Reference no: EM13875195

Business Analysis Blue Water Yachts is a small company founded by two businesspeople who are friends and avid sailors. At present, they are interested in expanding the business and have asked you to review its financial statements.

Blue Water Yachts sells approximately 100 to 150 sailboats each year, ranging from 14-foot din- ghies to 20-foot sailboats. Their sales prices range from $2,000 to more than $10,000. The company has a limited inventory of boats consisting primarily of one or two boats from each of the four manufacturers that supply Blue Water. The company also sells a variety of supplies and parts and performs different types of service. Most sales are on credit.

The company operates from a large building that has offices, storage, and sales for some of the smaller sailboats. The larger sailboats are kept in a fenced area adjacent to the main building, and an ample parking area is nearby. This year Blue Water purchased a boat lift to haul boats. The lift has brought in revenues for boat repairs, hull painting, and related services, as well as the boat hauls.

The balance sheet and income statement for Blue Water Yachts for 2005 through 2009 and for the first eleven months of 2010 follow. The increase in net fixed assets in the recent two years is due to improvements in the building, paving of the parking area, and the purchase of the lift.

The company obtains its debt financing from two sources: a small savings and loan for its short- term funds, and a larger commercial bank, also for short-term loans, but principally for long-term financing. The terms of the loan agreement with the bank include a restriction that its current ratio must remain higher than 1.5.

Required: Evaluate the liquidity and profitability of Blue Water Yachts using selected financial ratios. Assess the company's overall profitability, liquidity, and desirability as an investment. Use a spreadsheet to improve the speed and accuracy of your analysis.

BLUE WATER YACHTS COMPANY

Comparative Balance Sheet For the Years Ended December 31,

2010 2005            2006            2007            2008            2009      (11 months)

Cash                                          $ 23,260          $ 21,966          $ 18,735          $ 28,426         $ 43,692        $ 31,264

Accounts receivable                    99,465          102,834          112,903          125,663          104,388        142,009

Allowance for bad debts               (9,304)            (8,786)            (8,824)          (11,266)           (7,282)        (12,506)

Inventory                                        35,009            56,784            61,792            67,884           58,994          95,774

Other current assets                    11,894            12,894              9,024            11,006           18,923          22,903

                                                                                                       

Total current assets             $160,324         $185,692         $193,630         $221,713        $218,715       $279,444 Property and equipment                   262,195          282,008        299,380          368,565            405,269       498,626

Accounts payable	82,635	78,127	63,346	56,256	40,189	49,544
Taxes payable	11,630	10,983	11,780	14,083	3,738	15,632
Short-term loans	59,876	56,980	37,583	41,093	49,594	76,962
Accrued payroll payable	5,227	4,598	3,649	4,224	4,774	4,779
Total current liabilities	$159,368	$150,688	$116,358	$115,656	$98,295	$146,917
Long-term debt	158,173	172,388	179,490	214,997	229,471	262,258
Equity	38,994	51,182	74,270	101,526	108,991	142,588
Total liabilities and equity	$356,535	$374,258	$370,118	$432,179	$436,757	$551,763
Accumulated depreciation	65,984)	(93,442)	(122,892)	(158,099)	(187,227)	(226,307)
Total assets	$356,53	$374,258	$370,118	$432,179	$436,757	$551,763

BLUE WATER YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow
For the Years Ended December 31,
2005            2006            2007           2008	2009	2010 (11 months)
Sales                                           $767,580        $724,878         $777,480       $929,478	$764,610	$938,857
Returns and allowances                38,379            35,645            40,334           45,998	32,887	46,380
Cost of sales                                 473,908          441,298          458,015         545,778	453,669	530,597
Gross margin                          $255,293        $247,935         $279,131       $337,702	$278,054	$361,880
Depreciation expense                 $ 29,075           $27,458        $ 29,450        $ 35,208	$ 29,128	$ 35,563
Interest expense                             18,597            19,557            20,998           21,475	24,889	28,993
Salaries  and wages                       81,923            73,664            77,846           95,764	92,903	99,447
Accounting and legal                       9,304             8,786              9,323           11,834	13,108	11,380
Administration  expense                       79,666            75,234            80,693           96,469	87,995	97,441
Other expense                                12,630            18,927            15,763           22,903	18,934	22,662
Total expense                         $231,195        $223,626         $234,073       $283,653	$266,957	$295,486
Net income                                 $ 24,098         $ 24,309          $ 45,058        $ 54,049	$ 11,097	$ 66,394
Cash flow from operations Depreciation                                                    $ 27,458          $ 29,450        $ 35,208	$ 29,128	$ 35,563
Decrease (increase) in  receivables                (3,887)          (10,031)        (10,318)	17,291	(32,397)
Decrease (increase) in inventory                   (21,775)            (5,008)          (6,092) Decrease (increase) in other current assets                                                           (1,000)             3,870           (1,982)	8,890   (7,917)	(36,780)   (3,980)
Increase (decrease) in current

liabilities  (8,680)          (34,330)             (702)          (17,361)         48,622

$ 16,425          $ 29,009        $ 70,163         $ 41,128        $ 77,422