The more profitable the firm the likely it is to

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and repay their debt with cash generated from profits. The more profitable the firm, the likely it is to default on its debt. S&P's Rating Methodology: Evaluating the Issuer lays an additional consideration, "a company that generates higher operating returns has a er ability to generate equity capital internally, attract capital externally, and withstand - ess adversity. Earnings power ultimately attests to the value of the firm's assets as well." this point, on August 30,2011, Moody's upgraded Home Depot's rating to A3 from Baal e the rating agency was impressed by the company's strong operating performance - g the second quarter. "Home Depot's significant improvement in its in-store shopping ience and supply chain will continue to benefit its earnings. The rating also reflects e Depot's notably improved execution ability which has resulted in its comparable store out performing Lowe's for the past nine quarters." (Source: Moodys.comiresearch/ ys-upgrades-Home- Depots-senior-unsecured-rating-to-A3 - PR_225225.) _Iodule 3 describes in detail how to analyze a firm's profitability using return on net operat- _ assets (RNOA) and its component parts: net operating profit margin (NOPM), which mea- the profit earned on each dollar of sales; and net operating asset turnover (NOAT), which es the efficiency of operating assets. This type of profitability analysis is applicable for -t analysis. Home Depot's income statement for the year ended January 30,2011, is in Exhibit 4.3. Home t's net operating profit after tax is $3,696 million, computed as $5,839 million - [$1,953 ion + ($566 million X 36.7%)]. - - -------- =xliIBIT 4.3 Income Statement for Home Depot Year Ended (in millions) January 30, 2011 $67,997 $ 66,176 $71,288 44,693 43,764 47,298 --- --- 23,304 22,412 23,990 15,849 15,902 17,846 1,616 1,707 1,785 --- --- 17,465 17,609 19,631 5,839 4,803 4,359 566 821 769 5,273 3,982 3,590 1,935 1,362 1,278 --- 3,338 2,620 2,312 41 (52) $ 3,338 $ 2,661 $ 2,260 HOME DEPOT Income Statement sales ......................... •..• .... •..•.. _ _ . of sales _ ....... •.. _ _ _ . profit. _ _ . :oerating expenses , general and administrative '.' . eciation and amortization _ . - ..... , operating expenses . -:::aating income _ _ . est expense and other, net . ings from continuing operations before provision for income taxes . . ion for income taxes . ings from continuing operations . ings (loss) from discontinued operations, net of tax _ _.. _ ~eamings . Home Depot's net operating assets for 2011 and 2010, respectively, are $27,954 million 527,621 million.' Thus, the company's RNOA for 2011 is 13.3%.3 RNOA dropped sharply simplicity, we compute ratios in this module using numbers reported instead of adjusted numbers. We also do so that we can compare its ratios to other companies' ratios. An alternate, more exact, approach is to recompute all titors' numbers and create adjusted industry-level ratios. - II: ( 40,125 million - $545 million - $139 million) - ($21,236 million - $1,042 million - $8,707 million). 0: ($40,877 million - $1,421 million - $33 million) - ($21,484 million - $1,020 million - $8,662 million) -1:J96million/[($27,954 million + $27,621 million)/2J
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4-13 Module 4 I Credit Risk Analysis and Interpretation after the fiscal year ended January 2008, after housing starts markedly slowed and the recession kicked in. Since then, profitability has steadily improved but has not returned to pre-recession levels.
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