories to drive sales, which could eventually lead to bad debt.

At the Home Depot, there is a high Working Capital Turnover Ratio of 76.8 and this shows that the

company’s management is able to efficiently utilize their short-term assets and liabilities to drive sales for

the business.
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References

AccountingTools (2021, September 8). Total Asset Turnover Ratio. Retrieved from

[Link]

Bloomenthal, A. (2021, March 19). Gross Profit Margin. Retrieved from

[Link]

Fernando, Jason. (2021, October 21). Current Ratio. Retrieved from

[Link]

Hayes, A. (2022, February 23). Asset Turnover Ratio. Retrieved from

[Link]

Hayes, A. (2021, May 21). Working Capital Turnover Definition. Retrieved from

[Link]

Murphy, C. (2022, March 6). Net Profit Margin. Retrieved from

[Link]

Seth, S. (2022, March 31). Calculating the Current Ratio. Retrieved from

[Link]