AI Thomas has recently been approached by his brother-in-law, Robert Watson, with a proposal to buy a 20 percent interest in Watson Leisure Time Sporting Goods. The firm manufactures golf clubs, baseball bats, basketball goals, and other similar items.
Mr. Watson is quick to point out the increase in sales that has occurred over the past three years as indicated in the following income statement. The annual growth rate is 20 percent. A balance sheet for a similar time period and selected industry ratios are also presented. Note the industry growth rate in sales is only 10 percent per year. There was a steady real growth of 2 to 3 percent in gross domestic product during the period under study. The rate of inflation was in the 3 to 4 percent range.
The stock in the corporation has become available due to the ill health of a current shareholder, who needs cash. The issue here is not to determine the exact price for the stock but rather to determine whether Watson Leisure Time Sporting Goods represents an attractive investment situation. Although Mr. Thomas has a primary interest in the profitability ratios, he will take a close look at all the ratios. He has no fast and firm rules about required return on investment; rather, he wishes to analyze the overall condition of the firm. The firm does not currently pay a cash dividend, and return to the investor must come from selling the stock in the future.
After doing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations can you offer to Mr. Thomas?

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WATSON LEISURE TIME SPORTING GOODS Income Statements Year ended 2015 2014 2013 Sales (all on credit) $2,160,000 $1,800,000 $1,500,000 Cost of goods sold. 1,300,000 1,120,000 950,000 Gross profit..... 860,000 680,000 550,000 Selling and administrative expense*.. Operating profit (EBIT) ... Interest expense.. 590,000 490,000 380,000 270,000 190,000 170,000 85,000 40,000 30,000 Net income before taxes.. 185,000 150,000 140,000 Taxes..... 64,850 48,720 46,120 Net income. . $ 120,150 $ 101,280 $ 93,880 Shares..... 46,000 40,000 40,000 Earnings per share. $2.61 $2.53 $2.35 WATSON LEISURE TIME SPORTING GOODS Balance Sheet Dec. 31, 2015 2014 2013 Assets Cash ... $ 20,000 $ 30,000 $ 20,000 Marketable securities.. 50,000 35,000 30,000 Accounts receivable. 330,000 230,000 150,000 Inventory... 325,000 285,000 250,000 Total current assets... 725,000 580,000 450,000 Net plant and equipment. 720,000 $1,894,000 $1,300,000 $1,000,000 1,169,000 550,000 Total assets...... Liabilities and Shareholders' Equity Accounts payable...... $ 200,000 $ 225,000 $ 100,000 Accrued expenses 300,000 100,000 100,000 Total current liabilities. 500,000 325,000 200,000 Long-term liabilities. 550,740 331,120 250,000 Total liabilities... 1,050,740 656,120 450,000 Common stock 540,000 450,000 450,000 Retained earnings... Total shareholders' equity.. 303,260 843,260 $1,894,000 $1,300,000 $1,000,000 193,880 100,000 643,880 550,000 Total liabilities and shareholders' equity....