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Ratio Analysis

Ratio and Financial Planning at East Coast Yachts:

After Dan's analysis of East Coast Yacht's 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 our 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 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 Yacht's
2008 Income Statement
Sales $514,800,000
Cost of goods sold $362,800,000
Selling, general and administrative $61,520,000
Depreciation $16,800,000
EBIT $73,680,000
Interest Expense $9,260,000
EBT $64,420,000
Taxes $25,768,000
Net Income $38,652,000
Dividends $15,460,800
Retained Earnings $23,191,200

East Coast Yachts
2008 Balance Sheet
Current Assets Current Liabilities
Cash and equivalents $9,360,000 Accounts Payable $19,880,000
Accounts receivable $16,840,000 Notes Payable $13,250,000
Inventories $18,880,000 Accrued Expenses $ 3,160,000
Other $1,570,000 Total Current Liabilities$36.290,000
Total Current Assets $46,650,000
Long Term Debt $103,800,000
Stockholder equity
Fixed Assets $294,820,000 Preferred Stock $2,500,000
Common Stock $34,000,000
Capital Surplus $26,000,000
Accumulated Retained Earnings $154,280,000
Less Treasury Stock (15,400,000)
Total equity $201,380,000
Total Assets $341,470,000 Total liabilities & shareholder equity $341,470.000

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 0.47 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% 20.83%

1). East Coast Yachts uses a small percentage of preferred stock as a source of financing. In calculating the rations for the company, should preferred stock be included as part of the company's total equity?
2). Calculate all of the ratios listed in the industry table for East Coast Yachts.
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 a 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?

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Solution Summary

The solution explains some calculations relating to ratios for East Coast Yachts