Question

Home Depot, Inc. Common Size Statement of Earnings Jan. 28, 2018 Jan 29, 2017 Jan, 31,2016 $ 100,904$ 94,595 $88,51 Net sales Cost of sales Gross proft 66,54B 17,864 4,68 62 282 30 265 Selling, general and administrative Depreciation and amortization 17,132 16,801 Operating income Interest and other Oncome) expense: nterest and investment income Interest experse nterest and other, net Earnings before provision for income taxes Provision for income taxes Net earnings 36 972 166 963 13,698 491 1,021 7 a. Review the vertical analyses and give any major diferences over the three years. Do any petterns emerge? You should be focusing on specific accounts and not subtotals or totals b. What are the company's 2 largest major expenses for the current year? C. Discuss the fluctuations in interest expense and income taxes What are the cause of these changes? d. Was the company more or less profitable when compared to the prior year? what caused the change in income from the prior year?

Answer 1

	in million $			Percentages
Home Depot	Jan 28, 2018	Jan 29, 2017	Jan 31, 2016	Jan 28, 2018	Jan 29, 2017	Jan 31, 2016
Net Sales	100,904	94,595.00	88,519.00	100.00	100.00	100.00
Cost of sales	66,548	62,282.00	58,254.00	65.95	65.84	65.81
Gross profit	34,356	32,313	30,265	34.05	34.16	34.19
Operating expenses:
Selling, general and administrative	17,864	17,132.00	16,801.00	17.70	18.11	18.98
Depreciation and amortization	1,811	1,754.00	1,690.00	1.79	1.85	1.91
Total operating expenses	19,675	18,886	18,491	19.50	19.97	20.89
Operating income	14,681	13,427	11,774	14.55	14.19	13.30
Interest and other (income) expense
Interest and investment income	-74	-36	-166	-0.07	-0.04	-0.19
Interest expense	1,057	972	919	1.05	1.03	1.04
Interest and other, net	983	936	753	0.97	0.99	0.85
Earnings before provisions for income taxes	13,698	12,491	11,021	13.58	13.20	12.45
Provision for income tax	5,068	4,534	4,012	5.02	4.79	4.53
Net earnings	8,630	7,957	7,009	8.55	8.41	7.92

(a): First of all cost of sales (as a % of net sales) is increasing on a year-to-year basis. It was 65.81% in 2016 and increased to 65.84% in 2017. It further increased to 65.95% in 2018. This led to year on year decline in gross profit (as a % of net sales). Another trend that can be seen is the year on year decline in selling, general and administrative expenses and depreciation and amortization expenses. Both these expenses increased on a year on year basis from 2016 to 2017 and then from 2017 to 2018.

(b): For the current year two largest expenses are cost of sales (65.95%) and selling, general and administrative expenses (17.70%).

(c): Interest expenses declined in 2017 to 1.03% and then increased to 1.05% in 2018. This fluctuation can probably be attributed to change in debt levels. Income tax provisions have been increasing on an annual basis. This can be attributed to the fact that the estimated amount of income tax that Home Depot expects to pay for a year has been increasing each year. This can be seen by the increasing level of net sales for each year.

(d): In 2018 the company’s profitability stood at 8.55% and the level of profitability was higher than in 2017 when profitability was 8.41% (i.e. net earnings as a percentage of net sales). This change can be attributed to lower levels of operating expenses (i.e. operating expenses as a percentage of sales) for 2018 when compared to 2017’s level.