Watson Leisure Time Sporting Goods Scenario: Al Thomas has recently been approached by his brother-in-law, Robert Watson, with a proposal to buy a 20 percent interest in Watson Leisure Time Sporting Goods. The company manufactures golf clubs, baseball bats, basketball goals, and other similar items.

Mr. Watson is quick to point out the increase in sales over the last three years as indicated in the income statement, Exhibit 1. The annual growth rate is 20 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 approximately 10 percent per year. There was a steady real growth of 2 to 3 percent in gross domestic product during the period under study. The rate of inflation was in the 3 to 4 percent range.

The stock in the corporation has become available due to the ill health of a current stockholder, who needs cash. The issue here is not to determine the exact price for the stock, but rather whether Watson Leisure Time Sporting Goods represents an attractive investment situation. Although Mr. Thomas 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. Thomas?

Exhibit 1:

Income Statement

	2007	2008	2009
Sales (all on credit)	$1,500,000	$1,800,000	$2,160,000
Cost of Goods Sold	950,000	1,120,000	1,300,000
Gross Profit	$550,000	$680,000	$860,000
Selling and Admin. Expenses*	380,000	490,000	590,000
Operating Profit (EBIT)	$170,000	$190,000	$270,000
Interest Expense	30,000	40,000	85,000
Net Income Before Taxes	$140,000	$150,000	$185,000
Taxes	46,120	48,720	64,850
Net Income	$93,880	$101,280	$120,150
Shares	40,000	40,000	40,000
Earnings Per Share	$2.35	$2.35	$2.61

* Includes $20,000 in lease payments for each year.

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%

Exhibit 2:

Balance Sheet

Assets		2007	2008	2009
Cash		$ 20,000	$ 30,000	$ 20,000
Marketable Securities		30,000	35,000	50,000
Accounts Receivable		150,000	230,000	330,000
Inventory		250,000	285,000	325,000
Total Current Assets		$ 450,000	$ 580,000	$ 725,000
Net Plant and Equipment		550,000	720,000	1,169,000
Total Assets		$ 1,000,000	$ 1,300,000	$ 1,894,000
Liabilities and
Stockholders' Equity		2007	2008	2009
Accounts Payable		$ 100,000	$ 225,000	$ 200,000
Notes payable (bank)		100,000	100,000	300,000
Total Current Liabilities		$ 200,000	$ 325,000	$ 500,000
Long-Term Liabilities		250,000	331,120	550,740
Total Liabilities		$ 450,000	$ 656,120	$ 1,050,740
Common stock ($10 par)		400,000	400,000	460,000
Capital Paid in Excess of par		50,000	50,000	80,000
Retained Earnings		100,000	193,880	303,260
Total Stockholders' Equity		$ 550,000	$ 643,880	$ 843,260
Total Liabilities and
Stockholders' Equity		$ 1,000,000	$ 1,300,000	$ 1,894,000

This is the only part I need help with!

		2007	2008	2009
Growth in sales	(Company)	%	%	%
	(Industry)
Profit margin	(Company)	%	%	%
	(Industry)
Return on assets	(Company)	%	%	%
	(Industry)
Return on equity	(Company)	%	%	%
	(Industry)