Case One: 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 companys 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 Max Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the companys 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

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company has two models; the Birdie, which sells for GHS 53,000, and the Eagle, which sells for GHS 78,000.

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. 2021 Income Statement

GHS

Sales

Cost of goods sold Other expenses Depreciation EBIT

Interest

Taxable Income Taxes (40%)

Net income

Dividends

Add to retained earnings

30,499,420 22,224,580 3,867,500 1,366,680 3,040,660 478,240 2,562,420 1,024,968 1,537,452

GHS560,000 977,452

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Assets

Accounts receivable Inventory

Total current

assets

Fixed assets

Net plant and equipment

Total assets

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

GHS

441,000 708,400

1,037,120 2,186,520

16,122,400 18,308,920

Liabilities and Equity GHS

S&S AIR, INC. 2021 Balance Sheet

Current assets Cash

Current liabilities Accounts payable Notes payable

889,000 2,030,000

Total current

liabilities 2,919,000

Long-term debt

Shareholder equity

Common stock Retained earnings

Total equity

Total liabilities and equity

Upper Quartile

1.89 0.62 0.39 1.38

10.89 14.11 0.61 1.56 2.56 9.83 10.27 9.87% 13.21%

5,320,000

350,000 9,719,920 10,069,920 18,308,920

Light Airplane Industry Ratios Lower

Quartile Median 0.50 1.43 0.21 0.38 0.08 0.21 0.68 0.85 4.89 6.15 6.27 9.82 0.44 0.52 0.79 1.08 1.79 2.08 5.18 8.06 5.84 8.43 4.05% 6.98% 6.05% 10.53%

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Return on equity 9.93% 16.54% 26.15%

QUESTIONS:

1. UsingthefinancialstatementsprovidedforS&SAir,calculateeachoftheratios listed in the table for the light aircraft industry.

2. Mark and Todd agree that a ratio analysis can provide a measure of the companys performance. They have chosen Boeing as an aspirant 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: Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.

3. ComparetheperformanceofS&SAirtotheindustry.Foreachratio,comment on 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?

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Case Two: Planning for Growth at S&S Air (Continuation of Case One)

After Chris completed the ratio analysis for S&S Air , Mark and Todd approached him about planning for next years sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here:

S&S Air, Inc. 2021 Income Statement

Sales

Cost of goods sold Other expenses Depreciation EBIT

Interest

Taxable Income Taxes (40%)

Net income

Dividends

Add to retained earnings

GHS 30,499,420 22,224,580

3,867,500 1,366,680 3,040,660

478,240 2,562,420 1,024,968 1,537,452

GHS 560,000 977,452

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S&S Air, Inc. 2021 Balance Sheet

Assets

GHS

Current assets

Cash 441,000 Accounts receivable 708,400 Inventory 1,037,120

Liabilities and Equity

GHS

Total current assets Fixed assets

Net plant and equipment

Total assets

QUESTIONS:

2,186,520

16,122,400

18,308,920

Current liabilities Accounts payable Notes payable

Total current liabilities

Long-term debt

Shareholder equity Common stock Retained earnings

Total equity Total liabilities and

889,000 2,030,000 2,919,000

5,320,000

350,000 9,719,920 10,069,920

equity 18,308,920

1. CalculatetheinternalgrowthrateandsustainablegrowthrateforS&SAir. What do these numbers mean?

2. S&SAirisplanningforagrowthrateof12percentnextyear.Calculatethe EFN for the company assuming the company is operating at full capacity. Can the companys sales increase at this growth rate?

3. Mostassetscanbeincreasedasapercentageofsales.Forinstance,cashcanbe increased by any amount. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a staircase or lumpy fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of GHS 5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?

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