Question

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 $103,000, and the Eagle, which sells for $178,000.

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.

S&S AIR, INC. 2018 Income Statement
Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (25%) Net income Dividends $    705,000 Add to retained earnings 1,612,789	$46,298,115 34,536,913 5,870,865 2,074,853 $ 3,815,484 725,098 $ 3,090,386 772,597 $ 2,317,789

S&S AIR, INC. 2018 Balance Sheet
	Assets				Liabilities and Equity
	Current assets				Current liabilities
	Cash		$ 524,963		Accounts payable		$ 1,068,356
	Accounts receivable		843,094		Notes payable		2,439,553
	Inventory		1,235,161		Total current liabilities		$ 3,507,909
	Total current assets		$ 2,603,218
					Long-term debt		$ 6,300,000
	Fixed assets
	Net plant and equipment		$20,381,945		Shareholder equity
					Common stock		$ 460,000
					Retained earnings		12,717,254
					Total equity		$ 13,177,254
	Total assets		$22,985,163		Total liabilities and equity		$ 22,985,163

Light Airplane Industry Ratios
	Lower Quartile	Median	Upper Quartile
Current ratio Quick ratio Cash ratio Total asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit margin Return on assets Return on equity	.50 .21 .08 .68 4.89 6.27 .41 .68 1.68 5.18 5.84 4.05% 6.05% 9.93%	1.43 .35 .21 .85 6.15 9.82 .52 1.08 2.08 8.06 9.41 5.10% 9.53% 15.14%	1.89 .62 .39 1.38 10.89 14.11 .61 1.56 2.56 9.83 10.27 7.15% 13.21% 19.15%

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.

Answer 1

Current ratio = Current Assets/ Current Liabilities = (2,603,218)/(3,507,909) = 0.742

Quick ratio = (Current Assets - Inventory)/ Current Liabilities = (2,603,218- 1,235,161)/ (3,507,909) = 0.389

Cash ratio = Cash / Current Liabilities = (524,963)/(3,507,909) = 0.149

Total asset turnover = Sales/ Total Assets = (46,298,115)/ (22,985,163) = 2.014

Inventory turnover = COGS/ Average inventory = (34,536,913)/(1,235,161) = 27.96

Receivables turnover = Sales/ Average receivables = (46,298,115) / (843,094) = 54.91

Total debt ratio= Total Debt/ Assets = ( Total CL + Long term debt)/ Assets = (3,507,909+6,300,000)/22,985,163 = 42.67%

Debt-equity ratio= Total debt/ Equity = 3,507,909+6,300,000/ 13,177,254 = 74.43%

Equity multiplier = (Total Assets/ Equity) = 22,985,163/ 13,177, 254 = 1.744

Times interest earned = EBIT/ Interest = 3,815, 484/725,098 = 5.26

Cash coverage ratio = (EBIT + Depreciation)/ Interest = (3,815, 484+ 2,074,853)/725,098 = 8.12

Profit margin = Net Income/ Sales = (2,317,789)/(46,298,115) = 5.006%

Return on assets = Net Income/ Total Assets = 2,317,789/ 22,985,163 = 10.08%

Return on equity = Net Income/ Equity = 2,317,789/13,177, 254 = 17.58 %