| Yacht Industry Ratios| |
| Lower Quartile| Median| Upper Quartile|
Current 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 times
Quick ratio = ($14,651,000 – 6,136,000) / $19,539,000 = 0.44 times
Total asset turnover = $167,310,000 / $108,615,000 = 1.54 times
Inventory turnover = $117,910,000 / $6,136,000 =19.22 times
Receivables turnover = $167,310,000 / $5,473,000 = 30.57 times
Total debt ratio = ($108,615,000 – 55,341,000) / $108,615,000 = 0.49 times
Debt-equity ratio = ($19,539,000 + 33,735,000) / $55,341,000 = 0.96 times
Equity multiplier = $108,615,000 / $55,341,000 = 1.96 times
Interest coverage = $23,946,000 / $3,009,000 = 7.96 times
Profit 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%
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?
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 ratio is above the lower quartile, so there are companies in the industry with lower liquidity than East Coast Yachts. The company may have more predictable cash flows, or more access to short-term borrowing.
The turnover ratios are all higher than the industry median; in fact, all three turnover ratios are above the upper quartile. This may mean that East Coast Yachts is more efficient than the industry in using its assets to generate sales.
The financial leverage ratios are all below the industry median, but above the lower quartile. East Coast Yachts generally has less debt than comparable companies, but is still within the normal range.
The profit margin for the company is about the same as the industry median, the ROA is slightly higher than the industry median, and the ROE is well above the industry median. East Coast Yachts seems to be performing well in the profitability area.
Overall, East Coast Yachts’ performance seems good, although the liquidity ratios indicate that a closer 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 the industry. 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 lower than the industry median. The current ratio is below the industry median, while the quick ratio is above the industry median. This implies that East Coast Yachts has less inventory to current liabilities than the industry median. Because the cash ratio is lower than the industry median, East Coast Yachts has less inventory than the industry median, but more accounts receivable....