Although Lamar Swimwear is expanding its sales much more rapidly than others in the industry, there are some clear deficiencies in their performance. These can be seen in terms of a trend analysis over time as well as a comparative analysis with industry data. 1. Profitability: * The profit margin is declining over time, 2005: 7. 35%, 2006: 6. 12%, 2007: 6. 38%. This is surprising in light of the 56% increase in sales over two years (25% per year). There do not appear to be economies of scale for this firm. Higher costs of goods sold and interest expense appear to be causing the problem.
The cost of goods increase could be the result of several things. A question is whether the decline in profit margin is the result of a strategic decision to drop unit price to increase sales volumes or not. Another explanation may be that the industry, with growth less than half of Lamar's, has reacted to protect its market share with price reductions that Lamar had to at least partly match to maintain its momentum. Alternatively, the company may not have been able to maintain its efficiency. * ROA ratio starts out in 2005 above the industry average (8. 02 percent versus 7.
94 percent) and ends up well below it (5. 70 percent versus 8. 95 percent) in 2007. The decline in return on assets is serious, and can be attributed to the previously mentioned declining profit margin as well as a slowing total asset turnover (going from 1. 09 to 0. 89). However, Investors have to question the rapid growth in fixed assets and consider how that rate of growth would impact on gross profit, especially Cost of Goods, specifically the efficiency of direct labor. It could be labour inefficiency and redundant assets put in place to generate growth in the succeeding period that give the results noted.
* ROE is higher than the industry average the first year, and then also falls far below in following years. This decline is particularly significant in light of the progressively larger debt that the firm is using. High debt utilization tends to contribute to high return on equity, but not in this case. There appears to be too much deterioration in return on assets translating into low return on equity. 2. Activities * The previously mentioned slower turnover of assets can be analyzed through the turnover ratios. A problem may be found in accounts receivable where turnover has gone from 7. 06 to 5. 21.
This can also be stated in terms of an average collection period that has increased from 51 days to 70 days. Investors would have to be careful to look at growth and seasonal trends. The company has a 25% per year increase in sales. There could be significant distortion in the resulting receivable and inventory ratios due to this. While inventory turnover has been and remains superior to the industry, assuming that the industry ratio is based on sales, the same cannot be said for capital asset turnover. A decline from 1. 85 to 1. 35 was caused by an increase of 114 percent in capital assets (representing $740,000).
We can summarize the discussion of the turnover ratios by saying that despite a 56% increase in sales, assets grew even more rapidly causing a decline in total asset turnover from 1. 09 to 0. 89. This could, however, be consistent with a firm that expects continued rapid growth. 3. Liquidity * The liquidity ratios also are not encouraging. Both the current and quick ratios are falling against a stable industry norm of approximately two to one and one to one respectively. 4. Capital structure * The debt to equity ratio is particularly noticeable in regard to industry comparisons.
Lamar Swimwear has gone from being 55% over the industry average to 101% above the industry (98% versus 43. 70% and 145% vs 44. 10%). Their heavy debt position is clearly out of line with their competitors. Their downtrend in times interest earned confirms the heavy debt burden on the company. Again, this could be the result of productive capacity being added to support expected sales in a succeeding period, with an expected increase in debt to assets, which should be watched. * Finally, we see that the firm has a slower growth rate in earnings per share than the industry.
This is a function of less rapid growth in earnings as well as an increase in shares outstanding (with the sale of 8,000 shares in 2007). Once again, we see that the rapid growth in sales is not being translated down into significant earnings gains. This is true in spite of the fact that there is a very stable economic environment. The decision on whether or not to invest depends on how the analyst interprets the various questions raised by the ratios. Certainly on their face, this does not appear to be an attractive investment. Part 4 Investment Advice There are many objectives of investing in shares but the most focused are:
Dividend Payout Resale the shares Control the firm Mr. Wong would probably have difficulty justifying such an investment based on the performance of the firm. There is no dividend payout, so return to the investor would have to come in the form of capital appreciation if and when he was able to resell the shares. The prospects, at this point, would not appear to justify the purchase. This is particularly true when one considers that Mr. Wong would be buying a minority (25%) and would not have control of the firm. So, our advice to Mr. Wong is that he should not buy 25% share of Lamar Company in both short term and long term.