Sporting Goods Company

Sporting Goods Company

Watson Leisure Time Sporting Goods Company:

Financial ratios for the company for year 200X and 200Z are calculated below, these ratios are subdivided into liquidity, debt, activity and profitability ratios:

A. Liquidity:

1. Current ratio:

Determined by dividing the current assets by current liabilities (Block, 2010)

current  ratio

200X

200Z

1/32

Sporting Goods Company

current  assets

450,000

725,000

current  liabilities

200,000

500,000

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Sporting Goods Company

current ratio

2.25

1.45

industry

2.10X

2.15X

2. Quick ratio:

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Sporting Goods Company

Determined by subtracting inventory from current assets and dividing the result by current liabilities: (Block, 2010)

Quick ratio:

200X

200Z

Current  assets

450,000

725,000

inventory

250,000

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Sporting Goods Company

325,000

current  liabilities

200,000

500,000

Quick ratio:

1

0.8

industry

5/32

Sporting Goods Company

1.05X

1.10X

B. Activity:

1. Receivable turnover

Determined by dividing credit sales by account receivables: (Block, 2010)

Receivable turnover

200X

200Z

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Sporting Goods Company

credit  sales

1500000

2160000

account  receivable

150,000

330,000

Receivable turnover

10

7/32

Sporting Goods Company

6.545454545

industry

10X

10.1X

2. Average collection period:

Determined by dividing account receivables by annual sales divided 365 days (Block, 2010)

Average collection period:

200X

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Sporting Goods Company

200Z

account  receivable

150,000

330,000

annual  sales

1500000

2160000

Average collection period:

36.5

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Sporting Goods Company

55.76388889

industry

36 days

35.6 days

3. Fixed assets turnover:

Fixed assets turnover = Sales/ fixed assets (Block, 2010)

Fixed assets turnover:

200X

10/32

Sporting Goods Company

200Z

sales

1500000

2160000

fixed  assets

550000

1169000

Fixed assets turnover:

2.727272727

11/32

Sporting Goods Company

1.847733105

industry

2.75X

2.20X

4. Total assets turnover:

Total assets turnover =Sales/ total assets (Block, 2010)

Total assets turnover:

200X

12/32

Sporting Goods Company

200Z

sales

1500000

2160000

total  assets

1000000

1894000

Total assets turnover:

1.5

13/32

Sporting Goods Company

1.140443506

industry

1.43X

1.46X

C. Debt:

1. Debt ratio

Debt ratio =Total liabilities/ total assets (Block, 2010)

Debt ratio

200X

14/32

Sporting Goods Company

200Z

liabilities

450,000

1,050,740

assets

1000000

1894000

Debt ratio

15/32

Sporting Goods Company

45%

55%

industry

38%

40.10%

2. Times interest earned

TIE = Earnings before tax and interest/ interest (Block, 2010)

Times interest earned:

200X

16/32

Sporting Goods Company

200Z

Earnings  before tax and interest

170,000

270,000

interest

30,000

85,000

Times interest earned:

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Sporting Goods Company

5.666666667

3.176470588

industry

5.00X

5.26X

3. Fixed charge coverage:

FCC = Earnings before tax and interest + lease payment/ interest + lease payment + [(preferred stock dividends) X (1/1-t)] (Block, 2010)

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Sporting Goods Company

Fixed charge coverage:

200X

200Z

Earnings  before tax and interest

170,000

270,000

lease  payment

20000

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Sporting Goods Company

20000

interest

30000

85000

preferred  stock dividends

2.35

2.56

Fixed charge coverage:

3.799801566

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Sporting Goods Company

2.761829944

industry

3.85X

3.97X

D. Profitability:

1. Profit margin:

Profit margin = Net profit/ sales (Block, 2010)

21/32

Sporting Goods Company

Profit margin:

200X

200Z

net  profit

93880

120150

sales

1500000

22/32

Sporting Goods Company

2160000

Profit margin:

6.26%

5.56%

industry

5.75%

5.81%

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Sporting Goods Company

2. Return on assets:

ROA = Net profit/ assets (Block, 2010)

Return on assets:

200X

200Z

net  profit

93880

120150

assets

24/32

Sporting Goods Company

1000000

1894000

Return on assets:

9.39%

6.34%

industry

8.22%

8.48%

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Sporting Goods Company

3. Return on equity:

ROE = Net profit/ equity (Block, 2010)

Return on equity:

200X

200Z

net  profit

93880

120150

26/32

Sporting Goods Company

equity

550,000

843,260

Return on equity:

17.07%

14.25%

industry

13.26%

27/32

Sporting Goods Company

14.16%

4. Growth in sales:

sales growth

200X

200Z

sales

1500000

2160000

28/32

Sporting Goods Company

growth

44.00%

industry

10.02%

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Sporting Goods Company

5. Growth in earnings per share:

EPS growth

200X

200Z

share  earnings

2.35

2.56

Growth share

30/32

Sporting Goods Company

8.94%

industry

9.8%

Summary:

Liquidity ratios indicate whether the firm is able to meet its financial obligations in the short term, these ratios include the quick and current ratio. A lower value of these ratios is preferred by the investors, in this case the current ratio of the company has declined from 2.25 to 1.45, the quick ratio has also declined from 1 to 0.8 and given that these values are lower than the industry value then the liquidity ratios indicate that this would be a good investment option.

Activity ratios indicate how efficient a firm manages its assets, the receivable turnover ratio indicates the how fast company collects its receivables, this ratio has declined from 10 to 6.54 and these ratio is lower than the industry value, the average collection period has increased from 36.5 to 55.76 whereby these values are greater than the industry values, fixed asset turnover and total asset turnover values have also declined to values lower than the industry value. This means the efficiency of the firm has increased.

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Sporting Goods Company

Debt ratios calculated indicate how well a company is using its long term liabilities. The debt ratio has increased and has remained higher than the industry value, the times interest earned and the fixed charge coverage has declined and remained lower than the industry value, this indicates that the company is not properly using its long term debts.

Sales levels have grown by 44% while profit margins have declined from a high of 6.265 to 5.56, and this value is lower than the industry profit margin. EPS growth value is 8.94% while the industry value is 9.8%, return on equity has declined from 17% to 14% while return on assets has declined from 9% to 6% and remain lower than the industry value. This indicates that despite the growth in sales profit margins are declining and return on equity declining. This indicates that this would not be a good investment option, and therefore Robert Watson should not invest in the company.

REFERENCE:

Stanley, Block (2010) Foundation of financial Management: retrieved on 19th January from ht tp://classroom.follettebooks.com/shelf/servlet/Control/6?4578760830789882083&div=8&a mp;cust=4501&ktsID=71145

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