While you are an analyst at Investment Counselors, Inc., the senior portfolio manager at your firm makes a decision to increase sporting goods apparel manufacturer stocks in the firm’s managed funds. You are assigned to recommend one stock as an initial investment to meet this long run objective. You diligently analyze and evaluate all communication stocks and narrow the decision to two athletic shoe manufacturing companies: Bata and Lotto. The senior portfolio manager requests that you analyze the internal sources of earnings growth for each Company. You decide to disaggregate and evaluate the internal growth components for each company to explain any trends in your variable of interest, return on common equity. You identify the key components driving ROCE and develop the following spread sheet:

Bata

	2020	2019	2018	2017	2016
Return on Equity (ROCE)	21.60%	12.10%	18.10%	17.80%	18.50%
Return on net operating assets (RNOA)	19.20%	15.50%	14.20%	13.40%	13.30%
Financial leverage (LEV)	14.40%	24.80%	32.80%	41.30%	46.0%
Spread	16.60%	-13.90%	11.90%	10.60%	11.30%
Sales growth	14.55%	8.13%	4.26%	5.49%	2.49%
Gross profit margin	42.90%	41.00%	39.30%	39.00%	39.90%
SG & A expenses/sales	32.70%	31.90%	31.40%	30.60%	31.50%
NOPAT/Sales	7.80%	7.10%	7.00%	6.60%	6.80%
Tax expenses/Pretax income	34.80%	34.10%	34.30%	36.0%	37.7%
NOA turnover	2.44	2.19	2.03	2.02	1.96
Receivable turnover	5.83	5.50	5.78	5.95	5.79
Average collection period	62.62	66.33	63.19	61.37	63.09
Inventory turnover	4.45	4.37	4.29	4.03	4.13
Average inventory days outstanding	82.07	83.50	85.04	90.54	88.37
Long-term operating assets turnover	6.56	5.46	4.67	4.47	4.18
Accounts payable turnover	10.48	11.72	12.83	11.86	10.62
Average payable days outstanding	34.84	31.13	28.46	30.78	34.36
Return on equity (ROCE)	15.70%	15.10%	15.0%	13.40%	1.90%
Return on net operating assets (RNOA)	12.70%	12.30%	12.10%	10.10%	7.90%
Financial leverage (LEV)	36.70%	44.50%	53.80%	78.80%	101.0%
Spread	8.20%	6.30%	5.40%	4.20%	-6.00%
Sales growth	11.43%	4.51%	4.45%	-1.19%	-10.07%
Gross profit margin	38.40%	38.30%	36.70%	37.90%	38.50%
SG & A expenses/sales	32.20%	32.40%	31.80%	33.60%	35.20%
NOPAT/Sales	5.00%	4.80%	4.30%	3.80%	3.20%
Tax expenses/Pretax income	30.80%	31.00%	31.00%	36.10%	36.00%
NOA turnover	2.55	2.59	2.84	2.66	2.55
Receivables turnover	7.31	7.77	7.42	6.81	6.20

Lotto

	2020	2019	2018	2017	2016
Average collection period	49.96	46.98	49.22	53.58	58.86
Inventory turnover	5.71	5.06	5.01	4.40	3.76
Average inventory days outstanding	63.95	72.10	72.88	82.88	97.17
Long-term operating assets turnover	13.67	12.62	12.31	10.25	9.03
Accounts payable turnover	13.33	13.16	12.66	10.92	9.99
Average payable days outstanding	27.37	27.74	28.83	33.43	36.54

Required:

(a) Describe and interpret how the recent five year trend in the components of ROCE determines the ROCE for both Bata and Lotto.

(b) Recommended a “buy” on one of these companies based on your analysis. Support your recommendation with reference to your analysis in (a).