Question

Cape Fear Marine Mini Case

Sarah Connor was recently hired by Cape Fear Marine Company to assist the company with its short-term financial planning and to evaluate the firm’s financial performance. Sarah graduated from college five years ago with a degree in finance and had been employed in the treasury department of a large firm in Raleigh, North Carolina since then.

Kyle Reese founded Cape Fear Marine Company 15 years ago. The company’s operations are located near Wilmington, North Carolina. The firm is structured as an LLC. Cape Fear Marine manufactures a diverse line of boats, ranging from low-end fishing boats to high-end luxury craft. The company and its products have received high reviews for safety and reliability, as well as awards for customer satisfaction.

The marine products/boating industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity.

To get Sarah started with her analysis, Kyle has provided the following financial data. Sarah has gathered the industry ratios for the boat manufacturing industry.

CAPE FEAR MARINE CO. 2018 Income Statement
Sales		$ 167,310,000
Cost of Goods Sold		127,910,000
Other Expenses		19,994,000
Depreciation		5,460,000
Earnings Before Interest & Taxes (EBIT)		$ 13,946,000
Interest Expense		4,509,000
Taxable Income		$ 9,437,000
Income Taxes		3,774,800
Net Income		$ 5,662,200
Dividends	$ 3,537,320
Addition to Retained Earnings	$ 2,124,880

CAPE FEAR MARINE CO. Balance Sheet as of 31 December 2018
Assets			Liabilities & Equity
Current Assets			Current Liabilities
Cash	$ 3,042,000		Accounts Payable	$ 6,461,000
Accounts Receivable	4,473,000		Notes Payable	18,078,000
Inventory	8,136,000		Total	$ 24,539,000
Total	$ 15,651,000
Fixed Assets			Long-term Debt	$ 43,735,000
Net Plant & Equipment	$ 93,964,000
			Shareholders’ Equity
			Common Stock	$ 5,200,000
			Retained Earnings	36,141,000
			Total Equity	$ 41,341,000
Total Assets	$ 109,615,000		Total Liabilities & Equity	$ 109,615,000

Boat Manufacturing Industry Ratios
	Lower Quartile	Median	Upper Quartile
Current Ratio	0.50	1.43	1.89
Quick Ratio	0.21	0.38	0.62
Total Asset Turnover	0.68	0.85	1.38
Inventory Turnover	4.89	6.15	10.89
Receivable Turnover	6.27	9.82	14.11
Total Debt Ratio	0.44	0.52	0.61
Debt to 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
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%

a.   Calculate all of the ratios listed in the industry table for Cape Fear Marine.

b.   Compare the performance of Cape Fear Marine with the industry as a whole. For each ratio, comment on why it might be viewed as a positive or negative relative to the industry.

Answer 1

	RATIO	Lower Quartile	Median	Upper Quartile	CAPE FEAR MARINE		COMMENTS
	Current Ratio	0.50	1.43	1.89	=16651000/24539000 =	0.68	Negative--It is just above the lower quartile, and hence is unsatisfactory.
	Quick Ratio	0.21	0.38	0.62	=(3042000+4473000)/24539000 =	0.31	Negative--It is just above the lower quartile, and hence is unsatisfactory.
	Total Asset Turnover	0.68	0.85	1.38	=167310000/109615000 =	1.53	Positive--Above the industry upper quartile average; it indicates greater efficiency in utilization of total assets.
	Inventory Turnover	4.89	6.15	10.89	=127910000/8136000 =	15.72	Positive--Much above the industry higher quartile average; it indicates greater efficiency in utilization of inventory.
	Receivable Turnover	6.27	9.82	14.11	=167310000/4473000 =	37.40	Positive--Very much above the industry higher quartile average; it indicates much greater efficiency in receivables management.
	Total Debt Ratio	0.44	0.52	0.61	=(24539000+43735000)/109615000 =	0.62	Neutral--Just above the higher quartile of the industry average.
	Debt to Equity Ratio	0.79	1.08	1.56	=(24539000+43735000)/41341000 =	1.65	Higher than the upper quartile, but has to be judged with the ROE.
	Equity Multiplier	1.79	2.08	2.56	=109615000/41341000 =	2.65	Higher than the upper quartile, but has to be judged with the ROE.
	Times Interest Earned	5.18	8.06	9.83	=13946000/4509000 =	3.09	Negative--Unsatisfactory as it is lower than the lower quartile. It indicates inadequate protection to the lenders.
	Profit Margin	4.05%	6.98%	9.87%	=5662200/167310000 =	3.38%	Negative--Profitability is much lower and is unsatisfactory.
	Return on Assets	6.05%	10.53%	13.21%	=5662200/109615000 =	5.17%	Negative--Return is much lower and is unsatisfactory.
	Return on Equity	9.93%	16.54%	26.15%	=5662200/41341000 =	13.70%	Negative--Return is lower despite the higher D/E ratio.