Table of Contents
Executive Summary 2
Profitability Ratios 3
Profit Margin 3
Return on Assets 3
Return on Equity 3
Asset Utilization Ratios 3
Receivables Turnover 3
Average Collection Period 3
Inventory Turnover 3
Capital Asset Turnover 3
Total Asset Turnover 3
Liquidity Ratios 4
Current Ratio 4
Quick Ratio 4
Debt Utilization Ratios 4
Debt to Total Assets 4
Times Interest Earned 4
Conclusion and Recommendations 5
Appendix I: Ratios Analysis Results 6
The purpose of the report is to provide Wand Inc. a recommendation from the following choices: -
1. Grant short-term credit to Lululemon Athletica Inc.
2. Grant ...view middle of the document...
They measure how efficient managers temporarily convert assets such as receivables into cash. They show a relationship between the income statement and the balance sheet. These ratios assures Wand that a short-term credit is most ideal especially as its receivables turnover has been falling.
Lululemon’s Liquidity Ratios have steadily grown over three years. Most importantly, their return is almost 3 times better in the year 2014, it is also better compared to industry. Liquidity ratios measure solvency or the company’s ability to convert its assets to enable it to meet short term (one year) obligations as they fall due. As a result, creditors risk is minimized. Lululemon are well above their peer and industry which indicates that they are extremely efficient in collecting their receivables and they do not carry a lot of inventory.
Debt Utilization Ratios – This is a long term credit which measures how the company is using debt to finance its operations. Lululemon’s debt utilization is well below the industry. Hence, granting long-term credit is not advisable because there is a possibility that Lululemon is being too safe and not taking on enough risk in form of long-term debt equity that could significantly grow the company.
There is not enough information to recommend buying or not buying Nike shares. While they paid a dividend in 2013 which is a positive sign, there is no further historical dividend data. Although Lululemon has not paid a dividend in three years, their retained earnings have grown from $373,719 to $923,822 (147%). Therefore, it appears Lulu has just been incorporated. It currently has 400,000 authorized shares of which 227,713 are issued and outstanding. There is therefore 172,287 shares available for Wand to buy.
ANALYSIS OF LULULEMON ATHLETICA INC. FINANCIALS
1. Profit Margin (PM)
The PM is the company’s bottom line. It is a crucial measure because investors use it to trend the company’s ability to generate enough income and control costs and expenses that determines a net income. Lululemon’s PM of 18% means that for every dollar of sales made, 18% is going to the bottom line. The trend shows a 1.3% rise in 2013 but subsequently dropped almost 2% in 2014. However, the Income Statement shows that the cost of goods sold and the operating costs have while the PM has declined making it unfavourable. The Sales are growing rapidly while the profit is dropping indicating efficiency problems in controlling costs as well as setting the right acceptable price to customers.
2. Return on assets (ROA)
The ROA specifically measures how managers efficiently use assets to generate a profit. The higher the return, the more efficient management is in utilizing assets. Compared to Nike a business of similar product Lulu's ROA is considerably higher. In 2014 Lulu's ROA was recorded at 22.4% an all-time low for the past three years. This could potentially mean Lulu is not benefiting from some...