Question

In a recent year’s financial statements, Home Depot reported the following: Total liabilities = \(30,624 million and Total assets = \)39,946 million. Compute and interpret Home Depot’s debt ratio (assume competitors average a 60.0% debt ratio).

Short answer

The debt ratio is 77% which is around 30 percent higher than the competitor’s average.

Step-by-step solution

Debt ratio                                                                                              

$\begin{array}{rcl}\mathbf{DebtRatio}& \mathbf{=}& \frac{\mathbf{TotalLiabilities}}{\mathbf{TotalAssets}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{30}\mathbf{,}\mathbf{624}}{\mathbf{\$}\mathbf{39}\mathbf{,}\mathbf{946}}\\ & \mathbf{=}& \mathbf{0}\mathbf{.}\mathbf{77}\mathbf{or}\mathbf{77}\mathbf{\%}\end{array}$

Interpretation

In the given case, the debt ratio is 77% which indicates that 77% of the assets have been financed by liabilities or external borrowings. This ratio also shows the risk potential of the business.

In comparison to the competitors’ average, the risk potential is higher. The average ratio is only 60%, but for Home Depot this ratio is around 30 percent more than the competitor’s average.