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Analyzing a Company for Its Investment Potential In its annual report, WRS Athletic Supply, Inc., includes the following five-year financial summary. WRS ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted) 2010 2015 5244,524 12% 2013 2012 $191,329 5165,013 16% 2011 $137,634 17% 2014 $217,799 14% 6% 1,873 171,562 16% 5% 20% 8% 2,001 191,838 1,787 150,255 1,615 129,664 1,391 108,725 41,236 36,356 31,679 27,408 22,516 1,063 (138) 4,487 8,039 1357 (171) 3,897 6,671 1,383 (188) 3,692 6,295 1,045803 (204) (189) 3,338 5,377 2,740 (Dollar amounts in thousands except per share data) Net sales Net sales increase Domestic comparative store sales increase Other income-net Cost of sales Operating, selling, and general and administrative expenses Interest: Interest expense Interest income Income tax expense Net income Per share of common stock: Net income Dividends Financial Position Current assets, excluding inventory Inventories at LIFO cost Property, plant, and equipment, net Total assets Current liabilities Long-term debe Shareholders' equity Financial Ratios Acid-test ratio Rate of return on total assets Rate of return on shareholders' equity 1.41 1.81 0.300 1.21 0.20 0.99 0.16 .28 $16,497 $ 30,483 24,891 1 51,904 94,685 32,617 22,731 39,337 $ 27,878 22,614 45,750 83,527 27,282 21,143 35,102 S 26,555 $ 24,356 21.442 19,793 40,934 35,969 78,130 70.349 28,949 25,803 17,838 18,712 31,343 25,834 $ 21,132 17,076 25,973 49,996 16,762 12,122 21.112 0.9 13 0.9 10.2% 21.6% 1.0 9.9% 20.1% 0.9 10.3% 22.0% 10.7% 22.9% 22.4% Requirement 1. Analyze the company's financial summary for the fiscal years 2011-2015 to decide whether to invest in the common stock of WRS. Include the following sections in your analysis, and fully explain your final decision. a. Trend analysis for net sales and net income (use 2011 as the base year). b. Profitability analysis. c. Evaluate the ability to sell inventory (WRS uses the LIFO method). d. Evaluate the ability to pay debts. e. Evaluate the dividends.

Answer 1

Trend Analysis

It can be seen that company is continuously growing since 2011 and is well above the industry average. This reflects that management is pursuing right growth strategies and is continously ahead of its competitors .

Based on this analysis, investment can be made in the company.

Profitability Analysis

It is very important that company should grow over a period of time but it more important that company maintains its profitability. Company’s profitability ratios are given below:

		Year
		2015	2014	2013	2012	2011
Net Sales		244524	217799	191329	165013	137634
Other Income		2001	1873	1787	1615	1391
Total Income		246525	219672	193116	166628	139025
Cost of Sales		191838	171562	150255	129664	108725
Gross Profit (Total Income-Cost of Sales)		54687	48110	42861	36964	30300
Gross Profit% of sales		22.36	22.09	22.40	22.40	22.01
Operating. Selling & Administrative Exp.		41236	36356	31679	27408	22516
Operating Profit (GP- Expenses)		13451	11754	11182	9556	7784
Operating profit% of sales		5.50	5.40	5.84	5.79	5.66

It can be clearly seen that company has maintained its profitability despite growing at fast pace. This shows that company is performing well and there is no reason to believe that it will not be able to achieve the same result.

Company’s ability to Sell

Inventory Turnover Ratio (times)

10.29

9.89

9.28

8.95

16.12

It can be seen that even though the inventory turnover has come down from 16.12 in the year 2011 to 10.29 in the year 2015. Company has improved on this from year 2012 which was just 8.95 times only.

Company needs to take care that there is no stale/immovable inventory building up leading to losses.

Ability to Pay Debts

Company’s ability to pay debt is quite robust and company’s ability to pay interest is excellent.

Opeating Profit		13451	11754	11182	9556	7784
Interest Exp.		1063	1357	1383	1045	803
Interest Coverage ratio(Operating Profit/Interest)		12.65	8.66	8.09	9.14	9.69

Note: We are unable to calculate the Debt Service Coverage ratio as the details about repayment are not available.

Dividends:

Per Share Common Stock
Net Income		1.81	1.49	1.41	1.21	0.99
Dividend		0.3	0.28	0.24	0.2	0.16

As can be seen that company has maintained policy of paying aroud 16% of the Net income consistently and balance is used towards growth of the company.

Final Conclusion

Evaluating the company’s performance on various parameters explained above, company is performing well on all parameters and is a good candidate for investment.