2. Compare the financial ratios of East Coast Yachts to the industry as a whole by the following categories. a) Short-term solvency or liquidity measures b) Long-term solvency measures c) Asset management or turnover measures d) Profitability measures Also comment on the performance of each category (a) to (d) above and overall performance of East Coast Yachts based on your analyses. Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio. Ratio Good Bad Current ratio Better at managing current accounts. May be having liquidity problems. Quick ratio Better at managing current accounts. 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, Could be experiencing inventory shortage. Receivables turnover Better at collecting receivables. May have credit terms that are too strict. Decreasing receivables turnover may increase sales. Total debt to assets ratio Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Debt to equity ratio Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Equity multiplier Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Interest coverage Less debt than industry median means the company is less likely to experience credit problems. Increasing the amount of debt can increase shareholder returns. Especially notice that it could increase ROE. Profit margin May be able to better control costs. PM above the industry average means better performance than many peers. ROA Company is performing above many of its peers. Assets may be old and depreciated relative to industry, ROE Company is performing above many of its peers. Profit margin and equity multiplier Could still be increased, which would further increase ROE. (Adapted from a mini-case in "Corporate Finance" by Ross, Westerfield, and Jaffe) 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 a finance degree, and he has been employed in the treasury department of a Fortune 500 company since then. East Coast Yachts 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, Larissa has provided the following financial statements. Dan has gathered the industry ratios for the yacht manufacturing industry. EAST COAST YACHTS 2020 Income Statement Sales Cost of goods sold Other expenses Depreciation Earnings before interest and taxes (EBIT) Interest Taxable income Taxes (25%) Net income Dividends $9,421,650 Addition to RE $6,281,100 $167,310,000 117,910,000 19,994,000 5,460,000 $23,946,000 3,009,000 $20,937,000 5.234.250 $15.702.750 EAST COAST YACHTS Balance Sheet as of December 31, 2020 Assets Liabilities & Equity Current assets Cash Accounts receivable Inventory Total Current liabilities Accounts payable Notes payable $3,042,000 5,473,000 6,136,000 $14.651,000 $6,461,000 13.078.000 Total $19,539,000 Fixed assets Net plant and equipment $93,964,000 Long-term debt $33,735,000 Shareholders' equity Common stock $5,200,000 Retained earnings 50,141.000 Total equity $55,341,000 Total liabilities $108.615.000 and equity Total assets $108.615.000 Yacht Industry Ratios Lower Quartile Median Upper Quartile 1.43 0.38 0.85 6.15 9.82 0.52 Current ratio Quick ratio Total asset turnover Inventory turnover Receivables turnover Total debt to total assets ratio Total debt to equity ratio Equity multiplier Interest coverage Profit margin Return on assets Return on equity 0.50 0.21 0.68 4.89 6.27 0.44 0.79 1.79 5.18 4.05% 6.05% 9.93% 1.89 0.62 1.38 10.89 14.11 0.61 1.56 2.56 9.83 9.87% 13.21% 26.15% 1.08 2.08 8.06 6.98% 10.53% 16.54%