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




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 ind~ viduals 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 30,499,420 Cost of goods sold 22,224,580 Other expenses 3,867,500 Depreciation 1,366,680 EBIT 3,040,660 Interest 478,240 Taxable income 2,562,420 Taxes (40%) 1,024,968 Net income 1,537,452 Dividends 560,000 Add to retained earnings 977,452 S&SAIR,INC. 2006 Balance Sheet Assets Current assets Accounts receivable 708,400 Cash $ 441,000 Inventory 1,037,120 Total current assets $ 2,186,520 Fixed assets Net plant and equipment $16,122,400 Total assets $18,308,920 Liabilities and Equity Current liabilities Accounts payable $ 889,000 Notes payable 2,030,000 Total current liabilities $ 2,919,000 Long-term debt $ 5,320,000 Shareholder equity Common stock $ 350,000 Retained earnings 9,719,920 Total equity $10,069,920 Total liabilities and equity $18,308,920 Light Airplane Industry Ratios Lower quartilemedianUpper quartile Current Ratio.501.431.89 Quick Ratio.21.38.62 Cash Ratio.08.21.39 Total Asset Turnover.68.851.38 Inventory Turnover4.896.1510.89 Receivables turnover6.279.8214.11 Total Debt Ratio.44.52.61 Debt-Equity Ratio.791.081.56 Equity Multiplier1.792.082.56 Times Interest Earned5.188.069.83 Cash Coverage Ratio5.848.4310.27 Profit Margin4.05%6.98%9.87% Return on Assets6.05%10.53%13.21% Return on Equity9.93%16.54%26.15% Questions: 1.Using the financial statements provided for S &S Air, calculate each of the ratios listed in the table for the light aircraft industry. 2.Mark and Todd agree that a ratio analysis can provide a measure of a companys performance. They have chosen Boeing as an aspirant company. Would you choose Boeing as an aspirant company? Why or Why not? There are other aircraft manufacturers S &S Air could use as aspirant companies. Discuss whether its appropriate to use any of the following companies: Bombiardier, Embracer, Cirrus Design Corporation, and Cessna Aircraft Company. 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 Airs ratio would compare to the industry average.


Paper#5961 | Written in 18-Jul-2015

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