East Coast Yachts

Company Overview East Coast Yachts was founded in 1969 by Tom Warren as a sole proprietorship which later became a publicly traded corporation after operations were assumed by his daughter (Ross, 2011). Located in South Carolina, the company manufactured custom midsize, high-performance yachts and has been praised for safety and reliability (Ross, 2011). The company enjoyed new business and growth within its industry due to its customer satisfaction. However, an evaluation of cash flows later revealed two key issues: poor planning and limited facilities made it difficult to finance a growth plan and handle customer demands (Ross, 2011).The issues were determined after the financial analyst studied the consolidated income statements and balance sheets for the last two years, along with other short-term management decisions.

In an effort overcome the obstacles and make preparations for to fund an expansion, East Coast Yachts completed an industry comparison along with pro forma income statements and balance sheets. East Coast Yachts Ratios and Financial Statements When compared to its industry, East Coast Yachts ratios faired very well.There were twelve ratios compared and only four ratios impacted the company negatively. Those four ratios included the following: A current ratio of 1.

12 compared to the industry ratio of 1. 51 could be viewed as a potential risk due to an inability to pay current liabilities. A quick ratio of 0. 66 for ECY compared to 0. 75 could also be viewed as potential weakness. An inventory ratio of 0.

46 may show investors that ECY relies heavily on future sales to pay current assets. Lastly, the return on equity for ECY was 22% compared to 14. 32% for the industry.This interpretation could pose yet another threat as investors may assume that East Coast Yachts borrow too much money. From another perspective, the positive impact of the remaining ratios place East coast Yachts in a good position to move forward with its expansion. For example, the total asset turnover for ECY was 1.

51 compared to 1. 27 for the industry. ECY has generated significant sales from their assets. The receivables turnover for ECY was 30.

57 compared to 17. 65 for the industry. The debt ratio was 0. 48 compared to 0. 49 for the industry.The debt-equity ratio 0.

92 and the equity multiplier 1. 92 were both positive ratios for ECY. The total debt was less than the total equity. East Coast Yachts has sufficient sales to make interest payments only.

For every dollar in sales, ECY has generated eight cents. This ratio is reflected in its profit margin. Finally, the return on assets compared to the industry showed an above average profit per dollar generated by East Coast Yachts. After the comparison of ratios, the sustainable growth rate which was calculated for East Coast Yachts was 0. 56432 – almost a 16% growth rate. At this rate, ECY needed twenty-two million, sixty-nine thousand, six hundred ninety-five dollars and fifty-six cents in external funds.

Below are the pro forma income statements and balance sheets prepared from the sustainable growth rate. Table 1 East Coast Yachts Pro forma Income Statement Table 2 East Coast Yachts Pro forma Balance Sheet After preparation of the pro forma statements, East Coast Yacht ratios were compared to its industry a second time which showed little change.Another attempt to maximize growth included 20 percent expansion plans which have not been beneficial without further external financing to increase the leverage of the company. Given ECY's current debt level and its current ratio, ECY needs to fully utilize the new line so that ECY can cover the costs - assuming equity financing is out of the question. If ECY doesn't expand by equity financing, they can either suspend the dividend or borrow more money.

Borrowing more money increase current liabilities - which the current ratio tells us they are close to being unable to cover.CFO Analysis East Coast Yachts (ECY) is a large corporation that is in the business of manufacturing yachts. ECY faces a future dilemma. While the company is performing and can grow from only its own operations, this rate of growth is insufficient to meet market demand. As managers of ECY, it is our job to maximize shareholder wealth. In this interest, turning our back on market demand and gaining further market share is not in our best interests.

What is in our best interests, however, is balancing the need to expand with the need to maintain financial solvency and balance risk.As CFO of ECY, we examine the current numbers and analyze our options for growth. Our current financial picture is one that is certainly acceptable. From operations, we generate significant net income and are capable of paying our shareholders a nice dividend – almost 38% of net income is released in the form of a dividend.

Even then, we are able to contribute over $28M to our retained earnings. Not bad results for 2010 – a year in which the nation continues to struggle to put the recession behind us. When we look at the balance sheet, we may become alarmed though.While ECY has $11. 3M in cash and $20.

2M in receivables, it also has $146. 5M in long term debt. ECY has a current ratio of 1. 12 and a quick ratio of 0.

66, both below industry averages. ECY has significant annual debt service obligations that keep these ratios low. These facts are mitigated however by looking at other areas of the balance sheet, specifically inventory and accounts receivable. ECY has an inventory turnover ratio of 19. 22, superior to the industry, which means ECY sold off its entire inventory over 19 times in 2010.

When we look at the receivables turnover ratio, ECY has a value of 30. 57. If we convert this to days sales in receivables, we get a value of 11. 9 days. This tells us that ECY has very sound underwriting practices for who it decides to extend credit to.

So while are current ratio is on the light side, we as managers can be confident in our ability to sell our inventory and to collect on our credit accounts. We can presumably count on continuing strong demand, based from these numbers. While the current state of affairs for ECY is acceptable, the real issue is how to handle the future.ECY finds itself in an expanding market, and the managers want to capitalize on the opportunity.

Internal growth is insufficient to meet the demands. Based upon our calculation of ECY’s sustainable growth rate of . 15%, it’s clear that ECY will have to make a decision on how to finance this growth. If we use this growth rate to construct pro-forma statements, we find that ECY has external funds needed in the amount of $22M. As CFO, it is our job to determine the best course of action.

Recommendations Although ECY wants to expand, there is one condition present to how we expand.The shareholders do not want to finance growth by offering more shares for sale and diluting current ownership. We have to choose another route. As CFO, we feel that the best course of action for the health of the company is one that may not be popular with shareholders. However, given shareholder limitations that have been put on us, those shareholders actually help fuel this decision. To finance the external funds needed of $22M, ECY will suspend dividend payments of $21.

4M for one year and finance the remaining $600K. As a company, ECY is already carrying a large amount of debt.Its current and quick ratios speak of potential inabilities to service its annual debt. Should the market turn or the company experiences any type of a downturn, ECY’s ability to pay its creditors is seriously at risk without major fixed asset liquidation.

To protect against such a scenario, ECY will take on only the minimum amount of debt to meet our growth needs. The shareholders will have to be happy in the fact that ECY is growing, they are fiscally responsible, the move may increase the per share value, and can take comfort in the fact that future dividend payments will resume.