Question

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In its annual report, WRN Athletic Supply, Inc. includes the following five-year financial summary: (Click the icon to view the financial summary.) Read the requirements.

Answer 1

ANSWER:

Requirement 1: Trend Analysis for net sales revenue and net income (using 2014 as the base year)

Particulars	2018	2017	2016	2015	2014
Net sales revenue	295,000	219,000	195,000	165,000	136,000
Trend %	216.91%	161.02%	143.38%	121.32%	100%
Net income	26,615	11,945	9,555	5,950	3,658
Trend %	727.58%	326.54%	261.20%	162.65	100%

It can be seen from the above table that company is continuously growing since 2014. Also, Net earnings have increased at a higher rate than net revenue which shows that productivity of the company has improved over the period..

This reflects that management is pursuing right growth strategies and is continously ahead of its competitors.

Requirement 2: Profitability Analysis

Particulars	2018	2017	2016	2015	2014
Net sales revenue (A)	295,000	219,000	195,000	165,000	136,000
Net income (B)	26,615	11,945	9,555	5,950	3,658
Profit margin ratio (B / A)	9.02%	5.45%	4.9‬%	3.60%	2.68%

The profit margin ratio for the comapny has increased since 2014 from 2.68% to 9.02%. It can be seen from the above table that the profit margin of the company have increase steadily from 2014 to 2017 while in 2018 the profit margin ratio has increased substantially. This indicates the company is performing very well.

Requirement 3: Evaluation of the ability to sell merchandise inventory

Particulars	2018	2017	2016	2015	2014
Net sales revenue (A)	295,000	219,000	195,000	165,000	136,000
COGS (B)	223,905	167,535	150,735	129,195	107,712
Gross profit (C = A - B)	71,095‬	51,465‬	44,265	35,805	28,288‬
Gross profit % (C / A) * 100	24.1‬%	23.5‬%	22.7‬%	21.7‬%	20.8%
Beginning Inventory (D)	23,000	21,500	19,400	17,300	16,500
Ending Inventory (E)	24,200	23,000	21,500	19,400	17,300
Average Inventory F = (D + E) / 2	23,600‬	22,250	20,450‬	18,350‬	16,900‬
Inventory Turnover G = B / F	9.48	7.52	7.37	7.04	6.37
Days sales in inventory H = [(F / B) * 365]	38 days	48 days	50 days	52 days	57 days

The above table indicates that the Firms Ablity to sell inventory is enhanced during the relevant period. The required days to sell the inventory has increased from 57 days in 2018 to 38 days in 2014. And the inventory turnover have increased.

Requirement 4: Evaluation of the ability to pay debts:

Particulars	2018	2017	2016	2015	2014
Total assets	106,700	95,600	87,800	80,200	64,500
Total Equity	50,900	47,100	41,300	36,300	35,100
Total Liabilities (Current liabilities+Long term Liabilities)	55,800‬	48,500‬	46,500‬	43,900	29,400
Debt Ratio (Total Liabilities/Total Assets)	0.52	0.50	0.52	0.54	0.45
Debt to Equity Ratio (Total Liabilities/Total Equity)	1.09	1.02	1.12	1.20	0.83
Net income	26,615	11,945	9,555	5,950	3,658
Income Tax expense	4,450	3,880	3,610	3,390	2,710
Interest Expense	1,000	1,330	1,380	990	810
Total (EBIT)	32,065‬	17,155‬	14,545‬	10,330	7,178
Times-interest earned ratio (EBIT/Interest Expense)	32.06	12.89	10.53	10.43	8.86
Current assets (include inventory)	55,200	50,500	47,700	44,400	39,100
Current liabilities	33,000	27,100	29,100	25,800	16,700
Quick assets (current assets excluding inventory)	31,000	27,500	26,200	25,000	21,800
Current ratio (Current assets/current liabilities)	1.67	1.86	1.63	1.72	2.34
Quick ratio (Quick assets/current liabilities)	0.93	1.01	0.90	0.96	1.30

The company has a debt equity ratio of more than 1 in each year except in 2014. It is a high leveraged company. The ability to pay current debts are reflected in current ratio and being more than 1 is a good sign. The liquidity ratio is also close to 1 which means the funds can be easily mobilized for short term liabilities and working capital requirements.

Requirement 5: Evaluation of dividends

Particulars	2018	2017	2016	2015	2014
Annual Dividend per share	0.40	0.38	0.34	0.30	0.26
Earning per share	1.80	1.50	1.40	1.20	0.98
Dividend payout (Dividend per share/earning per share)	22.22%	25.33%	24.28%	25‬%	26.53%

The earning per share is quite stable, while the Divident payout has declined from 26.53% in 2014 to 22.22% in 2018. The dividend payout is not too high, which is a good sign as the comapny is retaining the profits. This may encourage the investors to invest in the firm.

Requirement 6:

Yes it is a good decision to invest in the common stock of WRN Atheletic Supply Inc.

From the analysis done above, it is clear that there is significant increase in the revenue, net income and profit margin of the business. This indicates that the company's product are at demand in the market.

Also, it is found that the days taken by the company to sell its inventory is decreasing.

There is an increasing trend in the rate of return on stockholder's equity, which indicates there is less risk of investment. This also means, that you may earn better in the future.

Hence, it is recommended to invest in the company.