Ratios and Financial Planning at East Coast Yachts
Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and also to evaluate the company’s financial performance. Dan graduated from college five years ago with finance degree and he has been employed in the treasury department of a Fortune 500 company since then. You were hired as an intern to assist Dan in the Finance Department.
East Coast Yachts (ECY) was founded 10 years ago by Larissa Warren. The company’s operations are located near Hilton Head Island, South Carolina, and the company is structured as an LLC. The company has manufactured custom midsize, high-performance yachts for clients over this period, and its products have received high reviews for safety and reliability. The company’s yachts have also recently received the highest award for customer satisfaction. The yachts are primarily purchased by wealthy individuals for pleasure use. Occasionally, a yacht is manufactured for purchase by a company for business purposes.
The custom yacht industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity. For instance, East Coast Yachts will spend 80 to 100 hours on hand-buffing the stainless steel stem-iron, which is the metal cap on the yacht’s bow that conceivably could collide with a dock or another boat.
To get Dan started with his analyses, you have been asked by Larissa to prepare a common size income statement and balance sheet for the year ending 2013. Larissa provides you with the following financial data. In 2013, ECY earned $167,310,000.00, During the year ECY had accounts payable of $6,461,000.00 and notes payable of $13,078,000.00TotalCurrent Liabilities are $19,539,000. You total all costs associated with earning the revenue and determine the costs of goods sold is $117,910,000.00.Operating Expenses not including, depreciation totaled $19,994,000.00.Depreciation expense accounted for an additional expenses totaling $5,460,000.00.Net plant and equipment is listed on the books as $93,964,000.00.There are no other fixed assets noted, however, current assets are listed as follows: Cash $3,042,000.00, Accounts receivable $5,473,000.00, Inventory $6,136,000.00. Current assets total $14,651,000.00.There were no other assets listed and therefore the total assets current and fixed total $108,615,000.00. Earnings before interest and taxes (EBIT) total $23,946,000.ECY has long-term debt of $33,735,000.00.Interest expense totaled $3,009,000.00 in 2013.Taxable income in 2013 is $20,937,000.00.The tax rate is 40%.Earnings after taxes is $12,562,200.Addition to retained earnings is $5,024,880 and total retained earnings are $50,141,000.Dividends paid are $7,537,320 and common stock is valued at $5,200,000.Total Equity is $55,341,000.00
Dan has gathered the industry ratios for the yachts manufacturing industry.
Yacht Industry Ratios
|Lower Quartile||Median||Upper Quartile|
|Total asset turnover||0.68||0.85||1.38|
|Debt equity ratio||0.79||1.08||1.56|
|Return on assets||6.05%||10.53%||13.21%|
|Return on equity||9.93%||16.54%||26.15%|
1.Calculate all of the ratios listed in the industry table for East Coast Yachts.
2.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 do you interpret this ratio? How does East Coast Yachts compare to the industry average?
3.Assume, that East Coast Yachts will grow annually at a 20% growth rate over the next five years, prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe?
4.As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners don’t want to dilute their existing ownership and control positions. However, East Coast Yachts is planning for a growth rate of 20 percent next year. What are your conclusions and recommendations about the feasibility of East Coast’s expansion plans?