Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15 percent 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 percent. 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.

Exhibit 1

*Includes $15,000 in lease payments for each year.
Exhibit 2

Exhibit 3

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 for the stock, but rather whether Lamar Swimwear represents an attractive investment situation. Although Mr. Adkins has a primary interest in the profitability ratios, he will take a close look at all the ratios. He has no fast and firm rules about required return on investment, but rather wishes to analyze the overall 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. After doing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations do you offer to Mr. Adkins?

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LAMAR SWMWEAR Income Sheet 20X1 20X2 20X3 9 Sales (all on credit) Cost of goods sold Gross profit. Selling and administrative expense' Operating profit (EBIT) Interest expense Net income before taxes $1,200,000 $1,500,000 $1,875,000 S400,000 460,000 $ 565,000 S 160,100 186,000 $ 260,300 $ 125,100 141,000 $ 175,300 $ 88,200 $ 91,800 $ 119,700 800,000 1,040,000 1310.000 274,000 45,000 49,200 30,000 239,900 35,000 36,900 30,000 304,700 85,000 55,600 38,000 Net income Earnings per share $2.94 $3.06 $3.15 LAMAR SWMWEAR Balance Sheet 2 Marketable securities. Accounts receivable Net plant and equipment Liabilities and Stockholders' Equity Accounts payable Total current liabilities S 545,400 703,600 1,243,900 Common stock ($2 par). Capital paid in excess of par 3 6 Total stockholders' equity Selected Industry Ratios Growth in sales on assets (investment). 0 14.31% Receivable turnover Average collection period. 39.9 days er Debt to total assets 43.47% 43.11% 4 Fixed charge coverage Growth in EPS