Chapter 3

MINI-CASE

RATIOS AND FINANCIAL PLANNING AT KIWI YACHTS LTD

Chris Guthrie was recently hired by Kiwi Yachts Ltd to help the company with its financial planning and to evaluate the companys performance. Chris graduated from university five years ago with a finance degree. He has been employed in the finance department of an S&P/ASX 200 company since then.

Kiwi Yachts was founded 10 years ago by friends Mark Kwan and Todd Jovanovich. The company has manufactured and sold large- to medium-sized yachts over this period, and the companys products have received high reviews for safety, performance and reliability. The company has a niche market in that it sells primarily to individuals who own, sail and race their own yachts. The company has two base models: the Swordfish, which sells for $53000; and the Shark, which sells for $78000.

While the company manufactures yachts, its operations are different from those of many commercial boating companies. Kiwi Yachts builds yachts to order. By using prefabricated parts, the company is able to complete the manufacture of a yacht in only five weeks. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, other commercial yacht builders may take 18 months to two years to manufacture once the order is placed.

Mark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the boating manufacturing industry:

Boating Manufacturing Industry Ratios
	Lower Quartile	Median	Upper Quartile
Current ratio	0.5	1.43	1.89
Quick ratio	0.21	0.38	0.62
Cash ratio	0.08	0.21	0.39
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
Total debt ratio	0.44	0.52	0.61
Debtequity ratio	0.79	1.08	1.56
Equity multiplier	1.79	2.08	2.56
Times interest earned	5.18	8.06	9.83
Cash coverage ratio	5.84	8.43	10.27
Profit margin	4.05%	6.98%	9.87%
Return on assets	6.05%	10.53%	13.21%
Return on equity	9.93%	16.54%	26.15%

QUESTIONS

1. Calculate the following ratios for Kiwi Yachts: current ratio, quick ratio, cash ratio, total asset turnover, inventory turnover, receivables turnover, total debt ratio, debtequity ratio, equity multiplier, times interest earned, cash coverage ratio, profit margin, return on assets and return on equity.

2. Mark and Todd agree that a ratio analysis can provide a measure of the companys performance. They have chosen Ferretti Group, manufacturers of over eight different brands of yachts, as an aspirant company. Would you choose Ferretti as an aspirant company? Why or why not?

3. Compare the performance of Kiwi Yachts to the industry. 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 by inventory divided by current liabilities. How do you think Kiwi Yachts ratio would compare with the industry average?

4. Calculate the internal growth rate and sustainable growth rate for Kiwi Yachts. What do these numbers mean?