Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a pr
ID: 2732824 • Letter: B
Question
Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15% interest in Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen products. Mr. Lamar is quick to point out the increase in sales that has taken place over the last three years as indicated in the income statement, Exhibit 1. The annual growth rate is 25%. A balance sheet for a similar time period is shown in Exhibit 2, and selected Industry ratios are presented in Exhibit 3. Note the industry growth rate in sales is only 10 to 12 percent per year. There was a steady real growth of 3 to 4 percent in gross domestic product during the period under study. The stock in the corporation has become available due to the ill health of a current stockholder, who is in need of cash. The issue here is not to determine the exact price of the stock, but rather, whether Lamar Swimwear represents and attractive investment situation. Although Mr. Adkins has a primary interest in profitability ratios, he will take a close look at all ratios. He has no fast and firm rules about required return on investment, but rather wishes to analyze the overall financial condition of the firm. The firm does not currently pay a cash dividend, and return to the investor must come from selling the stock in the future. Mr. Adkins has asked you to perform a thorough analysis and prepare a report with comments and recommendations do you offer to Mr. Adkins. 1. Calculate the liquidity, asset efficiency, debt, profitability ratios, and growth rates for sales and earnings for Lamar for each year. Analyze the liquidity, efficiency, debt, profitability, and growth rate trends and assess the condition and trend of the company in each area. 2. In each of the areas (liquidity, asset efficiency, debt, profitability, and growth) compare Lamar to the industry identifying those areas where Lamar’s performance is better than the industry and those areas where Lamar’s performance is worse than the industry. 3. Perform a DuPont analysis on Lamar to identify the areas that caused the changes in Return on Equity from 2009 to 2010 to 2011. 4. Based on this analysis prepare a list of Lamar’s strengths and weaknesses that you would present to Mr. Adkins. 5. What recommendation would you give Mr. Adkins? 6. Compile your analysis and conclusions into a professional report that Mr. Adkins could share with his banker, accountant, and lawyer. Include whatever schedules are appropriate as attachments to the report. This report should have the following sections: a. Introduction, company description, and summary of the analysis to be performed; b. Lamar Swimwear financial analysis (answer to question 1); c. Comparison of Lamar Swimwear to the industry (answer to question 2); d. Lamar Swimwear DuPont analysis (answer to questions 3); and e. Summary and conclusion (answers to questions 4 and 5).
Exhibit One
Lamar Swimwear
Income Statement
2009
2010
2011
Sales (all on credit)
1,200,000
1,500,000
1,875,000
Costs of Goods Sold
800,000
1,040,000
1,310,000
Gross Profit
400,000
460,000
565,000
Selling & Admin Exp
239,900
274,000
304,700
Operating Profit (EBIT)
160,100
186,000
260,300
Interest Expense
35,000
45,000
85,000
Net Income Before Taxes
125,100
141,000
175,300
Income Taxes
36,900
49,200
55,600
Net Income
88,200
91,800
119,700
Shares Outstanding
30,000
30,000
38,000
Earnings Per Share
$2.94
$3.06
$3.15
Exhibit Two
Lamar Swimwear
Balance Sheet
2009
2010
2011
Assets
Cash
30,000
40,000
30,000
Marketable Securities
20,000
25,000
30,000
Accounts Recievable
170,000
259,000
360,000
Inventory
230,000
261,000
290,000
Total Current Assets
450,000
585,000
710,000
Net Plant & Equipment
650,000
765,000
1,390,000
Total Assets
1,100,000
1,350,000
2,100,000
Liabilities & Stockholders' Equity
Accounts Payable
200,000
310,000
505,000
Accrued Expenses
20,400
30,000
35,000
Total Current Liabilities
220,400
340,000
540,000
Long Term Liabilities
325,000
363,600
703,900
Total Liabilities
545,400
703,600
1,243,900
Common Stock
60,000
60,000
60,000
Capital Paid in Excess of Par
190,000
190,000
280,000
Retained Earnings
304,600
396,400
516,100
Total Stockholders' Equity
554,600
646,400
856,100
Total Liabilities & Equity
1,100,000
1,350,000
2,100,000
Exhibit Three
Selected Industry Ratios
2009
2010
2011
Growth in Sales
--
10.00%
12.00%
Profit Margin
7.71%
7.82%
7.96%
Return on Assets
7.94%
8.86%
8.95%
Return on Equity
14.31%
15.26%
16.01%
Receivables Turnover
9.02
8.86
9.31
Average Collection Period
39.9
40.6
38.7
Inventory Turnover
4.24
5.10
5.11
Total Asset Turnover
1.05
1.10
1.12
Current Ratio
1.96
2.25
2.40
Quick Ratio
1.37
1.41
1.38
Debt to Total Assets
43.47%
43.11%
44.10%
Times Interest Earned
6.50
5.99
6.61
Growth in EPS
--
10.10%
13.00%
Exhibit One
Lamar Swimwear
Income Statement
2009
2010
2011
Sales (all on credit)
1,200,000
1,500,000
1,875,000
Costs of Goods Sold
800,000
1,040,000
1,310,000
Gross Profit
400,000
460,000
565,000
Selling & Admin Exp
239,900
274,000
304,700
Operating Profit (EBIT)
160,100
186,000
260,300
Interest Expense
35,000
45,000
85,000
Net Income Before Taxes
125,100
141,000
175,300
Income Taxes
36,900
49,200
55,600
Net Income
88,200
91,800
119,700
Shares Outstanding
30,000
30,000
38,000
Earnings Per Share
$2.94
$3.06
$3.15
Explanation / Answer
Answer:
I. Profitability:
In analyzing the profitability ratios; we see Lamar Swimwear shows a lower return on the sales than industry average. Return on assets (investment) exceeds the industry norm. Return on equity is 15.90% in 2009 versus the industry norm of 14.31%. So, it is good norm for 2009. But 2010 & 20011 norm are lower than the industry norm. So, it affects to create a high return on total asset or a generous utilization of debt or a combination thereof.
II. Assets Utilization:
Lamar Swimwear does not collect its receivables faster than the industry. The average collection period suggest how long, on average, customers’ accounts stay on the books. Lamar Swimwear needs more days to collect money than the industry. In here inventory turnover, Lamar Swimwear generates more sales per dollar of inventory than the average company in the industry and we assume the firm uses very efficient inventory- ordering and cost-control methods.
III. Liquidity Ratio:
Current ratio & quick ratio are good position because those norms are more than the industry norms.
IV. Debt Utilization :
In debt to total assets, there are slightly more debt than the industry. Time interest earned & fixed charge coverage is not good position because those norms are lower than the industry norm.
Growth in sales of Lamar Swimwear (in both years 2010 and 2011) is higher than the Industry. On the other hand, Growth in EPS of Lamar Swimwear (in both years 2010 and 2011) is lower than the industry.
Lamar Swimwear 2009 2010 2011 Growth in sales Company 25% 25% Industry 10% 12% Profit margin Company 7.35% 6.12% 6.38% Industry 7.71% 7.82% 7.96% Return on assets Company 8.02% 6.80% 5.70% Industry 7.94% 8.68% 8.95% Return on equity Company 15.90% 14.20% 13.98% Industry 14.31% 15.26% 16.01% Receivable turnover Company 7.06 times 5.79 times 5.21 times Industry 9.02 times 8.86 times 9.31 times Average Collection Period Company 51.0 days 62.2 days 69.1 days Industry 39.9 days 40.6 days 38.7 days Inventory Turnover Company 5.22 times 5.75 times 6.47 times Industry 4.24 times 5.10 times 5.11 times Fixed asset turnover Company 1.85 times 1.96 times 1.35 times Industry 1.60 times 1.64 times 1.75 times Total asset tunrover Company 1.09 times 1.11 times 0.89 times Industry 1.05 times 1.10 times 1.12 times Current ratio Company 2.04 times 1.72 times 1.31 times Industry 1.96 times 2.25 times 2.40 times Quick ratio Company 1.00 times 0.95 times 0.78 times Industry 1.37 times 1.41 times 1.38 times Debt to total assets Company 49.58% 52.12% 59.23% Industry 43.47% 43.11% 44.10% Times interest earned Company 4.57 times 4.13 times 3.06 times Industry 6.50 times 5.99 times 6.61 times Fixed charge coverage Company 3.50 times 3.35 times 2.75 times Industry 4.70 times 4.69 times 4.73 times Growth in E.P.S Company 4.10% 2.90% Industry 10.10% 13.30%