Advertisement
New Zealand markets closed
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NZD/USD

    0.5984
    +0.0008 (+0.14%)
     
  • NZD/EUR

    0.5538
    +0.0005 (+0.09%)
     
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD

    2,254.80
    +16.40 (+0.73%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.40
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     
  • NZD/JPY

    90.4340
    +0.0410 (+0.05%)
     

What Investors Should Know About The Home Depot Inc’s (NYSE:HD) Financial Strength

The Home Depot Inc (NYSE:HD), a large-cap worth US$229.80b, comes to mind for investors seeking a strong and reliable stock investment. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. Today we will look at Home Depot’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HD here. Check out our latest analysis for Home Depot

Does HD produce enough cash relative to debt?

HD has built up its total debt levels in the last twelve months, from US$23.60b to US$0 , which comprises of short- and long-term debt. With this rise in debt, HD’s cash and short-term investments stands at US$3.60b for investing into the business. On top of this, HD has generated cash from operations of US$12.03b during the same period of time, leading to an operating cash to total debt ratio of 44.51%, meaning that HD’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HD’s case, it is able to generate 0.45x cash from its debt capital.

Can HD meet its short-term obligations with the cash in hand?

At the current liabilities level of US$16.19b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.17x. Usually, for Specialty Retail companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:HD Historical Debt June 21st 18
NYSE:HD Historical Debt June 21st 18

Is HD’s debt level acceptable?

Since equity is smaller than total debt levels, Home Depot is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In HD’s case, the ratio of 15x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as HD is a safe investment.

Next Steps:

Although HD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for HD’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Home Depot to get a better picture of the large-cap by looking at:

ADVERTISEMENT
  1. Future Outlook: What are well-informed industry analysts predicting for HD’s future growth? Take a look at our free research report of analyst consensus for HD’s outlook.

  2. Valuation: What is HD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HD is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.