Question

Chris Guthrie was recently hired by S&S Air, Inc., to asset 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 is 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 contast, a commercial airplane may take one and one-half to two years to manufacture once the order is placed.

Mark and Todd have provided financial statements (which are to the left and below). In addition, Chris has gathered the industry ratios for the light airplance manufacturing industry (below).

	2019 Income Statement
	Sales		$    40,259,230
	COGS		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 RE		$       1,419,766

		2019 Balance Sheet
		Assets				Liabilities & Equity
		Current Assets				Current Liabilities
		Cash		$          456,435		Accounts Payable	$          929,005
		Accounts rec.		733,125		Notes Payable	2,121,350
		Inventory		1,073,180		Total CL	$       3,050,355
		Total CA		$       2,262,740
						Long-term debt	$       5,500,000
						Shareholder Equity
		Fixed assets				Common stock	$          400,000
		Net PP&E		$    17,723,430		Retained earnings	11,035,815
						Total Equity	$     11,435,815
		Total Assets		$    19,986,170		Total L&E	$     19,986,170

		Industry
		Lower Quartile	Median	Upper Quartile
Current ratio		0.50	1.43	1.89
Quick ratio		0.21	0.35	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		0.68	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%

Questions:

1. Using the financial statements provided above, calculate each of the ratios listed in the industry table for S&S Air (all 14 of them).

2. Mark and Todd agree a ratio analysis can provide a measure of the company's performance. They have chosen Boeing as an aspirant (comparison) company. Would you choose Boeing as an aspirant company? Why or why not? There are other aircraft manufacturers S&S Air could use as aspirant companies. Discuss whether it is appropriate to use any of the following companies: Bombadier, Embraer, Cirrus Aircraft Corporation, and Cessna Aircraft Company.

3. Compare the performance of S&S Air to the industry, using the 14 ratios you calculated in part 1 and the industry table provided. For each ratio, comment on whether it would be viewed as positive or negative (favorable or unfavorable) to the industry and why.

Answer 1

1) Using the financial statements provided above, calculate each of the ratios listed in the industry table for S&S Air
Current ratio = Total Current Assets/ Total Current Liabilities	0.74	times
Quick ratio =  (Total Current Assets - Inventory)/ Total Current Liabilities	0.39	times
Cash ratio = Cash / Total Current Liabilities	0.1496	times
Total asset turnover = Net income/ total Assets	2.014	times
Inventory days = Inventory x 365 days/ COGS	13.35	days
Receivables days = Accounts Receivables x 365 days /sales	6.65	days
Total debt ratio = Total Liabilities / Total Assets	0.428	:1
Debt-equity ratio = Total Liabilities / Total Equity	0.748	:1
Equity multiplier = Debt-equity ratio + 1	1.748	times
Times interest earned = EBIT/Interest	6.365	times
Cash coverage ratio = (EBIT+ dep.)/Interest	9.227	times
Profit margin = Net Income/ Sales	5.04%
Return on assets = Net Income/ Total Assets	10.16%
Return on equity = Net Income/ Total Equity	17.75%