Corporate Financial Analysis
1. Ratio Calculations.
Current ratio = $51,123,050 / $50,584,750 = 1.01 times
Quick ratio = ($51,123,050– $20,149,650) / $50,584,750 = 0.61 times
Total asset turnover = $611,582,000 / $401,558,750 = 1.52 times
Inventory turnover = $431,006,000 / $20,149,650 =21.39 times
Receivables turnover = $611,582,000 / $18,681,500 = 32.74 times
Debt ratio = ($401,558,750 – 181,714,000) / $401,558,750 = 0.55 times
Debt-equity ratio = $169,260,000 / $181,714,000 = 0.93 times
Equity multiplier = $401,558,750 / $181,714,000 = 2.21 times
Interest coverage = $87,531,900 / $11,000,900 = 7.96 times
Profit margin = $45,918,600 / $611,582,000 = 7.51%
Return on assets = $45,918,600 / $401,558,750 = 11.44%
Return on equity = $45,918,600 / $181,714,000 = 25.27%
2. Comparison of East Coast Yacht to the Industry
Liquidity Ratios
The company has a lower current ratio compared to the median industry ratio. This indicates a lower liquidity for the company than the industry. Despite the low liquidity ratios, the current ratio for the company is higher than the lower quartile for the industry, meaning there are companies in the industry that with much lower liquidity.
Turnover Ratios
The firm has a higher turnover ratio compared to the industry median. This indicates that the company efficiently utilizes its assets in sales generation.
Leverage Ratios
East Coast Yacht’s leverage ratios are above the lower quartile but below the industry media, indicating that the company has less debts in comparison to other comparable firms.
Profit Margin
East Coast Yacht has a profit margin almost equivalent to the industry median, indicating that the firm may be performing within the industry’s profitability margin.
Generally, the company seems to be profitable, though based on the liquidity ratio results a closer and detailed analysis needs to be considered.
3. Sustainable Growth Rate of East Coast Yachts
To compute the firm’s sustainable growth rate, we first ROE and the firm’s retention ratio, so:
ROE = Net Income / Total Equity
ROE = $45, 918,600 / $181, 714,000 = .2527 or 25.27%
b = Addition to Receivables / Net Income
b = $18,681,500 / $45, 918,600 = 0.4068 or 40.68%
Therefore, the sustainable growth rate is:
Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]
Sustainable growth rate = [0.2527(.4068)] / [1 – 0.2527(.4068)]
0.1028/ 0.90 = 0.1146 or 11.46%
4. 2018 Pro forma financial statements at a 20% growth rate are:
| Income statement | |||||
| Sales | $733,898,400 | ||||
| COGS | 517,207,200 | ||||
| Selling, general, and administrative | 87,702,840 | ||||
| Depreciation | 23,950,080 | ||||
| EBIT | $105,038,280 | ||||
| Interest expense | 13,201,080 | ||||
| EBT | $91,837,200 | ||||
| Taxes | 36,734,800 | ||||
| Net income | $55,102,320 | ||||
| Dividends | $20,849,400 | ||||
| Retained Earnings | 34,252,920 | ||||
| Balance sheet | |||||
| Assets | Liabilities & Equity | ||||
| Current Assets | Current Liabilities | ||||
| Cash and Equivalents | $13,343,640 | Accounts Payable | $53,353,860 | ||
| Accounts receivables | 22,417,800 | Accrued expenses | 7,347,840 | ||
| Inventory | 24,179,580 | Total Current Liabilities | $60,701,700 | ||
| Other | 1,406,640 | ||||
| Total current assets | $61,347,660 | Long-term debt | $203,112,000 | ||
| Total long-term liabilities | |||||
| Fixed assets | Shareholder Equity | $2,364,000 | |||
| Property, plant, and equipment | $549,011,520 | Preferred stock | 45,100,440 | ||
| Less accumulated depreciation | -136,615,080 | Common stock | 33,739,560 | ||
| Net property, plant, and equipment | $412,396,440 | Capital surplus | 193,876,800 | ||
| Intangible assets and others | 8,126,400 | Accumulated retained earnings | (57,024,000 | ||
| Total fixed assets | $420,522,840 | Less treasury stock | $218,056,800 | ||
| Total Equity | |||||
| $481,870,500 | |||||
| Total Assets | $481,870,500 | Total Liabilities & shareholder’s equity |
So, the required external funds will be the total value that East Coast Yacht will need in order to get a loan. In this case, the long-term debt is constant, and thus, the external funds will be computed as;
Total assets – Total liabilities and equity
= $481,870,500 - $481,870,500
= 0
5. Apart from borrowing, East Coast Yacht management can formulate the firm’s financial strategy based on the following available options to achieve its goal of a 20% growth.
i. increasing its profit margin
ii. Lowering its percentage of total assets to sales.
iii. Selling its new equity.
6. The company will be increasing its fixed assets, which means that cash out flow will be increasing and with a constant sustainable growth rate of 11.46% and zero cash inflows. I would recommend the company to emphasize on boosting its cash inflows in order to survive its expansion plan and with a constant debt loan.