Ratios and financial planning at east coast yachts
After Dan's analysis of East Coast Yachts cash flow (at the end of our previous chapter), Larissa approached Dan about the company's performance and future growth plans. First, Larissa wants to find out how East Coast Yachts is performing relative to its peers. Additionally, she wants to find out the future financing necessary to fund the company's growth. In the past, East Coast Yachts experienced difficulty in financing its growth plan, in large part because of poor planning. In fact, the company had to turn down several large jobs because its facilities were unable to handle the additional demand. Larissa hoped that Dan would be able to estimate the amount of capital the company would have to raise next year so that East Coast Yachts would be better prepared to fund its expansion plans.
To get Dan started with his analyses, Larissa provided the following financial statements. Dan then gathered the industry ratios for the yacht manufacturing industry.
EAST COAST YACHTS 2010 Income Statement
|
Sales
|
$617,760,000
|
|
Cost of goods sold
|
435,360,000
|
|
Selling, general, and administrative
|
73,824,000
|
|
Depreciation
|
20,160,000
|
|
EBIT
|
$ 88,416,000
|
|
Interest expense
|
11,112,000
|
|
EBT
|
$ 77,304,000
|
|
Taxes
|
30,921,600
|
|
Net income
|
$ 46,382,400
|
|
Dividends
|
$ 17,550,960
|
|
Retained earnings
|
$ 28,831,440
|
|
|
|
EAST COAST YACHTS 2010 Balance Sheet
|
Current assets
|
|
Current liabilities
|
|
|
Cash and equivalents
|
$ 11,232,000
|
Accounts payable
|
$ 24,546,000
|
|
Accounts receivable
|
20,208,000
|
Notes payable
|
18,725,000
|
|
Inventories
|
22,656,000
|
Accrued expenses
|
6,185,000
|
|
Other
|
1,184,000
|
Total current liabilities
|
$ 49,456,000
|
|
Total current assets
|
$ 55,280,000
|
Long-term debt
|
$146,560,000
|
|
Fixed assets
|
|
Total long term liabilities
|
$146,560,000
|
|
Property, plant, and equipment
|
$462,030,000
|
Stockholders equity
|
|
|
Less accumulated depreciation
|
(114,996,000)
|
Preferred stock
|
$ 3,000,000
|
|
Net property, plant, and equipment
|
347,034,000
|
Common stock
|
40,800,000
|
|
Intangible assets and others
|
6,840,000
|
Capital surplus
|
31,200,000
|
|
Total fixed assets
|
$353,874,000
|
Accumulated retained earnings
|
186,138,000
|
|
|
|
Less treasury stock
|
(48,000,000)
|
|
|
|
Total equity
|
$213,138,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$409,154,000
|
Total liabilities and shareholders equity
|
$409,154,000
|
Yacht Industry Ratios
|
|
LOWER QUARTILE
|
MEDIAN
|
UPPER QUARTILE
|
|
Current ratio
|
0.86
|
1.51
|
1.97
|
|
Quick ratio
|
0.43
|
0.75
|
1.01
|
|
Total asset turnover
|
1.10
|
1.27
|
1.46
|
|
Inventory turnover
|
12.18
|
14.38
|
16.43
|
|
Receivables turnover
|
10.25
|
17.65
|
22.43
|
|
Debt ratio
|
0.32
|
0.49
|
0.61
|
|
Debt-equity ratio
|
0.51
|
0.83
|
1.03
|
|
Equity multiplier
|
1.51
|
1.83
|
2.03
|
|
Interest coverage
|
5.72
|
8.21
|
10.83
|
|
Profit margin
|
5.02%
|
7.48%
|
9.05%
|
|
Return on assets
|
7.05%
|
10.67%
|
14.16%
|
|
Return on equity
|
9.06%
|
14.32%
|
22.41%
|
3. Compare the performance of East Coast Yachts to the industry as a whole. For each ratio, comment on why it might be viewed as positive or negative relative to the industry. Suppose you create an inventory ratio calculated as inventory divided by current liabilities. How would you interpret this ratio? How does East Coast Yachts compare to the industry average for this ratio?