1. Calculate all of the ratios listed in the industry table for East Coast Yachts. 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 would you interpret this ratio? How does East Coast Yachts compare to the industry average for this ratio? 3. Calculate the sustainable growth rate for East Coast Yachts. Calculate external funds needed (EFN) and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe? calculate the ratios listed in the industry table for East Coast Yachts

QUESTION

1. Calculate all of the ratios listed in the industry table for East Coast Yachts.
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 would you interpret this ratio? How does East Coast Yachts compare to the industry average for this ratio?
3. Calculate the sustainable growth rate for East Coast Yachts. Calculate external funds needed (EFN) and prepare pro forma income statements and balance sheets assuming growth at precisely this rate. Recalculate the ratios in the previous question. What do you observe? calculate the ratios listed in the industry table for East Coast Yachts

ANSWER

Calculating Ratios

To calculate financial ratios, you need specific financial data such as balance sheets and income statements. Ratios can vary depending on the industry and the specific metrics you are interested in analyzing. Common ratios include profitability ratios, liquidity ratios, solvency ratios, and efficiency ratios.

To calculate a ratio, you typically divide one financial metric by another. For example, to calculate the current ratio, you divide current assets by current liabilities. The formula for each ratio may differ, but it is generally straightforward to calculate once you have the required data.

Comparing Performance

When comparing East Coast Yachts to the industry as a whole, it is essential to analyze each ratio individually and understand its implications. Positive or negative views can vary depending on the specific ratio and its context. Here are a few examples:

– Profitability Ratios: Higher profitability ratios, such as gross profit margin or net profit margin, are generally viewed as positive, indicating a company’s ability to generate profits. Lower profitability ratios may be seen as negative, suggesting lower profitability relative to the industry.

– Liquidity Ratios: Higher liquidity ratios, such as the current ratio or quick ratio, are generally viewed as positive because they indicate a company’s ability to meet short-term obligations. Lower liquidity ratios may indicate difficulties in paying off debts.

– Solvency Ratios: Higher solvency ratios, such as the debt-to-equity ratio or interest coverage ratio, are generally viewed as positive because they demonstrate a company’s ability to meet long-term obligations and manage debt. Lower solvency ratios may be seen as negative, indicating higher financial risk.

– Efficiency Ratios: Higher efficiency ratios, such as asset turnover or inventory turnover, are generally viewed as positive because they suggest effective asset utilization and inventory management. Lower efficiency ratios may indicate inefficiencies in resource utilization.

Regarding the inventory ratio calculated as inventory divided by current liabilities, this ratio measures the ability of a company to cover its current liabilities with its inventory. A higher ratio suggests that the company has enough inventory to cover its short-term obligations, which can be viewed as positive. Conversely, a lower ratio may indicate potential difficulties in meeting current liabilities with available inventory.

To compare East Coast Yachts to the industry average for this ratio, you would need industry-specific data to calculate the average ratio. By comparing East Coast Yachts’ ratio to the industry average, you can assess how well they manage their inventory relative to their peers.

sustainable Growth Rate and Pro Forma Statements

The sustainable growth rate is the maximum rate at which a company can grow without relying on external financing. To calculate it, you need information such as the return on equity (ROE) and the retention ratio (plowback ratio). The formula for the sustainable growth rate is: Sustainable Growth Rate = ROE × Retention Ratio.

By calculating the sustainable growth rate, you can determine the growth rate at which East Coast Yachts can grow while maintaining its current financial structure.

To calculate external funds needed (EFN), you would need additional information about the company’s projected growth rate, assets, liabilities, and equity. EFN represents the additional funds required to support a company’s growth rate.

Preparing pro forma income statements and balance sheets involves projecting future financial statements based on anticipated changes in the business. These statements can provide insights into the financial impact of growth and help assess the company’s future financial position.

By recalculating the ratios after considering the sustainable growth rate and projecting financial statements, you can observe how these factors influence the company’s financial performance.