Ratio Analysis at S&S Air, Inc.

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Ratio Analysis at S&S Air, Inc.

Chris Guthrie was recently hired by S&S Air, Inc., to assist thecompany with its financial planning and to evaluate the company’sperformance. Chris graduated from college five yearsago with a finance degree. He has been employed in the financedepartment of a Fortune 500 company since then.

S&S Air was founded 10 years ago by friends MarkSexton and Todd Story. The company has manufactured andsold light airplanes over this period, and the company’s productshave received high reviews for safety and reliability. Thecompany has a niche market in that it sells primarily to individuals who own and fly their-own airplanes. The companyhas two models; the Birdie, which sells for $53,000, and theEagle, which sells for $78,000.

Although the company manufactures aircraft, its operationsare different from commercial aircraft companies. S&SAir builds aircraft to order. By using prefabricated parts, thecompany can complete the manufacture of an airplane in onlyfive weeks. The company also receives a deposit on each
order, as well as another partial payment before the order iscomplete. In contrast, a commercial airplane may take oneand one-half to two years to manufacture once the order isplaced.

Mark and Todd have provided the following financialstatements. Chris has gathered the industry ratios for the lightairplane manufacturing industry.

S&S Air INC.

2015 Income Statement

 

 

Sales                                                             $ 40,259,230
Cost of goods sold                                           29,336,446
Other expenses                                                  5,105,100
Depreciation                                                       1,804,220
EBIT                                                                 $ 4,013,464
Interest                                                                   630,520
Taxable income                                                $ 3,382,944
Taxes (40%)                                                        1,353,178
Net income                                                        $ 2,029,766
Dividends                                 $  610,000
Add to retained earnings           1,419,766

 

 

 

 

 

 

 

 

 

S&S Air Inc

2014 Balance Sheet
          Assets                                                                        Liabilities & Equalities
 

Current assetsCurrent liabilities

Cash $ 456,435                 Accounts payable                       $ 929,005

Accounts receivable              733,125                 Notes payable                            2,121,350
Inventory                             1,037,180                   Total current liabilities           $  3,050,355
Total current assets $ 2,262,740

Fixed assets                                                         Long-term debt                       $  5,500,000

Net plant and equipment$17,723,430            Shareholders equity common stock       $   400,000
Retained earnings                                 11,035,815
Total Equity                                        $ 11,435,815

 

Total assets                        $19,986,170Total liabilities and equity$19,986,170

 

 

Light Airplane Industry Ratios

Lower quartileMedianUpper quartile
 

Current Ratio                         .50                                            1.43                                           1.89
Quick Ratio                            .21                                             .35                                              .62
Cash Ratio                             .08                                             .21                                              .39
Total Asset Turnover             .68                                             .85                                            1.38
Inventory Turnover               4.89                                           6.15                                          10.89
Receivables turnover            6.27                                           9.82                                          14.11
Total Debt Ratio                     .44                                              .52                                              .61
Debt-Equity Ratio                   .68                                            1.08                                            1.56
Equity Multiplier                    1.68                                            2.08                                            2.56
Times Interest Earned          5.18                                            8.06                                            9.83
Cash Coverage Ratio           5.84                                            9.41                                          10.27
Profit Margin                         4.05%                                         5.10%                                        7.15%
Return on Assets                  6.05%                                       10.53%                                       13.21%
Return on Equity                   9.93%                                       18.14%                                       26.15%

 

 

 

 

Instructions

  1. In your textbook, Fundamentals of Corporate Finance, read:
    1. Chapter 3, “Working with Financial Statements,” pages 57–80 (sections 3.3, 3.4, and 3.5)
  2. Download and review the PowerPoint file Chapter 3 – Working with Financial Statements.ppt to help you further understand the chapter.
  3. In your textbook, Fundamentals of Corporate Finance, complete the requirements of the Mini-case “Ratio Analysis at S&S Air, Inc.” on pages 89 and 90:
    1.  Question # 1: Use an Excel spreadsheet to calculate each of the ratios listed in the table.  Be sure to show your work.
    2. Question #2:  Briefly comment in your Excel spreadsheet on the appropriateness of Boeing and the other competitors as an aspirant company for comparison.
    3. Question # 3: In your Excel spreadsheet, compare each calculated ratio to the industry ratios given in the table.  Briefly explain whether the calculated ratio would be viewed positively or negatively relative to the industry and why.  (Exclude the second half of this question regarding the creation of an inventory ratio)
 
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