Please ensure Javascript is enabled for purposes of website accessibility

1 Number That Shows Home Depot Is an Unusually Strong Business

By Demitri Kalogeropoulos - Oct 27, 2016 at 1:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The home improvement giant is one of the most efficient companies on the market.

Image source: Getty Images.

News flash: Home Depot (HD -0.20%) is minting money right now. Earnings in the last fiscal year passed $7 billion -- up from $3 billion in 2011.

But, as the billionaire investor Warren Buffett likes to point out, earnings alone don't tell us squat about a business unless we also know how much capital was needed to produce those profits.

For that information, we need to look at return on invested capital, or ROIC, which is profit expressed as a percentage of long-term debt and equity. A consistently high ROIC is evidence of a good management team that deploys capital efficiently while making judicious use of debt.

Home Depot happens to boast not only the strongest ROIC in the industry, but also one of the highest returns on the stock market.

Market-thumping returns

The retailer's ROIC was 29% over the past year, 4 full percentage points above the prior-year period and double what its closest rival, Lowe's (LOW -1.69%), could manage. The figure has roughly doubled for Home Depot since 2011, when it was below 15%. Lowe's, meanwhile, hasn't enjoyed nearly the same rebound.

LOW Return on Invested Capital (TTM) Chart

LOW Return on Invested Capital (TTM) data by YCharts.

Among the nation's largest companies, Home Depot stands out as one of the best in this regard. Its ROIC places it at the top within the Dow, essentially tied with Apple and Boeing.

Top ROIC stocks in the Dow:


Return on Invested Capital



Home Depot








Data source: Company financial filings and Finviz .

Like many of these giants, Home Depot has relied heavily on borrowing to increase shareholder returns. Long-term debt has risen to about $21 billion from $11 billion in the past five years. Its debt-to-equity ratio has surged from 60% to over 300% now.

Business efficiency has spiked over that time, though, suggesting that management has been putting the cash to good work. Working capital is down even though the sales base has spiked. And inventory turnover has improved to 4.9 times per year from 4.3 times in 2011.

Meanwhile, Home Depot's share count has plunged by 18% as management spent billions on stock buybacks. As a result, per-share earnings are up 121% even though net income rose by just 80%.

Executives prioritize capital allocation as a key part of running the business. In fact, it's one of the retailer's three biggest initiatives. Home Depot advances its efficiency metrics, it says in its 10-K report, by "building best-in-class competitive advantages in our information technology and supply chain to better ensure product availability to our customers while managing our costs."

More gains are on the way

Home Depot's latest logistics initiative is a network of rapid deployment centers that involves deep collaboration between the company, its suppliers, and its transportation providers. The strategy should yield a big reduction in the average time between when a product leaves a supplier and when it arrives on a Home Depot shelf. Inventory management may not be the most exciting thing Home Depot is working on, but it is the project that's most likely to keep capital returns churning higher.

CEO Craig Menear and his executive team believe that there is plenty of room for ROIC to improve in the coming years. They project achieving a whopping 35% by 2018, the same year that the company expects to pass $100 billion of annual sales while hitting a 15% operating margin.

Image source: Home Depot investor presentation.

Debt will probably play an important role in that ROIC growth. But investors have every reason to believe management will continue to make smart choices about where to best deploy those funds for their benefit.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$287.19 (-0.20%) $0.57
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$184.69 (-1.69%) $-3.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.