Question

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. Although the company manufactures aircraft, its operations are different from commercial aircraft companies. S&S Air builds aircrafts 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 financial statements in the second sheet of this Excel spreadsheet along with the industry ratios for the light airplane manufacturing industry Chris has gathered.
Project 4: S&S Air and Light Aircraft Industry Analysis
Name:
Income Statement
Sales		$                     15,444,000			Ratios
Cost of Goods Sold		10,884,000			Current Ratio		0.75
Other Expenses		1,845,600			Quick Ratio		0.44
Depreciation		504,000			Cash Ratio
EBIT		2,210,400			Total Asset Turnover Ratio
Interest		277,800			Inventory Turnover
Taxable Income		$                        1,932,600			Receivables Turnover
Taxes (40%)		773,040			Total Debt Ratio
Net Income		$                        1,159,560			Debt to Equity Ratio
Dividends	$              347,868				Equity Multiplier
Add. To Retained Earnings	$              811,692				Times Interest Earned
					Cash Coverage Ratio
					Profit Margin
Balance Sheet					Return on Assets
Assets		Liabilities & Equity			Return on Equity
Current Assets		Current Liabilities
Cash	$              280,800	Acc. Payable	$             596,400
Accounts Rec.	505,200	Notes Payable	1,207,200
Inventory	566,400	Total Curr Liab.	$         1,803,600
Total Curr. Assets	$          1,352,400
Fixed Assets		Lont Term Debt	3,114,000
		Total Liabilities	$         4,917,600
Net Plant & Eqp.	$          8,673,600	Shareholde Eqty.
		Common Stock	$             120,000
		Retained Earnings	4,988,400
		Total Equity	$         5,108,400
Total Assets	$        10,026,000	Total Liab. & Equity	$       10,026,000
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 using formulas in cells H7 through H20. Answers will automatically also appear in cells E46 through E59.
2. Mark and Todd agree that a ratio analysis can provide a measure of the company’s performance. They have chosen Boeing as an aspirant (Beta) company. Would you choose Boeing as an aspirant (Beta) company? Why or why not?
3. Compare the performance of S&S Air to the Light Aircraft Industry. For each ratio, comment on why it might be viewed as positive or negative for S&S Air relative to the industry.
	Light Aircraft Industry
	Lower Quartile	Median	Upper Quartile	S&S
	Column1	Column2	Column3	Column4
Current ratio	0.5	1.43	1.89	0.75
Quick ratio	0.21	0.38	0.62	0.44
Cash ratio	0.08	0.21	0.39	0.00
Total asset turnover	0.68	0.85	1.38	0.00
Inventory turnover	4.89	6.15	10.89	0.00
Receivables turnover	6.27	9.82	14.11	0.00
Total debt ratio	0.44	0.52	0.61	0.00
Debt-equity ratio	0.79	1.08	1.56	0.00
Equity multiplier	1.79	2.08	2.56	0.00
TIE	5.18	8.06	9.83	0.00
Cash coverage	5.84	8.43	10.27	0.00
Profit margin	4.05%	6.98%	9.87%	0.00%
ROA	6.05%	10.53%	13.21%	0.00%
ROE	9.93%	16.54%	26.15%	0.00%

Answer 1

Current ratio	Current Assets/Current Liabilities	0.75x	It is a measure of company's liquidity as it measures compnay's ability to fulfill its current obligations. It should be more than one as its represts the compnay's current assets are more than current liabilities. S&S Air's Current ratio is not impressive.
Liquidity Ratio	Cash+Accounts Recievables/Current Liab.	0.44x	Liquidity ratio is more aggressive way of meaauring company's liquidity. It is also not good as liquidity ratio is far below 1x.
Cash Ratio	Cash/Current Liabilities	0.16x	It is between the lower and upper quartile but still needs improvent as it measures company's ability to fulfill current obligations using cash and cash equivalents

Total Assets Turnover	Sales/Total Assets	1.54x	Assets turnover is better than the industry figures which can be viewed as apositive sign
Inventory Turnover	COGS/Inventory	19.22x	Inventory turnover is also better tan industry figures
Recievables Turnover	Sales/Debtors	30.57x	Since, Recievables trunver is very high, it is good.
Total Debt Ratio	Total Debt/Total Assets	0.43x	This ratio indicates S7S air's debt is on the lower side, which is positive sign
Debt to Equity Ratio	Total Debt/Equity	0.85x	Debt is low, hence Debt to equity ratio is also low which is positive.
Equity Multiplier	Total Assets/Total Equity	1.96x	Positive outlook
TIE	EBIT/Interest Expense	7.96x	Very positive. As debt is low, interest is low and earnings are high, Times Interest Earned is positive.
Cash Coverage	EBITDA/Interest Expense	9.77x	Very positive. As debt is low, interest is low and earnings are high, Cash coverage is positive. It does not consider D&A for the interest coverage calculation purpose as D&A is anon cash expense.
Profit Margin	Net Profit/Sales	7.5%	Profit margin is at par with the industy which is good
ROA	Net Profit/Total Assets	11.6%	ROA is at par with the industy which is good
ROE	Net Profit/Total Equity	22.7%	ROE is at par with the industy which is good

The company can be chosen as an aspirant (Beta) company as all the ratios and financial measure except liquidity ratios are positive.