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Ratio Analysis at S & S Air, Inc. Chris Guthrie...

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Ratio Analysis at S & S Air, Inc. Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the company's performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then. S&S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the company's products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their-own airplanes. The company has two models; the Birdie, which sells for $53,000, and the Eagle, which sells for $78,000. Although the company manufactures aircraft, its operations are different from commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated parts, the company can complete the manufacture of an airplane in only five weeks. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial airplane may take one and one-half to two years to manufacture once the order is placed. Mark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry. Income Statement Sales $20,077,000 Cost of goods sold $14,985,000 Other expenses $2,399,000 Depreciation $655,000 EBIT $2,038,000 Interest $362,000 Taxable income $1,676,000 Taxes (40%) $670,400 Net income $1,005,600 Dividends $205,000 Add to retained earnings $800,600 S&SAIR,INC. 2006 Balance Sheet Assets Current assets Cash $365,040 Accounts receivable $1,534,680 Inventory $1,238,500 Total current assets $3,138,220 Fixed assets Net plant and equipment $12,315,680 Total assets $15,453,900 Liabilities and Equity Current liabilities Accounts payable $715,680 Notes payable $1,446,400 Total current liabilities $2,162,080 Long-term debt $3,825,000 Shareholder equity Common stock $150,000 Retained earnings $9,316,820 Total equity $9,466,820 Total liabilities and equity $15,453,900 Light Airplane Industry Ratios Lower quartile median Upper quartile Current Ratio .50 1.43 1.89 Quick Ratio .64 .84 1.05 Cash Ratio .08 .21 .39 Total Asset Turnover .68 .85 1.28 Inventory Turnover 4.89 6.15 10.89 Receivables turnover 6.27 9.82 11.51 Total Debt Ratio .31 .52 .61 Debt-Equity Ratio .58 1.08 1.56 Equity Multiplier 1.58 2.08 2.56 Times Interest Earned 5.18 8.06 9.83 Cash Coverage Ratio 5.84 8.43 10.27 Profit Margin 4.05% 5.15% 6.47% Return on Assets 6.05% 10.53% 13.21% Return on Equity 9.93% 16.54% 26.15% Questions: 1. Calculate the ratios for S &S Air that are shown for the industry. 2. Mark and Todd agree that a ratio analysis can provide a measure of a company?s performance. They have chosen Boeing as an aspirant company. Would you choose Boeing as an aspirant company? Why or Why not? 3. Compare the performance of S & S Air to the industry. For each Ratio comment why it might be viewed as positive or negative relative to the industry. Suppose you create an inventory ratio calculated as inventory divided by current liabilities. How do you think S & S Air?s ratio would compare to the industry average. 4. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?

 

Paper#5496 | Written in 18-Jul-2015

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