FIN - RATIOS AND FINANCIAL PLANNING AT KIWI YACHTS LTD

Chris Guthrie was recently hired by Kiwi Yachts Ltd to help the company with itsFINANCIAL planning and to evaluate the company’s 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 company’s products have received high reviews for safety, performance and reliability. The company has a nicheMARKET 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 $53?000; and the Shark, which sells for $78?000. 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 followingFINANCIAL statements. Chris has gathered the industry ratios for the boating manufacturing industry:

Kiwi Yachts Ltd

2014 Income Statement

Sales

$24?092?400

Cost of goods sold

17?982?000

Other expenses

2?878?800

Depreciation

786?000

EBIT

$?2?445?600

Interest

434?400

Taxable income

$?2?011?200

Taxes

?? 804?480

Net income

$?1?206?720

Dividends

$246?000

Additions to retained earnings

960?720

Kiwi Yachts Ltd

2014 Balance Sheet

Assets

Liabilities and Equity

Current assets

Current liabilities

Cash

$ 438?048

Accounts payable

$? 858?816

Accounts receivable

1?841?616

Notes payable

1?735?680

Inventory

1?486?200

?Total current liabilities

$ 2?594?496

Total current assets

$ 3?765?864

Fixed assets

Long-term debt

$ 4?590?000

Net plant and equipment

$14?778?816

Shareholder equity

Ordinary shares

180?000

Retained earnings

11?180?184

?

?Total equity

$11?360?184

?Total assets

$18?544?680

Total liabilities and equity

$18?544?680

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

Debt–equity 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%

Based on the above information, answer the following questions:

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

•b) 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.