Question

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 US$53, 000, and the Eagle,
which sells for US$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 is
able to 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. They have also gathered the
industry ratios for the light airplane manufacturing industry.

S&S Air Inc. Income Statement for the year ended 31st December 2016
(GHC)
Sales 15,444,000
Cost of goods sold 10,884,000
Other expenses 1,845,600
Depreciation 504,000
EBIT 2,210,400
Interest 277,800
Taxable income 1,932,600
Taxes (40%) 773,040
Net income 1,159,560
Dividends 347,868
Add. To retained earnings 811,692

S&S Air Inc. Statement of Financial Position as at 31st December 2016
GHC
ASSETS
Non-current assets
Net plant and equipment 8,673,600
8,673,600

Current assets
Inventory 566,400
Accounts receivable 505,200
Cash 280,800
1,352,400
TOTAL ASSETS 10,026,000

EQUITY AND LIABILITIES
Shareholder equity
Common stock 120,000
Retained earnings 4,988,400
Total equity 5,108,400

Non-current liabilities
Long-term debt 3,114,000
Total non-current liabilities 3,114,000

Current liabilities
Accounts payable 596,400
Notes payable 1,207,200
Total current liabilities 1,803,600
Total liabilities 4,917,600
TOTAL EQUITY AND LIABILITIES 10,026,000

Light Airplane Industry Ratios
                                 Lower quartile   Median       Upper quartile
Current ratio.                   0.50.           1.43               1.89
Quick ratio.                      0.21             0.38               0.62
Cash ratio.                       0.08             0.21               0.39
Total asset turnover.      0.68.            0.85.              1.38
Inventory turnover.         4.89.            6.15               10.89
Receivables turnover.    6.27.            9.82               14.11
Total debt ratio               0.44            0.52                0.61
Debt-equity ratio.           0.79            1.08                 1.56
Equity multiplier            1.79.            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%.         6.98%.            9.87%
Return on assets.          6.05%.         10.53%           13.21%
Return on equity.           9.93%.         16.54%.          26.15%

Required
a. In view of the high reviews for safety and reliability that their products have received, would you say
that S&S Air has lower credit risk than the industry’s median?
b. Calculate ten ratios and evaluate them to support your conclusion.
c. Note that marks will be awarded for the following: introduction, mechanics and style, arguments made
and conclusion.

Answer 1

1.CURRENT RATIO = CURRENT ASSET/CURRENT LIABILITIES
CURRENT ASSET
INVENOTRY			5,66,400.00
ACCOUNT RECIEVABLES			5,05,200.00
CASH			2,80,800.00
TOTAL CURRENT ASSET			13,52,400.00
CURRENT LIABILITIES
ACCOUNT PAYABLE			5,96,400.00
NOTES PAYABLE			12,07,200.00
			18,03,600.00
CURRENT RATIO=1352400/1803600			0.75
CURRENT RATIO IS BELOW THE INDUSTRY
2.QUICK RATIO=QUICK ASSET/CURRENT LIABILITIES
QUICK ASSET=CASH+ACCOUNT RECIEVABLE
ACCOUNT RECIEVABLE			5,05,200.00
CASH			2,80,800.00
			7,86,000.00
QUICK RATIO=786000/1803600				0.44
QUICK RATIO IS BELOW THE INDUSTRY
3.CASH RATIO=CASH & CASH EQUIVALENT/CURRENT LIABILITIES
CASH			2,80,800.00
CURRENT LAIBILITIES			18,03,600.00
CASH RATIO=280800/1803600				0.16
CASH RATIO IS BELOW THE INDUSTRY
4.TOTAL ASSET TURNOVER =SALES/ENDING TOTAL ASSET
SALES			1,54,44,000.00
ENDING TOTAL ASSETS			1,00,26,000.00
TOTAL ASSET TURNOVER=1544400/10026000		1.54
TOTAL ASSET TURNOVER IS ABOVE THE INDUSTRY ,HENCE	POSITIVE
5.INVENTORY =COST OF GOODS SOLD/ENDING INVENTORY
COST OF GOODS SOLD			1,08,84,000.00
ENDING INVENTORY			5,66,400.00
INVENTORY TURNOVER			19.22
INVENTORY TURNOVER IS VERY HIGH COMPARED TO INDUSTRY,FURTHER INVESTIGATION
NEEDS TO BE DONE
6.RECIEVABLES TURNOVER= SALES/ENDING RECIEVABLE
SALES			1,54,44,000.00
RECIEVABLE			5,05,200.00
RECIEVABLE TURNOVER			30.57
RECIEVABLE TURNOVER IS VERY HIGH COMPARED TO INDUSTRY FURTHER INVESTIGATION
IS REQUIRED
7.TOTAL DEBT RATIO=TOTAL LIABILITIES/TOTAL ASSET
TOTAL LIABILITIES
CURRENT LIABILITIES			18,03,600.00
LONG TERM DEBT			31,14,000.00
TOTAL LIABILITIES			49,17,600.00
TOTAL ASSET			1,00,26,000.00
TOTAL DEBT RATIO			0.49
8.DEBT-EQUITY RATIO=TOTAL DEBT/EQUITY
NOTES PAYABLE			12,07,200.00
LONG TERM DEBT			31,14,000.00
TOTAL DEBT			43,21,200.00
EQUITY			51,08,400.00
DEBT EQUITY RATIO=4321200/5108400		0.85
ITS BELOW THE INDUSTRY BUT CONSIDERED GOODS
9.EQUITY MULTIPLIER=TOTAL ASSET / TOTAL EQUITY
TOTAL ASSET			1,00,26,000.00
EQUITY			51,08,400.00
EQUITY MULTIPLIER			1.96
ITS BELOW THE INDUSTRY
10. PROFIT MARGIN=NET INCOME/NET SALES
NET INCOME			11,59,560.00
NET SALES			1,54,44,000.00
PROFIT MARGIN			7.51%
PROFIT MARGIN IS BELOW THE INDUSTRY HENCE NOT A GOOD SIGN
11.RETURN ON ASSET=NET INCOME/ENDING TOTAL ASSET
NET INCOME			11,59,560.00
TOTAL ASSET			1,00,26,000.00
RETURN ON ASSET			12%
12.RETURN ON EQUITY=NET INCOME/SHARE HOLDER EQUITY
NET INCOME			11,59,560.00
SHAREHOLDERS EQUITY			51,08,400.00
RETURN ON EQUITY			23%
ABOVE THE EQUITY HENCE A GOOD POSITION