Introduction to Finance
Introduction to Finance
Part 1
The income statement of the Home Depot is simple. Unlike the income statement of other companies, it is relatively simple with fewer terms mentioned. The income statement begins with the net sales of the company followed by the cost of goods sold (The Home Depot, Inc., 2014). These two are the fundamental things in the income statement. Net sales represent total sales less any sales return while the cost of goods sold represents the cost incurred for the materials that is sold. The next important term in the income statement is gross profit, which is the profit before any taxes and other expenses. When other operating expenses like depreciation, administrative and selling expenses are deducted from gross profit, then we get earnings before interest and tax (EBIT), also known as operating income (Keown, Martin, & Petty, 2008). Another important term in the income statement is tax and interest. Various taxes and interest on the debts are deducted from operating income to get a net profit of the company (The Home Depot, Inc., 2014). The net income divided by the number of shares outstanding will give earning per share that reflects how much dollar amount is earned by each unit of company’s stock.
The income statement can be used to predict that the company is involved in the business where there is a high sales turnover. We can say this because the cost of goods sold is very high. Generally, the cost of goods sold is higher for the company whose turnover is high. This fact is more supported by the amount of depreciation that the company charges. Since the depreciation of the company is very small, we can say that it does not have high valued machines and equipment. From the income statement, we can say that the company is performing well. Its profit margin is very high. Its profit are increasing continuously for the observation period (2012-2015). Even though the sales is growing very high, its administrative and other expenses have grown by very minimum amount. So, we can say that company is being efficient, and it is financially sound.
Part 2
Learning Objective 1 & 2: Return and Risk in Investment
The investment is generally done to increase the money. So, an investor can invest in different ways. Based on the expected return and the risk preference of an investor, he or she can invest his or her wealth in different alternatives as like real estate, commodity, and financial assets like bond, stocks, mutual funds or any other alternatives available (Keown, Martin, & Petty, 2008). Each of these investment alternatives has their own risk and return associated. For example, investing in stock is much riskier than investing in the bond and bond can generate lesser return than the return generated by investing in the stock. So, an investor can decide in which alternative to investing.
6: Types of investments
As stated above, there can be different types of investment opportunities for the investor based on the risk-return preference of the customer. Following are the major types of investments (Keown, Martin, & Petty, 2008):
Bonds: Bonds are fixed income securities where the investors received the fixed amount of periodic return. Bond is a debt for the company. An investor invests the money in buying the bond for which the investor is paid the fixed sum of money by the bond issuer periodically. It is the safer type of investment generally preferred by the risk-averse investor.
Stock: Stock is riskier than the bond and does not guarantee the returns from the investment. It makes an investor the owner of the business. Stocks generally have higher return potential but carry substantial risk.
Mutual Funds: the Mutual fund is a much safer form of investment where the mutual fund company collects a small amount from the investors and then invests it in another form of securities like bonds and stocks. The risk is transferred to the mutual fund company where the experts invest the pool of money after analyzing the risk and return of each investment opportunity. Hence, it is much safer.
Other investment alternatives: Other investment alternatives include the investment in different currencies, commodities, real estates, options, swaps, and futures. Depending upon the risk taking attitude of an investor, one can decide the most appropriate form of investment.
References
The Home Depot, Inc. (2014). The Home Depot, Inc. Annual Report 2014. The Home Depot, Inc.
Investing 101: Introduction | Investopedia. (n.d.). Retrieved from http://www.investopedia.com/university/beginner/
Keown, A. J., Martin, J. D., & Petty, J. W. (2008). Foundations of finance: The logic and practice of financial management. Upper Saddle River, NJ: Pearson Prentice Hall.
