After Dan\'s analysis of East Coast Yachts\' cash flow (at the end of our previo

Question

After Dan's analysis of East Coast Yachts' cash flow (at the end of our previous chapter), Larissa approached Dan aobut he company's performance and future growth plans. First Larissa wants to find out how East Coast Yachts is perhforming relative to its peers. Additionally, she wants to find out the future financing necessary to fund the company's growth. In the past, East Coat Yachts expeirned difficulty in financing its growth plan, in 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 Coat Yachts would be better prepared to funds its expansion plans.

To get Dan started with his anaylses, Larissa provided the following financial statements. Dan then gathered the industry ratios for the yacht manufacutring industry.

Income Statement

41,744,160

Balance Sheet

Calculated Ratios

Liquidity or Short-Term Solvency Ratios

Calculate and compare to industry ratios

East Coast Yachts

Lower Quartile

Median

Upper Quartile

Positive, Negative, or Neutral Relative to Industry

Current Ratio

1.01

0.86

1.51

1.97

Negative

Quick Ratio

0.61

0.43

0.75

1.01

Negative

Asset Management or Turnover Ratios

Calculate and compare to industry ratios:

East Coast Yachts

Lower Quartile

Median

Upper Quartile

Positive, Negative, or Neutral Relative to Industry

Assets Turnover

1.52

1.10

1.27

1.46

Positive

Inventory Turnover     

21.39

12.18

14.38

16.43

Positive

Receivables Turnover

32.74

10.25

17.65

22.43

Positive

Long-Term Solvency Ratios

Calculate and compare to industry ratios:

East Coast Yachts

Lower Quartile

Median

Upper Quartile

Positive, Negative, or Neutral Relative to Industry

Debt Ratio    

.49

0.32

0.47

0.61

Neutral

Debt-Equity Ratio

.96

0.51

0.83

1.03

Neutral

Equity Multiplier

1.96

1.51

1.83

2.03

Neutral

Interest Coverage

7.96

5.72

8.21

10.83

Negative

Profitability Measures   

Calculate and compare to industry ratios:

East Coast Yachts

Lower Quartile

Median

Upper Quartile

Positive, Negative, or Neutral Relative to Industry

Profit Margin     

7.51%

5.02%

7.48%

9.05%

Neutral

Return on Assets

11.44%

7.05%

10.67%

14.16%

Neutral

Return on Equity

22.34%

9.06%

14.32%

20.83%

Positive

Based on your calculations and comparisons above, how would you characterize East Coast Yacht’s performance relative to its industry?

Sales $555,984,000 Cost of Goods Sold 391,824,000 Selling, General, and administrative 66,441,600 Depreciation 18,144,000 EBIT 79,574,400 Interest Expense 10,000,800 EBT 69,573,600 Taxes 27,829,440 Net Income

41,744,160

Dividends 15,795,000 Retained Earnings 25,949,160

Explanation / Answer

East cost yachts has less liquidity comparing to industry. Liquidity is very important for smooth functioning of the company and its current ratio is just 1. It should be minimum 1.5 to avoid of non payment of dues. Liquidity ratio was so bad. It should be minimum 1 to avoid default risk.

Turnover ratio was very good for company, it utilising its assets in better productive way to generate more sales. But it would be better for firm, if it can reduce liquidity receivables turnover.

Capital structure was good and but it either should try to improve earnings before interest and taxes. If it is not possible, it should decrease debt weight in capital structure.

Profit margin ratio was satisfactory on average and it effectively using assets to generate net income.

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