In this second trend analysis we looked at the Lamar Swimwear Company. In a few of the ratio areas Lamar is not up to industry standards but are not that far off pace. In other areas they seem to fail miserably when their ratios are compared to the standard of the industry. Trend analysis looks at the performance of the company in a number of ways and compares them to the rest of the industry. Though not in many cases was Lamar able to meet the industry standards even though they saw a minimal increase in sales from 2001 to 2002 and from 2002 to 2003.
The profitability ratios for Lamar were not far from industry standards. Their profit margin came in at 6.4% versus the standard of 7.9%. The profitability ratios allow a firm to measure their return on sales, assets and invested capital. When an organization runs into problems with these ratios it can sometimes be explained by how well they utilize their current resources. The profit margin shows what a firm receives on the return of the sales dollar (6.4%). Their return on assets also is lower than the average at 5.7% versus the standard of 8.9%. To increase this number they must find a way to turnover their assets quicker.
The second group of ratios we look are how well a company utilizes its assets. Lamar does not collect its receivables as fast as the rest of the industry. Their receivable turnover is 5.2% compared to the 9.3% of the industry and it takes them 31 more days to collect their accounts receivable. These ratios simply show how long a customer’s account stays on the book. Lamar is able to generate more sales per dollar of inventory because the inventory turnover is 6.5% versus the average of 5.1%.
Liquidity ratios are the third group of ratios that a firm looks at during a trend analysis. When comparing these ratios a firm may look at their ability to pay off short-term obligations as they happen. Lamar’s current ratio is 1.3% and that means that they can only afford to pay any lease obligations one time around. The average is 2.4% so it is saying that most firms in the industry can pay off their obligations two times around with out generating new cash flows.
Finally the fourth group of ratios is the dreaded debt analysis. These ratios look at the overall debt of the company and are evaluated on its assets and profit. Lamar’s debt to total assets is 59.2%, which is increasingly higher than the industry norm of 44.1%. The times interest earned ratio isn’t particularly superior compared to industry either. This ratio indicates the number of times that income and earnings before taxes can cover the firms interest obligations. Lamar shows an unpleasant 3.1% versus the standard of 6.6%.
After conducting my trend analysis of Lamar Swimwear it seems they are not in a strong financial position. Their sales are increasing but they need to do a much better job of utilizing their assets more rapidly. My opinion to Mr. Atkins would be to hold off on any investment with Lamar until they get caught up with the industry standards and reduce their debt to at least under 50%.