Financial Analysis Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a pro-posal 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. 2018 Sales (all on credit). Cost of goods sold Gross profit...... Selling and administrative expense* LAMAR SWIMWEAR Income Sheet 2016 $1,200,00 0 800,000 400,000 239,900 2017 $1,500,000 1,040,000 $ 460,000 274,000 $1,875,000 1,310,000 $ 565,000 304,700 *** Operating profit (EBIT) 160,100 Interest expense 35,000 Net income before taxes 125, 100 Taxes.... 36,900 Net Income. 88,200 Shares 30,000 Earnings per share $2.94 *Includes $15,000 in lease payments for each year. $ 186,000 45,000 $ 141,000 49,200 $ 91,800 30,000 $3.06 $ 260,300 85,000 $ 175,300 55,600 $ 119,700 38,000 $3.15 Financial Analysis LAMAR SWIMWEAR Balance Sheet 2016 2017 2018 Assets Cash Marketable securities Accounts receivable Inventory...... Total current assets $ 30,000 20.000 170.000 230,000 $ 40,000 25,000 259,000 261,000 30,000 30,000 360,000 290,000 $450,000 650,000 $ 585,000 765,000 710,000 1,390,000 Net plant and equipment Total assets $1,100.000 $1,350,000 2,100,000 Liabilities and Stockholders' Equity Accounts payable $ 200,000 20,400 $ 310,000 30,000 505,000 35,000 Accrued expenses. Total current liabilities $ 220,400 325,000 $ 340,000 363,600 540,000 703.900 Long-term liabilities Total liabilities Common stock ($2 par)..... Capital paid in excess of par... Retained earnings Total stockholders' equity $ 545,400 60.000 190,000 304,600 $ 703,600 60,000 190,000 396,400 1,243,900 76.000 264,000 516,100 $ 554,600 $ 646,400 856,100 Total liabilities and stockholders' equity 1.100.000 $1,350,000 2,100,000 2017 7.82% 8.86% 15.26% 8.86X 2018 7.96% 8.95% 16.01% 9.31% Profit margin Return on assets investment) Return on equity Receivable turnover Average collection period Inventory turnover Fleed asset turnover Total asset turnover Current ratio Quick ratio Debt to total assets Times interest earned Selected Industry Ratios 2016 7.71% 7.94% 14.31% 9.02x 39.9 days 4.24% 1.60X 1.05X 1.96X 1.37% 43.47% 6.50X 40.6 days 5.10X 1.64X 1.10X 2.25X 1.41X 43.11% 5.99X 38.7 days 5.11X 1.75X 1.12X 2.40X 1.38X 44.10% 6.61X Financial Analysis Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a pro-posal 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. 2018 Sales (all on credit). Cost of goods sold Gross profit...... Selling and administrative expense* LAMAR SWIMWEAR Income Sheet 2016 $1,200,00 0 800,000 400,000 239,900 2017 $1,500,000 1,040,000 $ 460,000 274,000 $1,875,000 1,310,000 $ 565,000 304,700 *** Operating profit (EBIT) 160,100 Interest expense 35,000 Net income before taxes 125, 100 Taxes.... 36,900 Net Income. 88,200 Shares 30,000 Earnings per share $2.94 *Includes $15,000 in lease payments for each year. $ 186,000 45,000 $ 141,000 49,200 $ 91,800 30,000 $3.06 $ 260,300 85,000 $ 175,300 55,600 $ 119,700 38,000 $3.15 Financial Analysis LAMAR SWIMWEAR Balance Sheet 2016 2017 2018 Assets Cash Marketable securities Accounts receivable Inventory...... Total current assets $ 30,000 20.000 170.000 230,000 $ 40,000 25,000 259,000 261,000 30,000 30,000 360,000 290,000 $450,000 650,000 $ 585,000 765,000 710,000 1,390,000 Net plant and equipment Total assets $1,100.000 $1,350,000 2,100,000 Liabilities and Stockholders' Equity Accounts payable $ 200,000 20,400 $ 310,000 30,000 505,000 35,000 Accrued expenses. Total current liabilities $ 220,400 325,000 $ 340,000 363,600 540,000 703.900 Long-term liabilities Total liabilities Common stock ($2 par)..... Capital paid in excess of par... Retained earnings Total stockholders' equity $ 545,400 60.000 190,000 304,600 $ 703,600 60,000 190,000 396,400 1,243,900 76.000 264,000 516,100 $ 554,600 $ 646,400 856,100 Total liabilities and stockholders' equity 1.100.000 $1,350,000 2,100,000 2017 7.82% 8.86% 15.26% 8.86X 2018 7.96% 8.95% 16.01% 9.31% Profit margin Return on assets investment) Return on equity Receivable turnover Average collection period Inventory turnover Fleed asset turnover Total asset turnover Current ratio Quick ratio Debt to total assets Times interest earned Selected Industry Ratios 2016 7.71% 7.94% 14.31% 9.02x 39.9 days 4.24% 1.60X 1.05X 1.96X 1.37% 43.47% 6.50X 40.6 days 5.10X 1.64X 1.10X 2.25X 1.41X 43.11% 5.99X 38.7 days 5.11X 1.75X 1.12X 2.40X 1.38X 44.10% 6.61X