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Analysis of Goodwill and Intangible Assets
Difficulty: Advanced
Goodwill and Intangible Assets Accounting Policy
Goodwill represents the excess of purchase price over the fair value of net assets acquired. Home Depot does not amortize goodwill, but assesses the recoverability of goodwill in the third quarter of each fiscal year, or more often if indicators warrant, by determining whether the fair value of each reporting unit supports its carrying value. Each fiscal year, Home Depot may assess qualitative factors to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments, with a quantitative assessment completed at least once every three years. Home Depot completed the last quantitative assessment in fiscal 2016.
In fiscal 2017, Home Depot completed the annual assessment of the recoverability of goodwill for the U.S., Canada, and Mexico reporting units. Home Depot performed qualitative assessments, concluding that the fair value of the reporting units substantially exceeded the respective reporting unit’s carrying value, including goodwill. As a result, there were no impairment charges related to goodwill for fiscal 2017, 2016, or 2015.
Home Depot amortizes the cost of other intangible assets over their estimated useful lives, which range up to 12 years, unless such lives are deemed indefinite. Intangible assets with indefinite lives are tested in the third quarter of each fiscal year for impairment, or more often if indicators warrant. Intangible assets are included in other assets.
Source: 10-K (filing date: 2018-03-22).
Analyst Adjustments: Removal of Goodwill
Home Depot Inc., adjustments to financial data
USD $ in millions
Based on: 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27), 10-K (filing date: 2013-03-28).
Home Depot Inc., Financial Data: Reported vs. Adjusted
Adjusted Ratios: Removal of Goodwill (Summary)
Home Depot Inc., adjusted ratios
Based on: 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27), 10-K (filing date: 2013-03-28).
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Home Depot Inc.’s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018. |
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Home Depot Inc.’s adjusted total asset turnover improved from 2016 to 2017 and from 2017 to 2018. |
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
Home Depot Inc.’s adjusted financial leverage increased from 2016 to 2017 but then declined significantly from 2017 to 2018. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. | Home Depot Inc.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Home Depot Inc.’s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018. |
Home Depot Inc., Ratios: Reported vs. Adjusted
Adjusted Net Profit Margin
Based on: 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27), 10-K (filing date: 2013-03-28).
2018 Calculations
1 Net profit margin = 100 × Net earnings ÷ Net sales
= 100 × ÷ =
2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Net sales
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Home Depot Inc.’s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018. |
Adjusted Total Asset Turnover
Based on: 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27), 10-K (filing date: 2013-03-28).
2018 Calculations
1 Total asset turnover = Net sales ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Home Depot Inc.’s adjusted total asset turnover improved from 2016 to 2017 and from 2017 to 2018. |
Adjusted Financial Leverage
Based on: 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27), 10-K (filing date: 2013-03-28).
2018 Calculations
1 Financial leverage = Total assets ÷ Stockholders’ equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
Home Depot Inc.’s adjusted financial leverage increased from 2016 to 2017 but then declined significantly from 2017 to 2018. |
Adjusted Return on Equity (ROE)
Based on: 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27), 10-K (filing date: 2013-03-28).
2018 Calculations
1 ROE = 100 × Net earnings ÷ Stockholders’ equity
= 100 × ÷ =
2 Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted stockholders’ equity
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. | Home Depot Inc.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27), 10-K (filing date: 2013-03-28).
2018 Calculations
1 ROA = 100 × Net earnings ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Home Depot Inc.’s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018. |
