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WATSON LEISURE TIME SPORTING GOODS Exhibit 1 Income Statement Sales (all on credit) Cost of Goods Sold Gross Profit Selling and Admin. Expenses* Operating Profit (EBIT) Interest Expense Net Income Before Taxes Taxes Net Income Shares Earnings per share $ $ $ $ $ 2007 1,500,000 950,000 550,000 380,000 170,000 30,000 140,000 46,120 93,880 40,000 $2.35 *Includes $20,000 in lease payments for each year. $ $ $ $ $ 2008 1,800,000 1,120,000 680,000 490,000 190,000 40,000 150,000 48,720 101,280 40,000 $2.53 $ $ $ $ $ 2009 2,160,000 1,300,000 860,000 590,000 270,000 85,000 185,000 64,850 120,150 46,000 $2.61 Trend Analysis 2007 2008 2009 100.00% 100.00% 100.00% 63.33% 62.22% 60.19% 36.67% 37.78% 39.81% 25.33% 27.22% 27.31% 11.33% 10.56% 12.50% 2.00% 2.22% 3.94% 9.33% 8.33% 8.56% 3.07% 2.71% 3.00% 6.26% 5.63% 5.56% Why do a trend analysis? It helps you answer the question: If sales went up, why did net income go down? WATSON LEISURE TIME SPORTING GOODS Exhibit 2 Balance Sheet Assets 2007 2008 2009 $ 20,000 $ 30,000 $ 20,000 30,000 35,000 50,000 150,000 230,000 330,000 250,000 285,000 325,000 $ 450,000 $ 580,000 $ 725,000 550,000 720,000 1,169,000 $ 1,000,000 $ 1,300,000 $ 1,894,000 Cash Marketable Securities Accounts Receivable Inventory Total Current Assets Net Plant and Equipment Total Assets Liabilities and Stockholders' Equity Accounts Payable Notes payable (bank) Total Current Liabilities Long-Term Liabilities Total Liabilities Common stock ($10 par) Capital Paid in Excess of par Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity Exhibit 3 $ $ $ $ 2007 100,000 100,000 200,000 250,000 450,000 400,000 50,000 100,000 550,000 $ $ $ $ 2008 225,000 100,000 325,000 331,120 656,120 400,000 50,000 193,880 643,880 $ $ $ $ 2009 200,000 300,000 500,000 550,740 1,050,740 460,000 80,000 303,260 843,260 $ 1,000,000 $ 1,300,000 $ 1,894,000 Selected Industry Ratios Growth in sales Profit margin Return on assets (investment) Return on equity Receivables turnover Average collection period Inventory turnover Fixed asset turnover Total asset turnover Current ratio Quick ratio Debt to total assets Times interest earned Fixed charge coverage Growth in earnings per share 2007 5.75% 8.22% 13.26% 10X 36 days 2008 9.98% 5.80% 8.24% 13.62% 9.5X 37.9days 2009 10.02% 5.81% 8.48% 14.16% 10.1X 35.6 days 5.71X 2.75X 1.43X 2.10X 1.05X 38% 5.00X 3.85X 5.62X 2.66X 1.42X 2.08X 1.02X 39.50% 5.20X 3.95X 9.70% 5.84X 2.20X 1.46X 2.15X 1.10X 40.10% 5.26X 3.97X 9.80% Things to analyze Is A/R growing at the same rate as the sales increase? Is inventory increasing faster than sales? Have they invested in plant and equipment? What increase in debt do you see, and is it connected What did a shareholder pay for one share of stock? What is a marketable security? What approximate interest rate are they paying for deb What is the P/E ratio for Watson? What would Mr. Thomas be expected to pay? What is book value? If Mr. Thomas purchases 20% of the firm, can he influ ? d to an investment in fixed assets? ebt? fluence decisions? WATSON LEISURE TIME SPORTING GOODS Profitability Ratios 2007 (Company) (Industry) (Company) Profit margin (Industry) (Company) Return on assets (Industry) (Company) Return on equity (Industry) Asset Utilization Ratios Growth in sales (Company) (Industry) (Company) Average collection period (Industry) (Company) Inventory turnover (Industry) (Company) Fixed asset turnover (Industry) (Company) Total asset turnover (Industry) Liquidity Ratios Receivable turnover Current ratio Quick ratio (Company) (Industry) (Company) (Industry) Debt Utilization Ratios (Company) (Industry) (Company) Times interest earned (Industry) (Company) Fixed charge coverage (Industry) Other Ratios Debt to total assets Growth in E.P.S. (Company) (Industry) 2008 2009