John Bullis: Reading the financial statements

Bonnie and I own a little stock in Home Depot. We received the Annual Report for 2018 recently. I thought you might be interested in how I glanced through that Annual Report.

First, I find the Statements of Earnings (page 32). I glance at the “Net sales” for each of the three years displayed. I look at the changes from 2016 to 2017 and the changes from 2017 to 2018.

Then I look at the “Cost of sales” and “Gross profit.” Since Sales increased, it seems reasonable the Cost of sales also increased. For 2016 the Cost of sales was about 65.9 percent of Net sales. For 2018 it was 66.0 percent, but in 2019 the Cost of sales divided by Net sales was 65.7 percent. That looks pretty good and the Gross profit for each of the three years increased in total amounts.

Then I glance at “Selling, general and admin.” costs for each of the three years. That was 18.1 percent of Net sales for 2016. 2017 was 17.7 percent and 2018 was 18.0 percent of Net sales. That seems to be holding steady.

Looking at the “Earnings before provision for income taxes” shows a steady increase for each year. The new tax law had an impact on 2017 “Net earnings after income taxes” just like most big public traded businesses. The increases look good.

On page 33, the report shows “Foreign currency translation adjustments” for each year. 2016 and 2018 had an “expense” but 2017 had an additional income. The numbers seem small in relation to Net earnings, but it’s interesting. The footnote mentions 2016 and 2017 reported information on 52 weeks, but 2018 is for 53 weeks.

Back on page 32, the “Diluted earnings per share” shows an increase in both 2017 and 2018 — that’s encouraging.

The Balance Sheets (lists of assets and liabilities) for Jan. 28, 2018 and Feb. 3, 2019 on page 31 indicate fairly comparable amounts. However, the “Total stockholders’ (deficit) equity” moved from a positive 1,454 in 1/28/18 to a negative 1,878 at 2/3/19. Remembering that all the numbers are in millions, that’s a significant change. Then looking at the Treasury stock shows $10,000 more reduction in equity — that’s $10 billion. If the company hadn’t purchased all that Treasury stock, the stockholders’ equity would be a big positive number (so that explained the change OK).

The footnote about Commitments and Contingencies on page 57 is brief. It basically says “Don’t worry.” Pages 8 through 15 list the various risk factors that could be important.

Did you hear “The person who does not work for the love of work but only for money is not likely to make money nor to find much fun in life.” Charles M. Schwab (1862-1939) Steel magnate

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.