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Swanson Shipyards Case
The Swanson Shipyards Corporation has been operating since 1981 on a somewhat volatile market, where governmental purchases (and I am referring here to contracts with the navy for example) played a high stake for the business. Additionally, there were other factors to be considered in what the business was concerned, factors relating to the location of maritime accidents (I am assuming that the shipyards closer to the accident area would have been used), availability and scheduling of maintenance overhauls (if the first factor would have been an external factor, not related to the company, this is an internal factor and regards the way Swanson is able to best schedule its activity so as not to have any "dead times") and the conditions in the maritime industry as a whole (again an external factor).
If we are to resume the main factors determining Swanson's activity, we will notice that two of the factors are external of the company's will and only one is actually internal. This shows in my opinion, a high rate of probabilistic approach governing the business. In this sense, there are things that Swanson can take into consideration and can work on, like improving its scheduling, and other things that do not have anything to do with what the company can or cannot do. To these external factors, but to a lesser degree, I would also add a psychological factor that is mentioned there, the customer preference for a certain shipyard. In many ways, this is an external factor, however, the company may improve its relationship with the customers, by means of an efficient marketing and pubic relation policy. It is notable, on the other side, that the most important factor is the ability to repair quickly and that often the other factors are less considered when choosing the shipyard.
Among the other specific characteristics of the maritime market, we should also consider the way contracts were negotiated and paid for. As such, the owners supplied a set of specifications and plans that provided the basis for the contract and on which the contract functioned. Additionally, payment was usually made after work was completed, so that it could be properly evaluated and any extra costs could be added to the list. Due to this and to the short duration of each contract, no cost-escalation provisions were made.
Analyzing Swanson's activity in 1999, we notice that a large portion of the 1999 total sales came from the Navy contracts that Swanson had. In fact, these accounted for roughly 46% of total sales, almost half. If I am to interpret this, I will notice a rather accentuated dependence on the Navy, however, we see this is no cause for concern, because the Navy has constantly increased its number of contracts, resulting in "extensive work performed over a substantial period of time." So, in this sense, even if Swanson depends greatly for its revenues on the contracts placed by the Navy, these keep constantly coming in.
Referring to the market in general and to the direct competitors, the first observation is that this is a very competitive market. In many ways, Swanson appears as a small company, competing with other shipyards with much greater resources. The market has a large number of competitors rivaling for contracts and price competition seems very acute because of this. So, we should be considering the two main methodologies of increasing profits: lower cost (combined with a higher rate of efficiency) and higher revenues (strictly determined by the accurate schedule and where the saying "time is money" becomes fully understandable).
If we are to summarize the findings until now, we may first assert that Swanson is a rather small company (only 64 acres of space and only two dry-docks, one of wood and one of steel). However, it seems to have gained its position in a market niche, mainly due to its competitiveness and to the Navy contracts from which it fully benefits. The fact that the Navy seems to have increased the number of contracts awarded to Swanson and due to the fact that more work is coming in, Swanson may be in a situation to increase its fixed assets value by acquiring a new dry-dock. It is mentioned that a contract was lost because only one dry-dock was in service, so it may be the case that the fixed assets that the company holds at the present time are no longer enough to cover the whole amount of work coming in. As I have said, the profit has two determinants: costs and revenues. Cost reduction may be somewhat difficult on this market, because I am assuming you have a rather large amount of fixed costs involved at each operation (cost with materials, with the workforce, etc.) and it would be hard to reduce these. In this sense, Swanson may be able to increase its profits by increasing its revenues. On the demand side, there is no problem: as I have mentioned, contracts keep coming in and there is more and more work to be done. The only problem is that the company can no longer manage this amount of work with the equipment it has in use at the present time. It has to consider expanding its business and the first step would be acquiring a new dry-dock.
Before evaluating the new investment and making some decisions in this sense, I would first like to use some of the known financial ratios in order to evaluate the company's present financial situation. Understandably, if this is not sound, it is unlikely that the company will be able to buy a new dry-dock.
In order to evaluate the company's solvability, we will calculate the current rate by dividing the current assets value to the current liabilities value. The value obtained will give us an idea about the present financial condition of the company. In this sense, if the current liabilities are greater than the current assets value, we may assume that Swanson is honoring its current liabilities later than it should and that in the future, it will begin accumulating debts in order to cover its liabilities. However, as we can see, the value obtained for this ratio is 1.36, so there is no question about the short-term solvability of the company.
Current Rate = Current assets/Current liabilities = 1.36
The data used does not give us any detail on the liabilities and debt (which would have been useful to calculate some of the debt management ratios, given the fact that Swanson intends to use a loan to buy the new equipment), however, we can calculate the return on total assets by dividing the net profit after taxes to the total assets. I am using this financial indicator in order to evaluate the current rate of return of the invested capital. If this is very small, then I would reconsider a new investment, because it would show me that the investments already made are not being used effectively.
ROA = Net profit after taxes/Total assets = 4.7%
It would have been interesting to be able to compare this result with those of other companies in the industry, however, the figure obtained seems to be rather high and may prove high profit margin on sales rates and this is encouraging.
Given the fact that Swanson is considering a new asset in the form of a dry-dock, it is useful to calculate some ratios that will evaluate the company's asset management. I will be calculating and explaining the fixed-assets turnover and the total-assets turnover.
The former is calculated as the net sales divided to the value of fixed assets and will show us how efficient the company is in using its machines and equipment. The value I have obtained was rather expected, given the analysis I have provided so far. Indeed, I have explained that the main problem that the company was facing regarded large amount of work, too large compared to the existing assets. This figure simply reflects and justifies the assertion I have made earlier.
Fixed-assets turnover = Net sales/Fixed assets = 8.2
In what the total-assets turnover is concerned, this is calculated by dividing the net sales to the total assets value. Again, this value seems consistent with the evaluations I have made above.
Total- assets turnover = 37,299,000/17,805,000 = 2.1
In order to evaluate which one of the dry-docks is the best investment, we have to appeal again to some financial rates and calculations. However, this seems to be a difficult task, because we don't have all the data necessary, such as, for example, the yearly cash flows that each dry-dock would bring. These would have helped calculate such indicators as the NPV (net present value).
The steel dry-dock costs $988,200, while the wooden one costs $794,300. To these costs, we should also add the maintenance costs, amounting for $1,800,000 for the 30 years the wooden dry-dock is expected to function and $1,600,000 for the steel one. So, a hypothetic total…[continue]
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