Home Depot Firms Statement of Cash Flows & Debt Repayment Problems

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While examining the statement of cash flows from Home Depot for the past two years, one can note some unique features that reflect the financial strength of the organization. As a significant criterion, net earnings should be considered, which, compared to 2019, increased by $1.5 billion. Based on such parameters as changes in inventories and changes in deferred revenue, the company gained more recognition and was able to broaden its range of interests. Particularly, the increase in deferred revenue indicates that more partnerships were established in 2020 than in 2019. The growth of potential profit is a consequence of competent operating activities aimed at increasing market recognition and capital accumulation. As Baker et al. (2020) state, there is a positive correlation between deferred revenue changes and the following two years sales growth, gross profit margin, profit margin, and return on assets (p. 72). Therefore, from this aspect, Home Depot strengthened its business opportunities.

From the perspective of investing activities, the organization expanded its work in this direction significantly in 2020 compared to 2019. The net cash utilized in investing activities in 2020 exceeded that in 2019 by almost four times, which indicates that Home Depot was more interested in establishing partnerships and collaborating work. At the same time, capital expenditures decreased slightly in 2020, which is also a factor that speaks about the optimization of activities. While taking into account the number of partnerships entered into in 2019 and 2020, one can conclude that the company changed its policy significantly and expanded its interests in the market by interacting with a large number of businesses.

An important factor in assessing the performance of Home Depot is the analysis of its financial performance from the perspective of debt obligations. While considering the repayments of short-term and long-term debts in 2019 and 2020, one can note that these rates more than doubled each. This, in turn, proves that the company is concerned about debt payments and is forced to spend significant funds to pay off debts. According to Kukk (2019), failure to pay debts is fraught with severe financial hardship and can have an impact on market stability and cause consumption fluctuations (p. 716). Judging by the organizations statement of cash flows, the volume of Home Depots repurchases of common stock decreased significantly in 2020 compared to 2019 and was reduced by almost ten times. This suggests that the company is forced to address current financial issues and cannot afford to pursue an active shareholder policy.

At the moment, as a creditor, I would be careful about lending money to the company. Despite its market recognition and significant profit growth, Home Depots financial activity indicators showed that the company spent significant funds on paying off short-term and long-term debt. In such an environment, the stability of debt repayments is threatened as the organization is required to repay funds as urgent, which can slow down the receipt of loan amounts. In addition, comparing the indicators of the repurchases of common stock, I would also pay attention to the decrease in activity in this direction. Having a stable financial background, the company would pursue a more active shareholder policy and be able to settle all debts faster. Thus, at the moment, I would not lend money to Home Depot and would study the latest data on its financing activities.

References

Baker, H. K., Satt, H., Atmounia, F., & El Fadel, B. (2020). How deferred revenue changes impact future financial performance. Corporate Ownership & Control, 17(4), 72-85. Web.

Kukk, M. (2019). Debt repayment problems: short-term and long-term implications for spending. Review of Economics of the Household, 17(2), 715-740. Web.

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