Running Head: LA-Z-BOY
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La-Z-Boy: An American Dream
Cassie Bezeau
Vickie Delaney
Bethany Hall
Ryan Rafko
David Wester
LDR 640
Finance for Executives
May 29, 2013
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Abstract
La-Z-Boy, Incorporated, head-quartered in Monroe, MI, is well known for its rocker-recliner
chairs and other globally recognized home furnishings. This paper will be analyzing La-Z-Boy’s
financial statements and twelve financial ratios to determine if the firm is creating value and
worth investing in. A peer-group analysis report of findings will be discussed. Finally, an
assessment will be made on what the company could have done differently and
recommendations will be made for the upcoming three years. We will take a look at their
retained earnings and determine if the company is funded well enough to sustain its growth, and
we will attempt to see into the future any plans that La-Z-Boy has to remain competitive in their
industry.
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Introduction
La-Z-Boy has been in Monroe, MI since 1927 when two local men, Edwin Shoemaker
and Edward Knabush decided to build their own furniture company. Fortunately for them, one
was good at marketing, the other at design and engineering (La-Z-Boy, 2013). La-Z-Boy, Inc. is
a furniture manufacturer that has a history of producing quality rocker-recliner chairs. The
business was first known as Floral City Furniture and they started out producing novelty
furniture. The legacy began when they produced a wood slat folding porch chair that followed
the contour of the human body. This piece would eventually be padded and covered with fabric
to introduce the legendary La-Z-Boy recliner. The business has grown to include a wide range of
furniture with several brands at several price levels. La-Z-Boy is known as “An American
Dream” because it all started with the dreams of a farm boy and a woodworker (La-Z-Boy,
2013).
This paper will discuss the financial analysis of this local firm with close attention to
twelve financial ratios. There will also be an assessment of what they could have done
differently, if anything, and recommendations for the next three years. To start, a review of the
last three year’s balance sheets, income statements and cash flow statements will be presented.
We will also include the report on changes in equity. These statements can be found in
Appendix A-D and have been directly copied from the annual report (Investors at La-Z-Boy,
2013).
Analysis of Annual Report
A quick review and assessment of the above statements shows that there has been cash
outflow in the form of investing for the last two years. There was also cash outflow in the form
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of debt repayment. The end of the period showed a positive cash flow of over $150,000,000.
According to an article in the Monroe Evening News, “today, its income is up, so is productivity,
it’s fat with cash, low on debt, it restored its dividend last year and its stock has been trading
lately at more than $18.00 a share” (Slat, 2013).
Included in this report is the “changes in equity.” This can be found in Appendix D and
is represented graphically below. Note the total equity in April 2009 was $303,000, for April
2010 it shows $343,000, for April 2011 $364,000 and for April 2012 it was $447,000. This
shows a definite increase over the three year period.
Equity in 1,000s of $
600000
400000
200000
0
2009
2010
2011
2012
Equity in 1,000s of $
Calculation & Analysis of Financial Ratios and Values
Starting below and on the following pages you will find calculations of twelve financial
ratios including: Current Ratio, Debt Ratio, Liquidity Ratio, Quick Ratio, Average Payment
Period, Inventory Turnover, Average Collection Period, Rate of Return on Net Sales, Price
Earnings, Times Interest Earned, Earnings per Share of Common Stock, Return on Equity and
Return on Assets. The information for each of these was found in the text by Hawawini and
Viallet (2011). These ratios will help to determine the financial position of the company and will
be useful in evaluating whether or not to invest in La-Z-Boy (Victor, 2010). Each ratio is given
an assessment and this will help us to evaluate La-Z-Boy’s current financial condition.
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Financial Ratio
Calculation
Assessment
Current Ratio
3.34
Good
Debt Ratio
29.95%
Good
Liquidity Ratio
-33.43%
Poor
Quick Ratio
1.89%
Good
Average Payment Period
23.94 days
Good
Inventory Turnover
6.07 days
Good
Average Collection Period
49.56 days
Below Average
Return on Net Sales
55.82%
Good
Price Earnings Ratio
10.62
Good
Times Interest Earned
48.31
Good
Return on Equity
19.85%
Good
EPS of Common Stock
$1.70
Average
Return on Assets
12.97%
Good
Return on Sales
7.22%
Good
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Peer-group Analysis
Flexsteel and Ethan Allen are two companies that are comparative to La-Z-Boy.
Flexsteel celebrated its centennial in 1993 and it continues to grow. Ethan Allen began in
Vermont and has been in business since the 1930’s. It is named for a Revolutionary War hero
who was involved in getting the state of Vermont admitted in to the Union as the fourteenth
state. A peer-group analysis will be performed to help assist in the process of determining
whether to invest in La-Z-Boy or not to invest.
Current Ratio
The current ratio is defined by Investopedia (Current Ratio, n.d.) as a liquidity ratio that
measure’s a company’s ability to pay short term debts. Companies often use this ratio to quickly
determine if short term debts can be paid back with short term assets. The higher the current
ratio, the more liquid the company is. The formula for the current ratio is:
Current ratio = current assets/current liabilities.
The three companies that we chose had different current ratios for 2012 as follows:
La-Z-Boy = 3.34
Ethan Allen = 1.87
Flexsteel = 4.26
All three of these companies actually have quite good current ratios. At this point in time, using
only short term assets to pay short term liabilities, each company could pay all short term debts
and still have short term assets left over. If a company averages lower than 1.0, the ability to pay
debts down is not there, and the company could be in danger if debts came due.
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Debt Ratio
Debt ratio is defined by Investopedia (Debt Ratio, n.d.) as a ratio that indicates what
proportion of debt a company has relative to its assets. This ratio helps investors to determine the
company’s level of risk when it comes to assets and liabilities. The formula for the debt ratio is:
Debt ratio = total debt/total assets.
The three companies we compared had the following debt ratios for 2012:
La-Z-Boy = 29.95%
Ethan Allen = 53.42%
Flexsteel = 23.49%
La-Z-Boy and Flexsteel both have averages in the 20%-30% range. These are both good
averages, because they leverage less than one third of their assets when taking on debt. Ethan
Allen leverages more than 50% of their assets when taking on debt. This could be seen as a
problem for potential investors, as Ethan Allen is taking on more debt than they can pay back
with assets.
Liquidity Ratio
The liquidity ratio is a ratio that measures a firm’s liquidity position (Hawawini &Viallet,
2011,p. 624). The formula for the liquidity ratio is:
Liquidity ratio = net long-term financing/working capital requirement.
This ratio measures a company’s long term financing and the ability to pay it back based on the
working capital requirement. The liquidity ratios for 2012 of the three companies we are
comparing are as follows:
La-Z-Boy = (33.43%)
Ethan Allen = 254.43%
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FlexSteel = 34.72%
When comparing these three ratios, Flexsteel and Ethan Allen are in better liquidity positions
over the long term than La-Z-Boy. La-Z-Boy has a negative liquidity ratio, which could spell
trouble for the company with long term financing.
Quick Ratio (Acid Test Ratio)
The quick ratio is defined by Investopedia (Quick Ratio, n.d.) as a ratio that measures a
company’s ability to pay back short-term obligations with the most liquid assets on hand. The
formula for the quick ratio is:
Quick ratio = (current assets – inventory)/current liabilities.
This is often a ratio for measuring liquidity, because inventory is excluded from current assets.
The quick ratios for 2012 of the three companies we are comparing are as follows:
La-Z-Boy = 1.89%
Ethan Allen = 0.63%
Flexsteel = 1.49%
Ethan Allen is in the worst position at this point. They could pay back a little over half of their
debts when inventory is excluded. La-Z-Boy and Flexsteel could both pay back all of their debts
with some assets left over when excluding inventory. However, those numbers could always
stand to be a bit higher in order to maintain a comfortable financial position.
Average Payment Period
The average payment period is a ratio that measures the average number of days it takes
for a company to pay back accounts payable. The formula to calculate this is:
Average payment period = ending accounts payable/average daily purchases.
The average payment period for 2012 of the three companies we are comparing are as follows:
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La-Z-Boy = 23.95 days
Ethan Allen = 28.23 days
Flexsteel 23.66 days
Each of these companies is paying back some kind of debt within thirty days, which is very good
by industry standards. As long as these companies continue to keep their payback periods under
thirty days, they will continue to look good to investors.
Inventory Turnover
Inventory turnover is defined by Investopedia (Inventory Turnover, n.d.) as a ratio that
shows how many times a company’s inventory is sold and replaced over a period of time. It can
be calculated two different ways, but the formula we used was:
Inventory turnover = cost of goods sold/average inventory.
A low turnover ratio can imply low sales, which means there is extra inventory on hand. High
ratios can either mean strong sales or ineffective buying. The ratios for the three companies from
2012 we are comparing are as follows:
La-Z-Boy = 5.97
Ethan Allen = 2.28
Flexsteel = 3.23
As one can see from these ratios, La-Z-Boy appears to be the highest with regard to inventory
turnover, followed by Flexsteel and Ethan Allen. Based on the other financial information, it
would seem as though La-Z-Boy has had strong sales over the past year which has almost
maintained what was turned over in previous years. Ethan Allen and Flexsteel both have lower
turnover rates, which can be problematic if the products just sit in a warehouse over time. Each
company may need to make changes in order to increase sales and get rid of excess inventory.
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Average Collection Period
The average collection period is defined by Investopedia (Average Collection Period,
n.d.) as a ratio that shows the approximate time it takes for a company to collect payments on its
receivables from customers and clients. The formula to calculate this is:
Average collection period = (days * accounts receivable)/credit sales.
The average collection period for 2012 of each of the three companies we are comparing are as
follows:
La-Z-Boy = 49.56 days
Ethan Allen = 7.47 days
Flexsteel = 92.06 days
Ethan Allen has the best average collection period, meaning that they are collecting payment on
their receivables within seven days. That is actually a very quick turnaround, which is good for
that company. La-Z-Boy averages about 50 days, and Flexsteel averages about 92 days.
Flexsteel is at a disadvantage here, and could possibly look at offering a discount for credit paid
within 60 days to lower their average collection period.
Price-To-Earnings Ratio
The price-to-earnings ratio (P/E), which is also known as the firm’s earnings multiple, is
a favorite ratio among financial analysts (Hawawini & Viallet, 2011). The ratio takes the current
share price compared to its earnings per share and is defined as:
Price-to-earnings ratio = Share Price / Earnings per share
In general a high P/E means that investors are anticipating higher growth in the future. This
shows how much investors are willing to pay per dollar of earnings (Price-Earnings Ratio, n.d.).
Our three companies had the following P/E Ratios for 2012:
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La-Z-Boy – 10.616
Ethan Allen – 36.530
Flexsteel – 58.686
The average market P/E is 20-25 times the earnings per share (Price-Earnings Ratio,
n.d.). Based on the numbers above, Ethan Allen and Flexsteel have higher expected rates of
growth in earnings with a lower perceived risk in these earnings. This leads to a higher P/E ratio
than La-Z-Boy which would be considered a lower growth, higher risk company.
Times Interest Earned
The Times-Interest-Earned (TIE) ratio measures how many times a firm’s pre-tax
operating profit covers its interest expenses (Hawawini & Viallet, 2011). This ratio will show
how many times a company can cover its interest charges on a pre-tax basis (Times Interest
Earned, n.d.). TIE is defined as:
Times-interest-earned ratio (TIE) = Earnings before interest and tax (EBIT) / Interest Expenses
For 2012 our companies had the following TIE ratios:
La-Z-Boy – 35.86
Ethan Allen – 5.19
Flexsteel – 0
La-Z-Boy and Ethan Allen have seen increases in their TIE ratios since 2010. This is due to not
only an increase in their EBIT but also due to a decrease in their interest expense. Both
companies are earning more while paying down their debt obligations. La-Z-Boy’s high TIE
ratio is a positive sign of the direction that they have moved in the last few years. Another
interesting point in regards to these ratios is that Flexsteel has a TIE of 0. They have not had debt
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since 2010. Would it be wise for them to incur some debt in order to achieve growth? This is a
question they must ask.
Earnings Per Share of Common Stock
Earnings per share (EPS) are the firm’s earnings after tax divided by its total number of
shares outstanding. EPS is another ratio that is a favorite amongst financial analysts and is a
“normalized” measure of a firm’s earnings after tax (Hawawini & Viallet, 2011). Earnings per
share are defined as:
Earnings per share (EPS) = Earnings after tax (EAT) / Number of shares outstanding
The EPS for our chosen companies in 2012 are as follows:
La-Z-Boy – $1.71
Ethan Allen – $0.00
Flexsteel – $1.93
Earnings per share can be easily manipulated. Investors need to be aware that these earnings
manipulations will affect the quality of the earnings number. Ethan Allen had by far the largest
amount of shares outstanding which led to an EPS of 0. This does not mean that Ethan Allen’s
stock is not valuable but may be a cause for concern for their investors. La-Z-Boy’s 2012 EPS
shows the turn-around they continue to make, especially when you look at their 2010 and 2011
numbers.
Return on Equity
Return on equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested (Return on Equity, n.d.). The
earnings after tax represent the shareholders’ claim on the firm’s profit and the return on their
equity investment is found with the following ratio (Hawawini & Viallet, 2011) :
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Return on Equity (ROE) = Earnings after Tax (EAT) / Owner’s Equity
A higher growth company would expect to see a higher ROE and looking at the past 3-5 years
can give you an idea of a company’s historical growth. For 2012 our chosen companies had the
following ROE’s:
La-Z-Boy - 19.85%
Ethan Allen – 18.42%
Flexsteel – 9.37%
Many money managers rely on ROE to gauge growth potential and 15% ROE is typically the
standard that determines if a firm is worthy of investment (Return on Equity, n.d.). Based on this
standard and the growth in ROE over the past 3 years for La-Z-Boy this is another ratio that
favors La-Z-Boy as a potential investment.
Return on Assets
Return on Assets is a measure of profitability that uses the following equation (Hawawini
& Viallet, 2011):
Return on Assets (ROA) = Earnings after Tax / Total Assets
ROA gives an idea as to how efficient management is at using its assets to generate earnings.
When using ROA as a comparative measure, it is best to compare it against a company's
previous ROA numbers or the ROA of a similar company (Return on Assets, n.d.). Taking this
into consideration, our companies had the following ROA’s in 2012:
La-Z-Boy – 12.97%
Ethan Allen – 7.19%
Flexsteel – 6.22%
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As you can see La-Z-Boy did a better job of turning their investments into profit compared to
Ethan Allen and Flexsteel. La-Z-Boy’s managers did a better job of generating profit from the
firm’s assets than the other two firms.
Return on Sales
Return on Sales is another measure of profitability and is a ratio that is widely used to
evaluate a company's operational efficiency (Return on Sales, n.d.). ROS is also known as a
firm's net profit margin and can be found using the following ratio:
Return on Sales = Earnings after Tax (EAT) / Sales
This ratio is helpful to management since it provides insight into how much profit is being
produced per dollar of sales. As with some of the other ratios we have used it is best to look at
how a company compares to others in its industry. For 2012 our companies had the following
ROS:
La-Z-Boy – 7.22%
Ethan Allen – 5.50%
Flexsteel – 3.71%
Once again La-Z-Boy has another profitability measure that outperforms both Ethan Allen and
Flexsteel. The increasing ROS that La-Z-Boy has achieved shows that they are becoming more
efficient and look to be a worthy investment.
Worthwhile Investment
The following will sum up the above findings. The current and debt ratios are good.
Liquidity is not as good as it could be due to the amount of long term financing. The quick ratio
is the best of the three firms, but could be higher. The average payment period is less than 30
days, but all three companies are about the same. The La-Z-Boy inventory turnover period is
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better than Flexsteel and Ethan Allen. The average collection period is about 50 days, so it is
below 60 which is not bad. It falls between the other two companies with Ethan Allen having an
average of about seven days which is really quick. The price to earnings ratio is lowest but is
positive. Times interest earned and earnings per share have increased over the last three years
and this is a definite plus. Return on equity shows high growth potential and return on assets is
good, too. This makes investors happy. Return on sales shows they are more efficient than the
other two companies and that indicates a worthwhile investment.
Conclusion
Throughout this paper we have shown that La-Z-Boy has been improving over the last
three years with increases in equity, sales, times interest earning, return on equity and return on
assets. Though the price to earnings and liquidity ratios could be better, the overall picture is one
of continued growth. They have been a solid company for a long time and they have proven that
they have what it takes to sustain themselves during economic downturns. We can see with the
three year look back that they are on the upswing and have already regained their stability. Also,
with the information we learned about the new headquarters they're building, and their plans to
open several new gallery stores, it is safe to say that they are going to be experiencing continuing
growth. La-Z-Boy is a company of value creation and is a worthwhile investment.
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Appendix A
La-Z-Boy’s Consolidated Statement of Income
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Appendix B
La-Z-Boy’s Balance Sheet
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Appendix C
La-Z-Boy’s Statement of Cash Flows
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Appendix D
La-Z-Boy’s Statement of Equity
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References
Average Collection Period. (n.d.). Investopedia online dictionary. Retrieved from:
http://www.investopedia.com/terms/a/average_collection_period.asp
Current Ratio. (n.d). Investopedia online dictionary. Retrieved from:
http://www.investopedia.com/terms/c/currentratio.asp
Debt Ratio. (n.d.). Investopedia online dictionary. Retrieved from:
http://www.investopedia.com/terms/d/debtratio.asp
Hawawini, G. & Viallet, C. (2011). Finance for Executives: Managing for Value Creation.
Mason, OH: South-Western Cengage Learning.
Inventory Turnover (n.d.). Investopedia online dictionary. Retrieved from:
http://www.investopedia.com/terms/i/inventoryturnover.asp
Investors at La-Z-Boy. (2013). Retrieved from:
http://investors.la-z-boy.com/phoenix.zhtml?c=92596&p=irol-IRHome
La-Z-Boy. (2013). Retrieved from:
http://www.la-z-boy.com/About/History/?WT.ac=sidemenu
Price-Earnings Ratio. (n.d.). In Investopedia online dictionary. Retrieved from
http://www.investopedia.com/terms/p/price-earningsratio.asp
Quick Ratio. (n.d.). Investopedia online dictionary. Retrieved from:
http://www.investopedia.com/terms/q/quickratio.asp
Return on Assets. (n.d.). In Investopedia online dictionary. Retrieved from
http://www.investopedia.com/terms/r/returnonassets.asp
Return on Equity. (n.d.). In Investopedia online dictionary. Retrieved from
http://www.investopedia.com/terms/r/returnonequity.asp
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References
Return on Sales. (n.d.). In Investopedia online dictionary. Retrieved from
http://www.investopedia.com/terms/r/ros.asp
Slat, C. (2013). La-Z-Boy springing back. The Monroe Evening News. May 13, 2013, p. 1D.
Times Interest Earned. (n.d.). In Investopedia online dictionary. Retrieved from
http://www.investopedia.com/terms/t/tie.asp
Victor, J. (2010). Introduction to financial ratios. Retrieved from:
http://www.sharemarketschool.com/introduction-to-financial-ratios/