Ratios and Financial Planning at East Coast Yachts Mini Case

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Humber College *

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101

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Finance

Date

Apr 3, 2024

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xlsx

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East Cost Yatchs 2022 Income Statement Sales $185,250,000 Cost of goods sold $136,125,000 Other expenses $22,169,000 Depreciation $6,054,000 Earning before interest and Taxes (EBIT) $20,902,000 Interest $3,336,000 Taxable Income $17,566,000 Taxes(21%) $3,688,860 Net income $13,877,140 Dividends $6,340,000 Additions to retained earnings $7,537,140 East Cost Yatchs 2022 Balance ASSETS Current Asset Cash 2,891,400 Account Receivables 5,201,500 Inventory 5,832,100 Total Current Asset 13,925,000 Fixed Assets Net Plant & Equipment 89,303,400 Total Assets 103,228,400

e Sheet LIABILITIES & EQUITY Current Liability Account Payable 5,582,200 Notes Payable 12,621,500 Total Current Liability 18,203,700 Long Term Debt 32,100,000 SHAREHOLDER'S EQUITY Common Stock 4,912,000 Retained Earnings 48,012,700 Total Equity 52,924,700 Total Liabilities & Equity 103,228,400

Financial Ratio Calculation Value LIQUIDITY/SHORT TERM SOLVENCY RATIOS Current Ratio 0.76 Quick Ratio 0.44 SOLVENCY/FINANCIAL LEVERAGE RATIOS Debt Ratio 0.49 Debt to Equity Ratio 0.95 Equity Multiplier 1.95 ACTIVITY/EFFICIENCY/ASSET UTILIZATION RATIOS Total Asset Turnover 1.79 Inventory Turnover 23.34 Receivables Turnover 35.61 Interest Coverage 6.27 PROFITABILITY & RETURN RATIOS Gross Profit Margin 7.49% Return on Assets (ROA) 13.44% Return on Equity (ROE) 26.22%

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Formulae Current Assets/Current Liabilities Total Assets-Total equity/Total Assets Total Debt/Total Equity Total Assets/Total Equity Sales/Average Assets Cost of Goods Sold/Average Inventory Sales/ Avg. Accounts Receivable EBIT/Interest Gross Profit/Sales Net Income/Average total assets Net income/Average Total Equity quick assets/current liabilities or simple estimation = (Current assets - inventory)/current liabilities

Comparison the East Coast Yachts Ratio to Financial Ratio East Coast Yachts Ratio Lower Quartile Current Ratio 0.76 0.50 Quick Ratio 0.44 0.21 Total Asset Turnover 1.79 0.68 Inventory Turnover 23.34 6.85 Receivables Turnover 35.61 6.27 Debt Ratio 0.49 0.44 Debt to Equity Ratio 0.95 0.79 Equity Multiplier 1.95 1.79 Interest Coverage 6.27 5.18 Gross Profit Margin 7.49% 4.05% Return on Assets (ROA) 13.44% 6.05% Return on Equity (ROE) 26.22% 9.93%

Yachts Industry Ratio Yachts Industry Ratio Median Upper Quartile 1.43 1.89 0.38 0.62 0.85 1.38 9.15 16.13 11.81 21.45 0.52 0.61 1.08 1.56 2.08 2.56 8.06 9.83 6.98% 9.87% 10.53% 15.83% 16.54% 28.14%

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Interpretation of Ratio, relative to industry Able to handle short-term invoices; potential liquidity problem. Strong ability to meet short- term obligations without heavy reliance on inventory. Uses assets effectively for sales; operations are efficient. Manages inventory well and turns it into sales quickly. Manages accounts receivable effectively; collect sales at the right time. Capital conservative; less reliance on debt; financially stable. Prefer equity financing; less financial risk. Less dependent on debt assets; follows a conservative financial approach. Facing challenges to cover interest costs; necessary improvement for financial flexibility. Earns positive profit relative to sales. Effectively uses assets to generate profit. Provides strong return to shareholders relative to equity .

Pro Forma Income State Items Year 2022 Sales $185,250,000 Cost of goods sold $136,125,000 Other expenses $22,169,000 Depreciation $6,054,000 Earning before interest and Taxes (EBIT) $20,902,000 Interest $3,336,000 Taxable Income $17,566,000 Taxes(21%) $3,688,860 Net income $13,877,140 Dividends $6,340,000 Additions to retained earnings $7,537,140 Pro Forma Balance Sh Items Year 2022 Cash $2,891,400 Accounts Receivable $5,201,500 Inventory $5,832,100 Total Current Assets $13,925,000 Net PP&E (Fixed Assets) $89,303,400 Total Assets $103,228,400 Accounts Payable $5,582,200 Notes Payable $12,621,500 Total Current Liabilities $18,203,700 Long-term Debt $32,100,000 Total Liabilities $50,303,700 Common Stock $4,912,000 Retained Earnings $48,012,700 Total Equity $52,924,700 Total Liabilities & Equity $103,228,400 Sustainable Growth Rate (SGR) Cal SGR = ROE × Retention Ratio / (1 – ROE × R Given: ROE = 0.262, Retention Ratio SGR = 0.262 × 0.5431/ (1 – 0.262 × SGR = 0.1661 So, the Sustainable Growth Rate for East Coast Yacht

ement Pro Forma $216,020,025 $158,735,363 $25,851,271 $6,054,000 $25,379,392 $3,336,000 $22,043,392 $4,629,112 $17,414,279 $7,958,326 $9,455,953 heet Pro Forma $3,371,662 $6,065,469 $6,800,812 $16,237,943 $104,136,695 $120,374,637 $6,509,403 $14,717,931 $21,227,335 $32,100,000 $53,327,335 $4,912,000 $57,468,654 $62,380,654 $120,374,637 lculation: Retention Ratio) = 0.5431 × 0.5431) ts is approximately 16.61%

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Financial Ratio Calculation Industry Bench Mark LIQUIDITY/SHORT TERM SOLVENCY RATIOS Current Ratio 1.43 Quick Ratio 0.38 SOLVENCY/FINANCIAL LEVERAGE RATIOS Debt Ratio 0.52 Debt to Equity Ratio 1.08 Equity Multiplier 2.08 ACTIVITY/EFFICIENCY/ASSET UTILIZATION RATIOS Total Asset Turnover 0.85 Inventory Turnover 9.15 Receivables Turnover 11.81 Interest Coverage 8.06 PROFITABILITY & RETURN RATIOS Gross Profit Margin 7% Return on Assets (ROA) 11% Return on Equity (ROE) 17%

Year 2022 Pro Forma Value 0.76 0.76 0.44 0.44 0.49 0.48 0.95 0.85 1.95 1.93 1.79 1.79 23.34 23.34 35.61 13.30 6.27 7.61 7.49% 8.06% 13.44% 14.47% 26.22% 27.92%

Observation The current ratio is below the industry standards in both years concerning the liquidity Quick ratio is same as the year 2022 and above the industry benchmark Debt ratio is below the industry benchmark but increases than year 2022 The debt equity ratio is below the industry benchmark showing a lower financial risk Equity Multiplier is below the industry benchmark indicating lower reliance on debt for fianances Total Asset Turnover is unchanged from year 2022 and higher than the industry benchmark which ma Inventory Turnover is unchanged in proforma and is higher than the industry benchmark showing less Recieveables Turnover is drastically decreasing from year 2022 and is above industry benchmark, sho Interest coverage is improved in Pro forma suggesting stronger capacity to meet interest expenses bu Gross Profit Margin increases specifying a raise in profit compared to the industry benchmark ROA increases showing better use of assets to get profits ROE increases in Pro forma indicating better returns for shareholders

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Given that East Coast Yachts is unlikely to raise external capital, in part beca Thus comes the need to understand the concept of external financing need EFN known as the amount that the firm needs to borrow from outside for bus The sales are expected to increase from $185,250,000 to $222,300,000. Calculating the percentage increase in sales (New Sales-Old Sales)/Old Sales = ($222,300,000-$185,250,000)/$185,250,000 =$370,50,000/$185,250,000 20% Hence the increase in sales is by 20%. Since costs are proportional to the sales, we re-prepare the income statemen Income Statement Pro Forma Income Statement: With Increase of 20% Items Year 2022 Revised Statement Sales $185,250,000 $222,300,000 Cost of Goods Sold $136,125,000 $163,350,000 Other Expenses $22,169,000 $26,602,800 Depreciation $6,054,000 $7,264,800 EBIT $20,902,000 $25,082,400 Interest $3,336,000 $4,003,200 Taxable Income $17,566,000 $21,079,200 Taxes (21%) $3,688,860 $4,426,632 Net Income $13,877,140 $16,652,568 Dividends $6,340,000 $7,608,000 $7,537,140 $9,044,568 Next, we generate pro forma balance sheet: On our balance sheet we assume that some items vary directly with sales an For those that vary directly with sales we express each as a percentage of sa Pro Forma Balance Sheet(Percentage of Sales) Assets Amount % of sales Assets Cash $2,891,400 2% Accounts Receivable $5,201,500 3% Inventory $5,832,100 3% Total Current Assets $13,925,000 8% Additions to Retained Earnings Accounts Payable Notes Payable Total Current Liabilities Long-term Debt

Net PP&E (Fixed Assets) $89,303,400 48% Total Assets $103,228,400 56% New Sales $222,300,000 Based on above we construct proforma balance sheet Assets Amount Change in sales Cash $4,446,000 $1,554,600 Accounts Receivable $6,669,000 $1,467,500 Inventory $6,669,000 $836,900 Total Current Assets $17,784,000 $3,859,000 Net PP&E (Fixed Assets) $106,704,000 $17,400,600 Total Assets $124,488,000 $21,259,600 External Financ Total Assets-Total Liabilities EFN $21,259,600 The conclusion about the expansion plan is that we have to raise $2,12,59,60 However since the owners do not want to dilute their equity, we can only do b Recommendation Total Liabilities Common Stock Retained Earnings Total Equity Total Liabilities & Equity Liabilitie s Accounts Payable Notes Payable Total Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Equity Total Liabilities & Equity

Improve management of WC and also evaluate expansion particularly by inte Any plan should be carefully evaluated by evaluating all financing options, co

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ause the owners don’t want to dilute their existing ownership and control positions. siness operations provided sufficient funds are not available within the firm. nt and balance sheet with an increase in sales. nd others do not. ales for the year just completed and if an item does not vary directly with sales, we w Amount % of sales $5,582,200 3% $12,621,500 NA $18,203,700 NA $32,100,000 NA

$50,303,700 NA $4,912,000 NA $48,012,700 NA $52,924,700 NA $103,228,400 NA Amount % of sales $6,669,000 $1,086,800 $12,621,500 $0 $18,203,700 $0 $32,100,000 $0 $50,303,700 $0 $4,912,000 $0 $48,012,700 $0 $52,924,700 $0 $103,228,400 $0 00 without which we cannot increase projected sales by 20%. by using borrowing, short term or long term borrowing

ernal sources like retained earnings. onsucting risk assessment and considering strategic decision making

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write NA (or Not Applicable).

External Financing Needed (EFN) Formula: EFN = (Sales × SGR) - (Sales× (1 - Retention Ratio)) - Addition to Fixed Assets Sales SGR Retention Ratio Addition to Fixed Assets EFN = (185,250,000 × 0.1661) - (185,250,000 × (1 - 0.543 - 25,000,000) EFN = $29,066,649 Pro Forma Income Statement: Items Sales Cost of Goods Sold Other Expenses Depreciation EBIT Interest Taxable Income Taxes (21%) Net Income Dividends Additions to Retained Earnings Pro Forma Balance Sheet: Items Cash Accounts Receivable Inventory Total Current Assets Net PP&E (Fixed Assets) Total Assets Accounts Payable Notes Payable Total Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Equity Total Liabilities & Equity

Assets : Overall, total assets rose from $103,228,400 to $120,374,637, suggesting expansion and investment in the company's resources. Liabilities : In total, the amount of money the company owes went up from around $50.3 million to about $53.3 million. This rise was mostly because they had more short-term debts. Equity: Overall, the increase in equity signifies the accumulation of profits and positive performance of the company during the pro forma period. The EFN computation shows how much money East Coast Yachts will need to expand its capacity and establish a new production line. The requirement for a particular investment in fixed assets highlights the fixed cost structure's characteristics and suggests that the business must carefully manage its financial resources in order to fund the intended expansion.

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$185,250,000 16.61% 54.30% $25,000,000 Year 2022 Pro Forma $185,250,000 $216,020,025 $136,125,000 $158,735,363 $22,169,000 $25,851,271 $6,054,000 $6,054,000 $20,902,000 $25,379,392 $3,336,000 $3,336,000 $17,566,000 $22,043,392 $3,688,860 $4,629,112 $13,877,140 $17,414,279 $6,340,000 $7,958,326 $7,537,140 $9,455,953 Year 2022 Pro Forma $2,891,400 $3,371,662 $5,201,500 $6,065,469 $5,832,100 $6,800,812 $13,925,000 $16,237,943 $89,303,400 $104,136,695 $103,228,400 $120,374,637 $5,582,200 $6,509,403 $12,621,500 $14,717,931 $18,203,700 $21,227,335 $32,100,000 $32,100,000 $50,303,700 $53,327,335 $4,912,000 $4,912,000 $48,012,700 $57,468,654 $52,924,700 $62,380,654 $103,228,400 $120,374,637

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