Question

After graduating from college in May 2018, Ryan Crews started his career in finance at the W&T Corporation, a small- to medium-sized warehouse distributor in Nashville, Tennessee. The company was founded by David Winston and Colin Tabor in 2005, after they have worked together in management at Walmart. Although Crews had an offer from Sam's Club, he became excited about the opportunity with W&T For W&T, 2017 turned out to be a good financial year. But in 2018, the company experienced a 5.2 percent sales reduction, where sales declined from $5.9 million to $5.6 million. The downturn then led to other financial problems, including a 50 percent reduction in the company's stock price. The share price went from $42 per share at the end of 2017 to $21 per share at the end of 2018! David Winston and Colin Tabor want to understand what may have happened. Financial information for W&T for both years is shown in the popup window, where all the numbers, except for per-share data, are shown in thousands.

Answer 1

Particulars Formula used 2017 2018 Current assets/Current liabilities Current ratio Current assets Current liabilities 2.43 1.825 750 2.07 2,360 1,140 Quick assets/Current liabilities Acid-test ratio Quick assets Current liabilities 1.77 1,325 750 1.39 1,580 1.140 365/Accounts receivable turnover ratio Net credit sales/Closing accounts receivable Days in receivables Accounts receivable turnover ratio Net credit sales Closing accounts receivable 49.49 7.38 5,900 800 59.64 6.12 5,600 915 365/Inventory turnover ratio Cost of goods sold/Closing inventory Days in inventory Inventory turnover ratio COGS Closing inventory 50.69 7.20 3,600 500 83.74 4.36 3,400 780 Operating profit/Total assets Operating return on assets Operating profits Total assets 24.21% 1,180 4,875 18.96% 950 5,010

(Operating profit/Total net sales)*100 Operating profit margin Operating profits Total net sales 20.00% 1,180 5,900 16.96% 950 5,600 Total net sales/ Total assets Total asset turnover (in times) Total net sales Total assets 1.21 5,900 4,875 1.12 5,600 5,010 Total net sales/Net fixed assets Fixed asset turnover (in times) Total net sales Net fixed assets 1.93 5,900 3,050 2.11 5,600 2,650 (Total debt/Total assets) *100 Debt ratio Total debt Total assets 43.08% 2,100 4,875 50.70% 2,540 5,010 EBITDA/Interest expense 8.33 Times interest earned EBITDA Interest expense 1,500 180 5.47 1,450 265 (Net income/Total equity)*100 Return on equity Net income Total equity 28.47% 790 2,775 21.90% 541 2,470

Market price per share/Earnings per share Price earnings ratio (in times) Market price per share Earnings per share 8.51 6.21 4221 4.94 3.38 [790/160] [541/160] Market price per share/Book value per share Price/book ratio Market price per share Book value 2.42 1.36 4221 17.34 15.44 [2775/160] [2470/160] From the above analysis, it can be said that the company has performed better in 2017 in comparison to 2018. This has been substantiated with the fact that all the above ratios are better in 2017 than 2018 like current ratio, quick ratio, operating margin, earnings per share, return on equity, total asset turnover and interest coverage ratio. Most of the liquidity, profitability and efficiency ratios are better in 2017 than 2018. Therefore, in order to correct this, the management need to take some crucial steps like reducing the days in inventory by ensuring better sales and improve short-term liquidity position of the company.