Question

Use current public financial statements for Wing Stop to determine the following:

1. What is their sustainable growth rate based on earnings?

2. How has their historical growth compared to sustainable growth and what methods do they appear to have used to reduce the gap between the two?

3. Assuming the company’s growth doubles from recent trends, what challenges will the organization encounter and what is your recommendation to achieve growth?

			Year ended
(in thousands)	December 30, 2017	December 31, 2016	December 26, 2015	December 27, 2014	December 28, 2013
Consolidated Statements of
Income Data:
Revenue:
Royalty revenue and	$                      68,483	$                      57,071	$                      46,688	$                      38,032	$                      30,202
franchise fees
Company-owned restaurant	37,069	34,288	31,281	29,417	28,797
sales
Total revenue	105,552	91,359	77,969	67,449	58,999
Cost and expenses:
Cost of sales	28,745	25,308	22,219	20,473	22,176
Selling, general and	37,151	33,840	33,350	26,006	18,913
administrative
Depreciation and	3,376	3,008	2,682	2,904	3,030
amortization
Total costs and	69,272	62,156	58,251	49,383	44,119
expenses
Operating income	36,280	29,203	19,718	18,066	14,880
Interest expense, net	5,131	4,396	3,477	3,684	2,863
Other expense (income), net	-	254	396	84	(6)
Income before income taxes	31,149	24,553	15,845	14,298	12,023
Income tax expense	3,845	9,119	5,739	5,312	4,493
Net income	$                      27,304	$                      15,434	$                      10,106	$                       8,986	$                       7,530
Consolidated Statement of
Cash Flows Data:
Net cash provided by	$                      27,049	$                      23,329	$                      13,860	$                      15,119	$                      11,481
operating activities
Net cash provided by (used	(6,484)	(2,056)	(1,915)	(363)	(2,144)
in) investing activities
Net cash provided by (used	(20,252)	(28,213)	(10,978)	(8,206)	(10,417)
in) financing activities
Net increase (decrease) in	$                          313	$                      (6,940)	$                          967	$                       6,550	$                      (1,080)
cash and cash equivalents

Answer 1

The data of company is given in part , the complete data is available in public domain ,

Data has been collected from , finance.yahoo.com

Answer a)

sustainable growth rate(SGR) = ROE x (1 - dividend-payout ratio) = ROE * retetion ratio

Profit Margin=24.85%

Operating Margin =35.41%

Revenue Per Share= 3.77 , return on equity = 72.5% (with book value per share data ) and Payout Ratio = 22.58%

SGR = 0.725 *( 1-0.2258) =0.5613 = 56.13 %

This indicate that the company can grow at a rate of 56.13% using its own revenue and remain self-sustaining, but the book value per share i.e Book Value Per Share (mrq) -5.03 is major concern

Answer 2)

Historical growth rate on earning with base year 2013

	30-Dec-17	31-Dec-16	26-Dec-15	27-Dec-14	28-Dec-13
Income	27304	15434	10106	8986	7530
	76.91%	52.72%	12.46%	19.34%

The net Income is growing at very high rate in comparision to SGR ( calculated in a)

The gap can be reduced by  

• reducing the dividend payout to share holders
• using more money from income to core business of company
• Enchance operating revenue
• use less amount external fund

Answer 3)

challenges will entountered by company are

• Impact on sustainability of business model
• Create press on dividend payout to share holders
• Required more fund , will change leverage ratio of firm
• reduce the ROE of company

Recommendation , Company should consolidate its position at this time rather than looking for extraordinary growth as negative book value of share is one of the major area of concern for company.