Chris Guthrie was recently hired by Kiwi Yachts Ltd to help the company with its financial 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 niche market 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 following financial 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.