rRerHENSIVE PROBLEM > Comprehensive Problem for Appendix D Analyzing a company f
ID: 2592625 • Letter: R
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rRerHENSIVE PROBLEM > Comprehensive Problem for Appendix D Analyzing a company for its investment potential In its annual report, WRM Achletic Supply, Inc. indudes the following five-year financial summary WRM ATHLETIC SUPPLY, INC. Five- Year Financial Summary (Partial; adapted 2020 (Dollar amounts in thousands except per share dato) Net Sales Net Sales Increase Domestic Comparative Store Sales Increase Other Income-Net Cost of Goods Sold Selling and Administrative Expenses 2019 2018 2017 2016 2015 290,000 215,000 $ 194,000 $ 165,000 $139,000 35% 5% 11% 18% 19% 17% 10% 2,050 1,8101,790 1,660 1.300 218,660 163,400 150,350 129,360110,227 41,236 36,356 31.67927,40822,516 Interest Expense (1,010) (1,360) (1,370) (1,060) (870 Interest Income Income Tax Expense Net Income Per Share of Common Stock: 120 160 165 225 155 4,430 3,830 3,690 3,380 2,760 26,83412,024 8,866 5,6774.082 Net Income 1.80 1.50 1.40 1.200.98 0.40 0.38 0.34 0.30 0.26 Financial Position Current Assets, Excluding Merchandise Inventory Merchandise Inventory at LIFO Cost Property, Plant, and Equipment, Net Total Assets Current Liabilities Long-term Debt tockholders Equity inancial Ratios cid-Test Ratio ate of Return on Total Assets ate of Return on Common Stockholders' Equity 30,400 s 27,500 26,200 $ 24,900 s 21,700 24,200 22,500 21,400 19.900 17,100 $ 16,400 51,100 45,600 40,700 35,200 25,900 05,700 95,600 88,300 80,000 64,700 32,200 27,100 28,700 25,800 16,700 22,600 21,700 17,100 18,300 12,600 50,900 46,800 42,500 35,900 35,400 0.9 27.7% 54.9% 14.6% 26.9% 0.9 12.2% 22.6% 9.3% 15.9% 83% 15.4% Requirements Analyze the company's financial summary for the fiscal years 2016-2020 to decide whether to invest in the common stock of WRM. Include the following sections in your analysis, and fully explain your final decision. a. Trend analysis for net sales and net income (use 2016 as the base year). b. Profitability analysis. c. Evaluation of the ability to sell merchandise inventory (WRM uses the LIFO 1. method) d. Evaluation of the ability to pay debts. e. Evaluation of dividends.Explanation / Answer
We can go ahead and invest in the shares of the company as per following reasons:
1. The Sales and Net income as per the trend analysis (given in working) has been increasing. Sales increase is 209% & Net income increase is 657%, from the levels of the base year 2016.
2. Gross profit has increased from 21% to 25%, which shows that the company's pricing strength is intact and is able to efficiently pass on the cost to the customers. Operating efficiency has improved which resulted in increase in operating profit from 4.5% to 10.4%, almost double that of 2016.
As a result of increasing "Other income", the net income% has improved from 2.9% to 9.3%
3. The company is able to convert its inventory to sales efficiently and has increased the pace. The inventory turnover ratio has increased from 6.5 times to 9.3 times, which shows this efficiency.
4. The debt equity ratio is under "1", means, the leverage is under control. The increase in debt is almost on same levels of increase in equity. The ability to service is debt is measured by "cushion ratio", which shows that sufficent income is available to comfortably service its debt. It has increased from 8.86 times to 31.95 times.
5. the dividend payout per share is also increasing, which is a good sign of a growth stock.
a Sales and Net income: Year 2020 2019 2018 2017 2016 Net Sales 290,000 215,000 194,000 165,000 139,000 Less: Cost of goods Sold (218,660) (163,400) (150,350) (129,360) (110,227) Gross Profit 71,340 51,600 43,650 35,640 28,773 ----A Less: Selling & Admin Expense (41,236) (36,356) (31,679) (27,408) (22,516) ----B Operating Income 30,104 15,244 11,971 8,232 6,257 ---C = A-B Add: Non operating Income/(expense): - Other income 2050 1810 1790 1660 1300 ----D - Interest income 120 160 165 225 155 ----E - Interest Expense (1,010) (1,360) (1,370) (1,060) (870) ----F Profit before Tax 31,264 15,854 12,556 9,057 6,842 ----G = (C+D+E-F) Income tax Expense (4,430) (3,830) (3,690) (3,380) (2,760) ----H Net Income/ Profit after Tax 26,834 12,024 8,866 5,677 4,082 ----I= (G-H) Trend analysis for Sales and Net income: (2016 as base) Year 2020 2019 2018 2017 2016 Net Sales 209% 155% 140% 119% 100 (Sales/2016' Sales *100) Net income 657% 295% 217% 139% 100 (Netincome/2016' Net income *100) b Profitability analysis: Profitability Ratios: Gross Profit ratio = Gross Pf/ Sales*100 25% 24% 23% 22% 21% Operating pf ratio = Op pf/Sales * 100 10.4% 7.1% 6.2% 5.0% 4.5% Net Profit ratio = Net pf/Sales * 100 9.3% 5.6% 4.6% 3.4% 2.9% c Ability to sell inventory: Need to calculate inventory turnover ratio to find how efficiently it is able to convert inventory into sales: Inventory TO ratio = Cost of goods sold divided by average inventory Average inventory (avg of two years) 23350 21950 20650 18500 16750 (17100+16400)/2 (for 2016) Inventory TO ratio 9.364 7.444 7.281 6.992 6.581 d Evaluation of ability to pay debts: Need to find "Debt Equity ratio" & "Cushion Ratio" for this purpose: DEBT EQUITY RATIO = DEBT/EQUITY Debt 22600 21700 17100 18300 12600 Equity 50900 46800 42500 35900 35400 DEBT EQUITY RATIO = 0.444 0.464 0.402 0.510 0.356 Cushion Ratio: It is the measure of the ability of the firm to service its debts. It is also called as the debt service coverage ratio. = Net profit/ total debt service debt service (interest + principal repayment) 1,010 1,360 1,370 1,060 870 Net profit (before tax & interest paid) 32,274 17,214 13,926 10,117 7,712 (Pf before tax + Interest expense) Therefore, cushion ratio 31.95 12.66 10.16 9.54 8.86 Evaluation of dividends Dividend per share is increasing.Related Questions
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