Reference no: EM13202287

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?