Is The Home Depot, Inc. (HD) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does The Home Depot, Inc. (NYSE:HD) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell The Home Depot, Inc. (NYSE:HD)’s story, and we’ll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at The Home Depot, Inc. (NYSE:HD)’s key statistics:

HD Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	13.8%	Fail
Improving profit margin	44.6%	Pass
Free cash flow growth > Net income growth	30% vs. 64.5%	Fail
Improving EPS	85.5%	Pass
Stock growth (+ 15%) < EPS growth	166% vs. 85.5%	Fail

Source: YCharts.
*Period begins at end of Q1 2010.

HD Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	82.9%	Pass
Declining debt to equity	55.9%	Fail
Dividend growth > 25%	65%	Pass
Free cash flow payout ratio < 50%	32.2%	Pass

Source: YCharts.
*Period begins at end of Q1 2010.

How we got here and where we’re going
The Home Depot, Inc. (NYSE:HD) builds a pretty solid foundation by earning six out of nine possible passing grades. One of those falling grades only happened because net income growth has outpaced free cash flow during our tracking period — a common occurrence with corporate earnings these days — but the raw numbers show that The Home Depot, Inc. (NYSE:HD)’s trailing 12-month free cash flow is higher than its net income. A significant amount of debt raised during the year has certainly cost it a debt-to-equity passing grade. None of these shortfalls are insurmountable. But does today’s result mean The Home Depot, Inc. (NYSE:HD) will keep outperforming in the future? Let’s dig a little deeper.