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.
While 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.
| S& S Air, INC. 2009 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&S Air, INC 2009 Balance Sheet
| Assets |
|
|
Liabilites & Equity |
| Current assets |
|
|
|
Current Liabilities |
|
|
| Cash |
|
$365,040 |
|
Accounts payable |
|
$715,680 |
| Acconts receivable |
|
$1,534,680 |
|
Notes payable |
|
$1,446,400 |
| Inventory |
|
$1,238,500 |
|
Total Current liabilites |
$2,162,080 |
| Total Current assets |
|
$3,138,220 |
|
|
|
|
|
| Fixedassets |
|
|
|
Lont Term Debt |
|
$3,825,000 |
| Net Plant and equipment |
$12,315,680 |
|
Shareholder equity |
|
|
|
|
|
|
Common Stock |
|
$150,000 |
| Total Assests |
|
$15,453,900 |
|
Retained Earnings |
|
$9,316,820 |
|
|
|
|
Total Equity |
|
$9,466,820 |
|
|
|
|
Total Liabilities & Equity |
$15,453,900 |
|
|
|
|
|
|
|
|
| Light Airplane Industry Ratios |
|
|
Lower Quartile |
Median |
Upper Quartile |
| Current ratio |
0.50 |
1.43 |
1.89 |
|
| Quick Ratio |
0.64 |
0.84 |
1.05 |
|
| Cash Ratio |
0.08 |
0.21 |
0.39 |
|
| Total Asset Turnover |
0.68 |
0.85 |
1.28 |
|
| Iventory Turnover |
4.89 |
6.15 |
10.89 |
|
| Receivables Turnover |
6.27 |
9.82 |
11.51 |
|
| Total Debt Ratio |
0.31 |
0.52 |
0.61 |
|
| Debt-Equity Ratio |
0.58 |
1.08 |
1.56 |
|
| Equity Multiplier |
1.58 |
2.08 |
2.56 |
|
| Time Inerest 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% |
|
|
|
|
|
|
A. Calculate the ratios for S&S Air that are shown for the industry.
B. 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?
C. 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?
D. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?