Completing a comprehensive financial statement analysis

In its annual report, ABC Athletic Supply, Inc. includes the following five-year financial summary:

ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2013
Net Sales Revenue	\(250,000	\)216,000	\(191,000	\)161,000	\(134,000
Net Sales Revenue Increase	16%	13%	19%	20%	17%
Domestic Comparative Store Sales Increase	5%	6%	4%	7%	9%
Other Income—Net	2,110	1,840	1,760	1,690	1,330
Cost of Goods Sold	189,250	164,592	148,216	126,385	106,396
Selling and Administrative Expenses	41,210	36,330	31,620	27,440	22,540
Interest:
Interest Expense	(1,080)	(1,380)	(1,400)	(1,020)	(830)
Interest Income	125	165	155	235	190
Income Tax Expense	4,470	3,900	3,700	3,320	2,700
Net Income	16,225	11,803	7,979	4,760	3,054
Per Share of Common Stock:
Net Income	1.60	1.30	1.20	1.00	0.78
Dividends	0.40	0.38	0.34	0.30	0.26
Financial Position
Current Assets, Excluding Merchandise Inventory	\)30,700	\(27,200	\)26,700	\(24,400	\)21,500
Merchandise Inventory	24,500	22,600	21,700	19,000	17,500	$16,700
Property, Plant, and Equipment, Net	51,400	45,200	40,000	35,100	25,600
Total Assets	106,600	95,000	88,400	78,500	64,600
Current Liabilities	32,300	28,000	28,300	25,000	16,500
Long-term Debt	23,000	21,500	17,600	19,100	12,000
Stockholders’ Equity	51,300	45,500	42,500	34,400	36,100
Financial Ratios
Acid-Test Ratio	1.0	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	17.2%	14.4%	11.2%	8.1%	7.1%
Rate of Return on Common Stockholders’ Equity	35.5%	26.%	20.8%	13.5%	13.0%

Requirements

Analyze the company’s financial summary for the fiscal years 2014–2018 to decide whether to invest in the common stock of ABC. Include the following sections in your analysis.

1. Trend analysis for net sales revenue and net income (use 2014 as the base year).
2. Profitability analysis.
3. Evaluation of the ability to sell merchandise inventory.
4. Evaluation of the ability to pay debts.
5. Evaluation of dividends.
6. Should you invest in the common stock of ABC Athletic Supply, Inc.? Fully explain your final decision

A common tool for financial analysis is ratio analysis. It is a tool for extracting data from financial accounts and visualising it. It concentrates on numbers that show an organisation’s profitability, efficiency, financial leverage, and other pertinent data.

Analysis: The net sales revenue and the net income increases mean showing an upward and positive trend.

Note: The formula used to calculate the trend percentage is:

$\mathrm{Trend}\mathrm{percentage}=\frac{\mathrm{Net}\mathrm{sales}\mathrm{revenue}/\mathrm{Net}\mathrm{income}}{\mathrm{Base}\mathrm{year}\mathrm{value}\left(2014\right)}$

Working notes:

The formula used to calculate the profit margin ratio is as follows:

$\mathrm{Profit}\mathrm{margin}\text{\hspace{0.33em}}\mathrm{ratio}=\frac{\mathrm{Net}\mathrm{income}}{\mathrm{Net}\text{\hspace{0.33em}}\mathrm{sales}\mathrm{revenue}}$

There is an increase in the profit margin every year, which is favorable for the company.

The data is given

Notes: Following formula is used to calculate the asset turnover ratio

$\mathrm{Asset}\mathrm{turnover}\mathrm{ratio}=\frac{\mathrm{Net}\mathrm{sales}}{\mathrm{Average}\mathrm{total}\mathrm{asset}}$

d) Rate on return on common stockholder’s equity

Analysis: The profit margin ratio, returns on assets turnover ratio, and return on equity increased over the five years examined. The return on assets and the return on equity are both very respectful. The earnings per share increase over time, so the stock is attractive.

Note: Following formula is used to calculate the gross profit percentage

$\mathrm{Gross}\mathrm{profit}\mathrm{percentage}=\frac{\mathrm{Gross}\mathrm{profit}}{\mathrm{Net}\mathrm{sales}}$

Note: Following formula is used to calculate inventory turnover

$\mathrm{Inventory}\mathrm{turnover}=\frac{\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}}{\mathrm{Average}\mathrm{merchandise}\mathrm{inventory}}$

$\mathrm{Day}\text{'}\mathrm{s}\mathrm{sales}\mathrm{in}\mathrm{inventory}=\frac{365\mathrm{days}}{\mathrm{Inventory}\mathrm{turnover}}$

Analysis: The gross profit percentage is around 24% and has been increasing, which is a positive sign. Inventory turnover has increased over the period examined, which is a positive sign. The company is selling inventory more rapidly.

Note: Formula for acid test ratio

$\mathrm{Acid}-\mathrm{test}\mathrm{ratio}=\frac{\mathrm{Cash}+\mathrm{Cash}\mathrm{equivalent}+\mathrm{Short}-\mathrm{term}\mathrm{investments}+\mathrm{Net}\mathrm{current}\mathrm{receivables}}{\mathrm{Current}\mathrm{liabilities}}$

Note: Following formula is used to calculate the current ratio

$\mathrm{Current}\mathrm{ratio}=\frac{\mathrm{Current}\mathrm{asset}}{\mathrm{Current}\mathrm{liabilities}}$

Note: Following formula used to find debt ratio

$\mathrm{Debt}\mathrm{ratio}=\frac{\mathrm{Total}\text{\hspace{0.33em}}\mathrm{liabilities}}{\mathrm{Total}\mathrm{assets}}$

Note: Following formula is used to calculate the debt to equity ratio

$\mathrm{Debt}\mathrm{to}\mathrm{equity}\mathrm{ratio}=\frac{\mathrm{Total}\mathrm{liabilities}}{\mathrm{Total}\mathrm{equity}}$

Note: Formula used to find times interest earned ratio

$\mathrm{Times}\mathrm{interest}\mathrm{earned}\mathrm{ratio}=\frac{\mathrm{Net}\mathrm{income}+\mathrm{Income}\mathrm{tax}\mathrm{expense}+\mathrm{Interest}\mathrm{expense}}{\mathrm{Interest}\mathrm{expense}}$

Analysis: The current and quick ratios are relatively high. It indicates that the company can pay its liabilities. The company debt to total assets is not extraordinary high, which will facilitate the company making all payments for a debt. The time’s interest earned ratio has increased from 2014 to 2018, which is favourable.

Dividend payout

Note: Formula used to calculate the dividend payout

$\mathrm{Dividend}\mathrm{payout}=\frac{\mathrm{Annual}\mathrm{dividend}\mathrm{per}\mathrm{share}}{\mathrm{Earnings}\mathrm{per}\mathrm{share}}$

Analysis: The dividends per share and earnings per share ratios increase over time. These are probably the two watched financial measures, so the stock is attractive.

The net sales revenue, net income, inventory turnover, EPS, and times-interest-earned trends for ABC have all improved. All other metrics have remained the same or gotten better. The data from ABC shows no apparent issues. Consequently, buy ABC to benefit from rising dividends per share and consistent growth.