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inancial reporting is no longer the primary responsibility of the chief financial officer (CFO). The
role of today’s CFO, a key member of the executive team, has broadened to include strategic
planning and, at many companies, information management. Managing a company’s financial
operations takes many different skills. Financial planning, operations, and analysis; treasury oper-
ations (raising funds and managing cash); business acquisition and valuation; tax planning; and
investor relations are also under his or her control.
Home DepotCFO and treasurer Carol Tomé reports directly to chief executive officer Robert
L. Nardelli. She works closely with him and with Dennis J. Carey, an executive vice president and
the chief strategy officer, to guide the giant home improvement retailer’s future growth. Along
with her strategic responsibilities, Tomé chooses the key financial measurements on which she
wants managers to focus. These are tied to the economic climate. When the economy was
strong, her objective was improving the company’s return on investment (ROI). By late 2001, Home
Depot’s ROI was 16.0 percent, compared to 14.7 percent for the home improvement retail industry,
6.7 percent for the services sector, and 10.2 percent for the S&P 500.
In 2001’s slower economy, the emphasis shifted to activity ratios that measure how quickly
accounts are converted into cash. Particularly important to a retail chain are inventory turnover,
receivables collection period, and accounts payable periods. Home Depot hired consultants to
benchmark its financial operations with other best-in-class companies. “We’re looking for pro-
cessing efficiencies,” Tomé says. Improved new-store productivity and lower pre-opening costs
per store, together with attention to cost control, are boosting margins. In the third quarter of
2001, when many companies reported earnings drops, Home Depot’s net income and earnings per
share rose over the same period in 2000.
The company’s measures of debt also indicate a strong financial position. Its ratio of debt to
total capital indicates that only about 10 percent of its total long-term financing is debt, a very low
degree of indebtedness. This strong position gives Home Depot more flexibility to pursue new
projects, such as its new high-end line of stores called Expo, and more opportunities to raise
funds from banks, which use ratio analysis to assess creditworthiness.
In this chapter you will learn how to analyze financial statements using financial ratios.HOMEDEPOT
BUILDINGSTRONG
FINANCIALS