Finance and Accounting: Columbia Sportswear Stock Analysis - Case Study Example

Finance and Accounting: Columbia Sportswear Stock Analysis Stock analysis aims at identifying information on a stock and determining if the stock is able if purchased and the future business that it has. The study also aims at identifying the risks that the buyer stands if they purchased this stock and the effects that the stock would undergo in the future to determine the profitability. Stock analysis also helps identify the growth rate of a stock in quest to understand the profitability of the stock in the future. The details of the report below indicate on the stock analysis of Columbia Sportswear represented on the stock exchange market as COLM. Company Description and History Columbia Sportswear Company manufactures outwear including those meant for sports activities. The company is based in the United States and was started by Paul Lamfrom in 1938 who is the father of the Gert Boyle the current chairperson. Headquartered in Cedar Mill Oregon, Columbia Sportswear produces footwear, camping equipment, headgear, outerwear and skiwear having proved the highest seller of skiwear in America in the year 2001. The company has developed an international reputation through which it has managed to conduct their sales on an international platform developing their products more on quality standards, performance pact high functionality and giving value for money to the customers. The company deals with the designing of the products, their marketing and the distribution to the different markets that they create. The company has existed since 1938 amassing experience creating wisdom in business running. With more than 70 years in business, the company is in position to make viable decisions on product development with a mission to design and ensure delivery of authentic outdoor products of high value for all active consumers with no regard to ages. The company prides in understanding the needs of the customer well making products that keep customers comfortable and achieve protection from the different environmental effects or weather conditions. They provide products that can lead the market and help the customers achieve their market needs. The business started as a family business that developed slowly to reach the global market after the purchase of a small company Columbia Hat Company turning into today’s huge company Columbia Sportswear (Columbia History). Ratios For proper ratios analysis, the recent most years was considered that is 2013 whose full year results are available. a) Current Ratio Current ratio is equal to current assets divided by current liabilities. It reflects how many times the current assets can cover the current liabilities. Current ratio= current assets/current liabilities Current ratio= 1250472/301254 = 4.15. This means that the current assets are in position to cover all the current liabilities of the company 4.15 times which means the company has a reasonable working capital that can take care of the business needs of the company. Working capital is current assets minus current liabilities which results into (working capital = current assets – current liabilities = 1250472-301254= 949218) b) Quick Ratio (Current assets – inventory)/current liabilities = (1250472-329228)/301254 = 921244/301254 = 3.06 c) Total Debt Ratio Total debt ratio helps determine how much debt is placed in the assets and in each asset. It is determined by the formula Total Debt/Total Assets = the company has no debts for the year 2013. Considering this, the total debt ratio is zero. This means that the assets of the company are much financed by equity and the other short-term liabilities that include payables. d) Equity Multiplier Ratio This ratio considers the ratio of the total assets that the company has over the total shareholders’ equity. The equation is as below: Total assets/total Equity = where total assets = current assets + noncurrent assets = 1605588 Equity Multiplier Ratio = 1605588/1245418 = 1.29 e) Inventory Turnover Inventory turnover aims at determining the number of times the inventory changes in relation to sales and purchases. The identification of this follows the formula COGS/inventory Inventory turnover = 941341/329228 = 2.86 The results indicate that the inventory is 2.86 times more per COGS. COGS relate to the goods that have been sold and the inventory relates to the balance of the stock at the close of the financial year. f) Total Asset Turnover Total Asset Turnover relates to the number of times that the assets of the company relate to the sales in relation to how the assets influence the sales. Determining Total Asset Turnover, the formula Sales/total assets comes to consideration. Total Asset Turnover =Sales/Total Assets = 1684996/1605588 =1.05 The results indicate that the total assets of the company relate with 1.05 of the sales. g) Profit Margin The profit margin relates to the percentage of profit that the company earns on their sales. This is calculated as Net income/sales. Profit Margin= Net income/Sales = 94341/1684996 = 0.06 is the portion of profit on the sales which in percentage terms relates to 6% as the profit margin that the company engages on their products. h) Return on Assets Return on Assets determines the level of returns that the assets of the company generate in relation to the actual profits which is calculated as Net Income divide with Total Assets. Return on Assets = Net income/total assets = 94341/1605588 =0.06 which in percentage terms also represents 6%. i) Return on Equity ROE determines the much that the shareholder’s return on each amount of sales. The contribution of the shareholder’s equity in producing sales, which is determined by Net Sales/Shareholder’s Equity. ROE= Net sales/Shareholder’s Equity = 1684996/1245418 = 1.35 this translates to 1.35 of sales for each investment of the shareholders in equity terms. j) Market to Book Value: Market to book ratio relates to the market price per share in the current market in relation to the book value of each share. The formula for determining this is Market price per share/book value per share. Market to book value = Market Price per share/book value per share = 39.13/39.24 = 1.00 k) Price to Earnings Price to earnings relates to the price of the stock in relation to the earnings of the shares. Price to Earnings is obtained through the formula Market Price per share/EPS. Earnings Per Share= Net Income/ Number of Common Shares Outstanding = 94341/52325 = 1.80 Therefore Price to Earnings = 39.13/1.80 = 21.74 Determining these values exposes the company’s ability to remain profitable for a longer period and how much of the company’s resources goes into paying debts. It determines the asset level of the business and the relationship that the assets have with the other balance sheet aspects and income statement aspects. Through these analyses, a decision in relation to the purchase or sale of shares in the company is reachable leading to prudent decisions with regard to the company stocks. l) Required Return On Stock: Using Stock Market Line to calculate the return on stock Treasury rate is 2.35 as per the treasury records (Resource center). Average market return for expected return on market is 1.00 Current beta is 1.07 Following the above using the formula required return = risk free rate of a Treasury bill + risk premium (Capital Asset Pricing Model). Required return on stock = 2.35+[1.07*(2.35-1.00)] = 2.35+(1.07*1.35) = 2.35+1.44 = 3.79 Using the constant growth formula to calculate the required return on the stock, the following formula is applicable (Business finance online). Po= Do(1+g)/r-g=D1/(r-g) where, Po is the stock price at time zero, Do refers to the current dividends, D1 the next dividend at time 1, g is the growth rate in dividends, r is the required return on the stocks. Basing on the equation the required return on stock is as below: 39.13= 0.60(1+1.79)/r-1.79 = 39.13(r-1.79) = 0.60(1+1.79) = 39.13r-70.04= 0.60+1.074 =39.13r = 1.674+70.04 = 39.13r/39.13 = 71.714/39.13 r = 1.83 Therefore using the constant growth formula, the required rate of return on the stock is 1.83. Based on these, the required return on stock for the formula using the Stock Market Line is more. Determining this value provides confidence to the shareholders in relation to their investment decisions ensuring that the stock remains profitable for a given duration. This value aids in determining the decisions of the shareholders with relation to relinquishing the stock or maintaining it based on the results that indicate productivity for the next period. The calculation does not consider the market changes that could have an impact on the stock. Factors like inflation are not considered in this development and may affect the stock severely. SWOT Analysis on the Company Columbia Sportswear SWOT analysis helps relate the different strengths, weaknesses that a company holds internally, opportunities and threats that the company stands to face externally. The internal aspects rotate around the strengths of the company and their weaknesses that relate to aspects that the company holds internally that threaten its success. The external aspects rotate around the opportunities and threats that the company faces in the market with regard to future business (Ferrell & Hartline). a) Strengths Human resource The strong human resource formation and the motivational aspects relating to the management strategies is an advantage the company prides in. through this, the company stands chances of attracting and maintaining a good human resource team that will help it manage to scale through the market and satisfy the needs of the market. The strong human resource team makes viable decisions for the company making it earn more in returns for the shareholders hence encouraging investment from the shareholders. The human resource team also ensures customer satisfaction and the quality of products is maintained making the returns of the company grow at a reasonable pace. Ample capital for investment The company has enough capital to run the affairs of the company making it run its operations smoothly enabling the growth of revenue realized each financial year. For any company to have a successful business life, capital is key. Inadequate capital leads to limited operations and strained business aspects making limited returns. For Columbia Sportswear Company, the capital has managed to help them develop returns ample to provide dividends to the shareholders. The company also is in position to apply for debt into the business if need arises based on the debt free income generated. This provides a chance for expansion that the company may choose to explore. Good working capital The company has a good working capital with a working capital of 949218 and a current ratio of 4.15, the company is in position to provide a return to the shareholders contribution even after liquidation based on the current assets alone. Limited debts, which translates to more returns on the shareholder’s equity, and into fewer liabilities in case of liquidation of the company. The company operates much on equity and hence the appealing sense to shareholders. Other investments engaged in translate to 91755 in short term investments that could also translate to returns for the company. Dividends payouts The dividends paid out encourage the shareholders and the purchase of the shares by the prospective shareholders. Each investor aims at investing their money in a company that is in position to generate revenue and pay dividends. The ability of Columbia Sportswear to do this encourages investor activities. b) Weaknesses One of the major weaknesses of the company at this level is the limited diversity in production of products. The limited marketing efforts and few markets concurred weaken it in relation to its competitors like Addidas, Puma, Nike and others. c) Opportunities The company can utilize its good reputation and capture more markets to level off competition and manage to make more revenue. Including marketing efforts using personalities that are more prominent will encourage customer confidence in their products hence making the company succeed in the market. Increasing market for the products through the involvement of other markets would increase the returns that the company has to make. An increased market will mean increased revenue, increased profits and hence increased dividends that result into more investor confidence. d) Threats Increased competition will limit the sales of the company and the price wars could result into loss of profits, which will lead to low, or no dividends that could discourage shareholders from investing into the company. The increased competition will also affect the market levels in relation to demand that could lead to flooding of goods. At this, point the company needs to have a good customer loyalty level that will help sustain the company’s returns. Tougher market conditions including inflation will affect the business. At tough times, companies make tough decisions including laying off employees that would have good staff of the company let go making the company vulnerable. Dilution of returns by excessive ownership through over distribution of shares Determining the Value of the Stock In Relation To the Current Market Determining this helps identify if the stock is undervalued, overvalued or accurately priced. Considering this provides the investors with a more detailed understanding of the stock and its relation in the market. For an item that is undervalued, the price of the stock is above the SML and therefore the purchase decision should support buying it. On the other hand, if a price of a stock is below the SML then it is overvalued and it should therefore be sold. This provides a picture of the asset in relation to buying and selling. Considering the price obtained through the calculation of the required return rate, one considers the rate in relation to the prices for example the rate obtained indicates that the stock is undervalued and therefore buying it would be a good decision that could provide returns for any investor. Considering the rate of growth of the company and the required return on the stock, this stock is good maintained for a longer period until the stock becomes overvalued. Conclusion In conclusion, the stock is good for buying. Following on the analysis conducted on it and the results of the stock in relation to the different ratios analysis conducted, the stock has a strong market force that could ensure that it remains profitable for a long period. Buying this stock would ensure dividends for each financial year and so this stock is good for buying to maintain for a given period. The required return on the stock too shows that for a given period of years the stock will still provide returns to the shareholders. This positive aspect will provide the stock with market competitiveness. The analysis provide here provides a stable interpretation of the stock and following the ratios and the relationship the y portray on the stock, the conclusion that the stock is valuable and good for purchase is a valid argument. The information provided indicates the strength of the stock in relation to the market and the competition expected from the other companies in the industry that trade the same goods. The market capitalization of the stock that stands at 2.77 billion indicates a viable stock. Works Cited Business Finance Online. Constant Growth Stock Valuation. Retrieved from http://www.zenwealth.com/businessfinanceonline/SV/CGStock.html, n.d Capital Asset Pricing Model. Capital Asset Pricing Model. Retrieved from http://thismatter.com/money/investments/capital-asset-pricing-model.htm, n.d Columbia History. Retrieved from http://www.columbia.com/About-Us_History.html, n.d Ferrell, O.C. & Hartline, Michael. Marketing Strategy. Stamford, Connecticut: Cengage learning: 2012. Print Resource center. Daily Treasury Yield Curve Rates. Retrieved from http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield, n.d Read More