EX 1-26 Ratio of liabilities to stockholders’ equity

The Home Depot, Inc., is the world’s largest home improvement retailer and one of the largest retailers in the United States based on sales volume. The Home Depot operates over 2,200 Home Depot® stores that sell a wide assortment of building materials and home improvement and lawn and garden products. 

The Home Depot recently reported the following balance sheet data (in millions):

                                          Year 2 | Year 1

Total assets                    $40,518 | $40,125

Total stockholders’ equity 22,620 | 21,236

a. Determine the total liabilities at the end of Years 2 and 1.

b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.

c.  What conclusions regarding the margin of protection to the creditors can you draw from (b)?

Answer:

a. 

Year 2: $17,898 ($40,518 – $22,620) 

Year 1: $18,889 ($40,125 – $21,236) 

b. 

Year 2: 0.79 ($17,898 ÷ $22,620) 

Year 1: 0.89 ($18,889 ÷ $21,236) 

c. The ratio of liabilities to stockholders’ equity decreased from 0.89 to 0.79 indicating a slight decrease in risk for creditors from Year 1 to Year 2.