# East Coast Yachts: Ratio Analysis Below is a step-by-step calculation and analysis for East Coast Yachts, using the provided industry ratios as benchmarks. --- ## 1. Calculate Ratios for East Coast Yachts ### **Assume the Following Company Data** *(Please replace with your actual numbers if different)* - **Current Assets:** \$14,000 - **Current Liabilities:** \$8,000 - **Total Assets:** \$65,000 - **Total Debt:** \$36,000 - **Total Equity:** \$29,000 - **Sales:** \$110,000 - **Cost of Goods Sold (COGS):** \$80,000 - **Accounts Receivable:** \$8,500 - **Inventory:** \$7,000 - **Accounts Payable:** \$6,000 #### **Industry Ratios** | Ratio | Industry Value | |-----------------------------|:-------------:| | Current Ratio | 1.90 | | Quick Ratio | .70 | | Total Debt Ratio | .54 | | Debt-Equity | 1.20 | | Equity Multiplier | 2.10 | | Inventory Turnover | 7.40 | | Receivables Turnover | 13.20 | | Total Asset Turnover | 2.80 | --- ### **A. Liquidity Ratios** #### **Current Ratio** \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \] \[ = \frac{14,000}{8,000} = 1.75 \] #### **Quick Ratio** \[ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} \] \[ = \frac{14,000 - 7,000}{8,000} = \frac{7,000}{8,000} = .875 \] --- ### **B. Financial Leverage Ratios** #### **Total Debt Ratio** \[ \text{Total Debt Ratio} = \frac{\text{Total Assets} - \text{Total Equity}}{\text{Total Assets}} \] \[ = \frac{65,000 - 29,000}{65,000} = \frac{36,000}{65,000} \approx .554 \] #### **Debt-Equity Ratio** \[ \text{Debt-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}} \] \[ = \frac{36,000}{29,000} \approx 1.24 \] #### **Equity Multiplier** \[ \text{Equity Multiplier} = \frac{\text{Total Assets}}{\text{Total Equity}} \] \[ = \frac{65,000}{29,000} \approx 2.24 \] --- ### **C. Turnover Ratios** #### **Inventory Turnover** \[ \text{Inventory Turnover} = \frac{\text{COGS}}{\text{Inventory}} \] \[ = \frac{80,000}{7,000} \approx 11.43 \] #### **Receivables Turnover** \[ \text{Receivables Turnover} = \frac{\text{Sales}}{\text{Accounts Receivable}} \] \[ = \frac{110,000}{8,500} \approx 12.94 \] #### **Total Asset Turnover** \[ \text{Total Asset Turnover} = \frac{\text{Sales}}{\text{Total Assets}} \] \[ = \frac{110,000}{65,000} \approx 1.69 \] --- ## 2. Comparison Table | Ratio | East Coast | Industry | Better/Worse? | Meaning | |-------------------------|:----------:|:--------:|:-------------:|:--------------------------------------| | **Current Ratio** | 1.75 | 1.90 | Worse | Slightly less liquid | | **Quick Ratio** | .88 | .70 | Better | More liquid without inventory | | **Total Debt Ratio** | .55 | .54 | Worse | Slightly more leveraged | | **Debt-Equity Ratio** | 1.24 | 1.20 | Worse | More reliant on debt | | **Equity Multiplier** | 2.24 | 2.10 | Worse | Higher financial leverage | | **Inventory Turnover** | 11.43 | 7.40 | Better | Inventory moves faster | | **Receivables Turnover**| 12.94 | 13.20 | Worse | Collects receivables a bit slower | | **Total Asset Turnover**| 1.69 | 2.80 | Worse | Less efficient use of assets | --- ## 3. Analysis ### **Liquidity** - **Current Ratio:** East Coast's current ratio (1.75) is a bit lower than the industry (1.90). This means it has slightly less ability to cover short-term obligations. - **Quick Ratio:** At .88, East Coast is better than the industry standard (.70), indicating strong liquidity after removing inventory. ### **Financial Leverage** - **Total Debt Ratio, Debt-Equity, Equity Multiplier:** All are slightly worse than industry averages, meaning East Coast is more leveraged. This increases financial risk, especially if earnings are volatile. ### **Turnover** - **Inventory Turnover:** Much better (11.43 vs 7.40). East Coast sells inventory faster, which is positive for cash flow and reduces holding costs. - **Receivables Turnover:** Slightly worse (12.94 vs 13.20). They collect cash from customers a bit slower than peers. - **Total Asset Turnover:** Significantly lower (1.69 vs 2.80), indicating less efficient use of assets to generate sales. --- ## 4. Conclusion - **Strengths:** Good quick ratio and excellent inventory turnover. - **Weaknesses:** Higher leverage (riskier capital structure) and less efficient at using assets to generate sales. - **Implications:** East Coast should improve asset utilization and possibly reduce reliance on debt to align more closely with industry standards. --- **Note:** Replace financial data with actual numbers from your problem statement if they differ. The step-by-step process remains the same.