July 26, 2009
Is Watson Leisure Time Sporting Goods a Wise Investment?
The issue here is to determine if Watson Leisure Time Sporting Goods is a wise investment. In order to decide this, Al Thomas must consider several ratios (Watson will refer to Watson Leisure Time Sporting Goods).
These ratios fall into four categories: profit, asset utilization, liquidity, and debt utilization. Although there was a huge increase in Growth in Sales from 200x to 200z for Watson Leisure of 44% that is not enough.
The three profit ratios are profit margin, return on assets (investments), and return on equity. We examine the net profit ratio. Watson compares to industry for both 200x and 200z. According to Biz/Ed … if a company has given almost the same profitability ratio for two years this suggests the business is being managed in a stable way.
Next we examine Return on Assets and Return on equity. Watson was .78% higher than industry in 200xbut 2.48% lower in 200z. The reason for this is because there was a 127.9% increase in income from 200x to 200z but a large 189% increase in total assets from 200x to 200z.
Watson Leisure did well in terms of the return on equity ratio. They did somewhat better than industry during 200x but only matched it in 200z.
Next to examine are the asset utilization ratios. During the year 200x Watson compares to industry for all five of the ratios: Receivable turnover, Average collection period, Inventory turnover, fixed asset turnover, and total asset turnover. However, in 200z, there were some considerable differences in some of the ratios as compared to industry: Watson’s Receivable turnover ratio was somewhat smaller: According to Peabody:
“If this number is low compared to your industry average, it may mean your payment terms are to lenient or that you are not doing a good enough job on collections”(2).
Since receivable turnover was lower than industry it would follow that average...