Use current public financial statements for Wing Stop to determine the following

Question

Use current public financial statements for Wing Stop to determine the following:

1. What is their sustainable growth rate based on earnings?

2. How has their historical growth compared to sustainable growth and what methods do they appear to have used to reduce the gap between the two?

3. Assuming the company’s growth doubles from recent trends, what challenges will the organization encounter and what is your recommendation to achieve growth?

Year ended (in thousands) December 30, 2017 December 31, 2016 December 26, 2015 December 27, 2014 December 28, 2013 Consolidated Statements of Income Data: Revenue: Royalty revenue and $                      68,483 $                      57,071 $                      46,688 $                      38,032 $                      30,202 franchise fees Company-owned restaurant 37,069 34,288 31,281 29,417 28,797 sales Total revenue 105,552 91,359 77,969 67,449 58,999 Cost and expenses: Cost of sales 28,745 25,308 22,219 20,473 22,176 Selling, general and 37,151 33,840 33,350 26,006 18,913 administrative Depreciation and 3,376 3,008 2,682 2,904 3,030 amortization Total costs and 69,272 62,156 58,251 49,383 44,119 expenses Operating income 36,280 29,203 19,718 18,066 14,880 Interest expense, net 5,131 4,396 3,477 3,684 2,863 Other expense (income), net                                -   254 396 84 (6) Income before income taxes 31,149 24,553 15,845 14,298 12,023 Income tax expense 3,845 9,119 5,739 5,312 4,493 Net income $                      27,304 $                      15,434 $                      10,106 $                       8,986 $                       7,530 Consolidated Statement of Cash Flows Data: Net cash provided by $                      27,049 $                      23,329 $                      13,860 $                      15,119 $                      11,481 operating activities Net cash provided by (used (6,484) (2,056) (1,915) (363) (2,144) in) investing activities Net cash provided by (used (20,252) (28,213) (10,978) (8,206) (10,417) in) financing activities Net increase (decrease) in $                          313 $                      (6,940) $                          967 $                       6,550 $                      (1,080) cash and cash equivalents

Explanation / Answer

The data of company is given in part , the complete data is available in public domain ,

Data has been collected from , finance.yahoo.com

Answer a)

sustainable growth rate(SGR) = ROE x (1 - dividend-payout ratio) = ROE * retetion ratio

Profit Margin=24.85%

Operating Margin =35.41%

SGR = 0.725 *( 1-0.2258) =0.5613 = 56.13 %

This indicate that the company can grow at a rate of 56.13% using its own revenue and remain self-sustaining, but the book value per share i.e Book Value Per Share (mrq) -5.03 is major concern

Answer 2)

Historical growth rate on earning with base year 2013

The net Income is growing at very high rate in comparision to SGR ( calculated in a)

The gap can be reduced by  

Answer 3)

challenges will entountered by company are

Recommendation , Company should consolidate its position at this time rather than looking for extraordinary growth as negative book value of share is one of the major area of concern for company.

Revenue Per Share= 3.77 , return on equity = 72.5% (with book value per share data ) and Payout Ratio = 22.58%

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