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47304182 East Coast Yachts Key

47304182 East Coast Yachts Key

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Published by reddevil911

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Published by: reddevil911 on Jun 27, 2012
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02/27/2014

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Ratios and Financial Planning at East Coast Yachts
Yacht Industry Ratios
Lower Quartile Median Upper QuartileCurrent ratio
0.50 1.43 1.89
Quick ratio
0.21 0.38 0.62
Total asset turnover
0.68 0.85 1.38
Inventory turnover
4.89 6.15 10.89
Receivables turnover
6.27 9.82 14.11
Debt ratio
0.44 0.52 0.61
Debt-equity ratio
0.79 1.08 1.56
Equity multiplier
1.79 2.08 2.56
Interest coverage
5.18 8.06 9.83
Profit margin
4.05% 6.98% 9.87%
Return on assets
6.05% 10.53% 13.21%
Return on equity
9.93% 16.54% 36.15%
1.
Calculate all of the ratios listed in the industry table for East Coast yachts.
1.
The calculations for the ratios listed are:Current ratio = $14,651,000 / $19,539,000 = 0.75 timesQuick ratio = ($14,651,000
 –
6,136,000) / $19,539,000 = 0.44 timesTotal asset turnover = $167,310,000 / $108,615,000 = 1.54 timesInventory turnover = $117,910,000 / $6,136,000 =19.22 timesReceivables turnover = $167,310,000 / $5,473,000 = 30.57 timesTotal debt ratio = ($108,615,000
 –
55,341,000) / $108,615,000 = 0.49 timesDebt-equity ratio = ($19,539,000 + 33,735,000) / $55,341,000 = 0.96 timesEquity multiplier = $108,615,000 / $55,341,000 = 1.96 timesInterest coverage = $23,946,000 / $3,009,000 = 7.96 timesProfit margin = $12,562,200 / $167,310,000 = 7.51%Return on assets = $12,562,200 / $108,615,000 = 11.57%Return on equity = $12,562,000 / $55,341,000 = 22.70%
 
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2.
 
Compare the performance of 
 
East Coast Yachts to the industry as a whole. For each ratio commenton why it might be viewed as positive or negative relative to the industry. Suppose you create aninventory ratio calculated as inventory divided by current liabilities. How do you interpret this ratio?How does East Coast Yachts compare to the industry average?
Answer)
2.
Regarding the liquidity ratios, East Coast Yachts current ratio is below the median industry ratio.This implies the company has less liquidity than the industry in general. However, the current ratiois above the lower quartile, so there are companies in the industry with lower liquidity than EastCoast Yachts. The company may have more predictable cash flows, or more access to short-termborrowing.The turnover ratios are all higher than the industry median; in fact, all three turnover ratios areabove the upper quartile. This may mean that East Coast Yachts is more efficient than the industryin using its assets to generate sales.The financial leverage ratios are all below the industry median, but above the lower quartile. EastCoast Yachts generally has less debt than comparable companies, but is still within the normalrange.The profit margin for the company is about the same as the industry median, the ROA is slightlyhigher than the industry median, and the ROE is well above the industry median. East Coast Yachtsseems to be performing well in the profitability area.
Overall, East Coast Yachts’ performance seems good, although the liquidity ratios indicate
that acloser look may be needed in this area.Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than theindustry. Note that the list is not exhaustive but merely one possible explanation for each ratio.If you created an Inventory to current liabilities ratio, East Coast Yachts would have a ratio that is lowerthan the industry median. The current ratio is below the industry median, while the quick ratio is abovethe industry median. This implies that East Coast Yachts has less inventory to current liabilities than theindustry median. Because the cash ratio is lower than the industry median, East Coast Yachts has lessinventory than the industry median, but more accounts receivable.
 
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Ratio Good Bad
Current ratio Better at managing currentaccounts.May be having liquidity problems.Quick ratio Better at managing currentaccounts.May be having liquidity problems.Total asset turnover Better at utilizing assets. Assets may be older and depreciated,requiring extensive investment soon.Inventory turnover Better at inventory management,possibly due to better procedures.Could be experiencing inventoryshortages.Receivables turnover Better at collecting receivables. May have credit terms that are toostrict. Decreasing receivablesturnover may increase sales.Total debt ratio Less debt than industry medianmeans the company is less likely toexperience credit problems.Increasing the amount of debt canincrease shareholder returns.Especially notice that it will increaseROE.Debt-equity ratio Less debt than industry medianmeans the company is less likely toexperience credit problems.Increasing the amount of debt canincrease shareholder returns.Especially notice that it will increaseROE.Equity multiplier Less debt than industry medianmeans the company is less likely toexperience credit problems.Increasing the amount of debt canincrease shareholder returns.Especially notice that it will increaseROE.Interest coverage Less debt than industry medianmeans the company is less likely toexperience credit problems.Increasing the amount of debt canincrease shareholder returns.Especially notice that it will increaseROE.Profit margin The PM is slightly above theindustry median, so it is performingbetter than many peers.May be able to better control costs.ROA Company is performing abovemany of its peers.Assets may be old and depreciatedrelative to industry.ROE Company is performing abovemany of its peers.Profit margin and EM could still beincreased, which would furtherincrease ROE.

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