About the paper
The paper is commissioned to conduct financial analysis for West Marine Incorporation. As part of this analysis, we will be a performing a comprehensive analysis of the raw financial figures of the company and will use the tool of common-size analysis and ratio analysis to unearth the trend that led to led to changes in the financial position of the company for the past three years. However, before introducing the analysis section, we will be introducing some of the facts related to the company and some statistics related to the stock price movement. The report will finally be culminated with an overall conclusion assessing the financial standing of the company, i.e. whether it is forecasted to have a strong financial standing or is likely to go bankrupt using the widely accepted measure of Altman Z-Score.
About the company
Founded in the year 1968, West Marine Inc. is a California based entity that operates in the specialty retail industry and offers boating supplies, apparel, footwear and other water-life related products. In addition to providing core boating related products, the company also offers products related to fishing and water sports through its retail stores and online platform. As of April, 2015, the company operated 270 stores around the United States and Canada.
-Customers
West Marine Inc. serves a wide array of customers ranging from professional clients such as businesses involved in boat related activities which includes marine operations, boat building, yacht chartering and boat sales. The company also serves many international customers and government.
-Employees
-Stock price and related statistics
i) Year-end price trend
ii) Average Volume(3 months): 38,221
iii)Descriptive Statistics
Mean Return(3-year): -0.50%
Median Return( 3-year): -2.11%
Standard Deviation: 9.92%
Stock price movement
We analyzed the stock price movement of the company for the period of past three years from 1st Jan, 2013- 31st Dec 2015 and found that over the period, the stock has yielded a negative return of -29.95%. As we may see from the scatter plot below, the graph confirms the pessimistic outlook for the company.
It is considerable that even the company provided a comparison graph for the past five years against the NASDAQ composite index and peer companies in the Morningstar Industry group called Specialty Retail Index.
As we may notice from the above graph, West Marine Stock has failed to offer an attractive return in comparison to the industry benchmark and peer companies. For instance, while an investment of $100 in 2010 in West Marine’s stock would have been compounded to $155.09 by the end of 2015, on the other hand, similar investment in NASDAQ Composite Index and Specialty Retail group would have compounded to $220.62 and $227.20, respectively.
Ratio Analysis
While the previous two sections provided us with an oversight relating to the company profile and the trend in the stock price over the period of past three years, this section will help us in gaining a deep insight relating to trends that caused changes in the financial standing of the company. In order to provide a comprehensive outlook to our readers, we have divided this section of the report into multiple parts with each part explaining a particular ratio category:
-Liquidity Analysis
These ratios assist the analysts in evaluating the working capital position of the company and whether it is capable to honor its short-term obligations. For the similar purpose, we hereby quantify and discuss the liquidity ratios of West Marine Inc:
i)Current Ratio: Current Assets/ Current Liabilities
ii) Quick Ratio: Cash + Receivables/Current Liabilities
As noted from the above tables, the liquidity standing of the company took a downward trend during 2014 and has been negatively affected since 2012. Beginning with the current ratio, the multiple which took a marginal leap during 2013 from 4.56 to 4.78, plummeted to 4.03 amidst higher proportional increase in the current liabilities by 25.42% relative to the current asset base which increase by 5.67% during the year.
We also gauged the liquidity position of the company using the stringent measure of quick ratio. Our calculation for quick ratio revealed that relative to current liabilities, cash and receivable position of the company has been deteriorating for the past three years thus resulting in negative trend in the quick ratio multiple. Important to note, since 2012, the cash position of the company has decreased by 19.29%, while the current liabilities has increased by 19.35%.
Our analysis confirms that liquidity roots of the company are getting weak year-by-year and amidst poor working capital position, it is also losing the ability to honor its short-term obligations.
-Leverage Analysis
Leverage ratios allow analysts to gain an insight into the composition of the capital structure of the company and infer the solvency standing of the company using ratio multiples. Below we discuss leverage ratios of the company and the trend that fueled the changes in the leverage ratios:
i) Debt-Equity Ratio: (Short-term debt+ long-term debt)/ Total Equity
ii) Interest Coverage Ratio: Operating Income/ Interest Expense
While information relating to the debt position of the company was not available explicitly on the balance sheet, Note 4 to the financial statements disclosed the sources of short-term and long-term debt sources and the related amount outstanding. Referring to note 4 we found that the company relies on revolving credit facility and commercial stand-by letter of credit as sources of debt financing and by the end of 2012, 2013 and 2014, it had only utilized commercial stand-by letter of credit for meeting debt requirements.
Further, our calculation for leverage ratio revealed that while during 2014 the company opted for capital structure with low debt composition, the trend in the interest coverage confirmed that the company do not have the capacity to take on additional debt. It is considerable that during 2014, with significant decline in the operating profit that went down by 75% and with constant interest expense, the interest coverage ratio took a meteoritic fall from 36.27 to 10.36, signaling towards the poor solvency position of the company.
-Profitability Analysis
Profitability ratios are the most sought after financial ratios amongst the investors and the analyst community as it directly signals towards the profits being made by the entity using the available resources.
While the accounting literature is filled with numerous profitability ratios, for this paper, however, we have used three (3) profitability multiples and the same are discussed below:
i) Return on Equity(ROE): Net Income/Total Equity
ROE multiple is one of the most sought after ratios by the equity investors as this ratio multiple indicates the return generated by the company using the equity capital raised by it. The above table clearly indicates towards the poor financial run of the company and its failure to generate sustainable returns for the shareholders. As noted,over the period of three years,the ROE of the company has decreased significantly from 5.29% to 0.67%. Surely this trend will distort investor’s confidence and the entity is likely to see high stock sales volume.
ii) Return on Assets: Net Income/ Total Assets
This profitability ratio informs the analysts and other interested parties about the ability of the company to use its asset base and generate profitable figures from it. Just like other ratio that we have discussed so far, even this ratio multiple confirms that West Marine Inc. is going through a bizarre financial situation and is unable to generate favorable returns using the asset base also. As noted from the above table, over the period of past three years, the ROA multiple of the company has plummeted from 4.16% to merely 0.50%. Important to note, while the company is consistently increasing the asset base every year, its inability to improve the bottom line profits is hurting the overall financial standing.
iii) Earnings per share: (Net Income- Preferred Dividend) /Weighted average common share outstanding
This ratio multiple provides information over the amount of net income attributed to a single common share outstanding in the company. As noted from the above table, owing to the consistent fall in the bottom line profits , the EPS of the company has fallen significantly and thus validates the poor performance as against the sustainable EPS level of $0.63/share in 2012, the multiple now stands at merely $0.08/share.
Overall, the profitability analysis signals towards an alarming situation for West Mining Inc. as amidst massive turnaround in the net profit figures and inability to rejuvenate the business architecture, the company is likely to face a wave of distrust from the shareholders.
-Efficiency Analysis
Inventory Turnover Ratio: Cost of Goods Sold/ Inventory
This asset management ratio indicates how quickly an entity is able to sell its inventory. Referring to the above table, we may notice that the ratio multiple has been decreasing consistently over the period of three years. This confirms that it now takes more time for the company to sell its inventory and hence capital is tied up in inventory for a longer period of time. This trend also imposes a negative effect the liquidity standing of the company.
Predicting Bankruptcy: Altman Z-Score
In order to ascertain the financial standing of the company and its probability of going bankrupt, we have decided to use Altman Z-Score. Important to note, this financial metric is widely accepted in the financial industry for gauging the credit-strength test of a publicly traded company and its likelihood of going bankrupt. The output of this multiple is based on five financial ratios and establish the following relation:
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Here:
‘’A = Working Capital/Total AssetsB = Retained Earnings/Total AssetsC = Earnings Before Interest & Tax/Total AssetsD = Market Value of Equity/Total LiabilitiesE = Sales/Total Assets’’
A score below 1.8 indicates that the company is financially crippled and is probably heading towards bankruptcy, while a score above 3.0 confirms strong financial standing and least probability of bankruptcy.
Below we have calculated the Z-score for west Marine Inc. for past three years:
Referring to the above table, we can see that while the stock price trends and ratio analysis revealed a negative outcome for the company, Z-Score report confirms stable overall financial strength. The Z-score calculations revealed that although the credit strength is declining every year with consistent decline in the score, however, the company is not facing the danger of bankruptcy as even during the time of poor financial run during 2014, Z-score is still the safe zone of above 3.0.
Conclusion
At the end of this report, we conclude that amidst constant revenue figures and uncontrolled operating expenses, West Marine Inc. is facing tough financial time in the form of decreasing bottom line profits and negative sentiments for the stock by the investors. However, the outcome of Altman Z-Score confirmed that even though the financial strength is being affected every year, but the company is not even close to bankruptcy level and will continue to operate.
Works cited
Finance.yahoo.com,. "WMAR Profile | West Marine, Inc. Stock - Yahoo! Finance". N.p., 2016. Web. 29 Jan. 2016.
Investopedia,. "Altman Z-Score Definition | Investopedia". N.p., 2003. Web. 29 Jan. 2016.
West Marine Inc.,. Annual Report. West Marine Inc., 2015. Print.
