Chapter 3: In Class Group Exercise 1 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 $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 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. 2014 Income Statement Sales $40,259,230 Cost of goods sold 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 retained earnings 1.419,766 Styles Editing Voice Assets Current assets Cash Accounts receivable Inventory Total current assets S&S AIR, INC. 2014 Balance Sheet Liabilities and Equity Current abilities $ 456,435 Accounts payable 733,125 Notes payable 1,073,180 Total current abilities $ 2.282,740 Long-term debt $ 929,005 2,121,350 $ 3.050,355 $ 5.500.000 Fixed assets Net plant and equipment $17.723.430 Shareholder equity Common stock Retained earnings Total equity Total abilities and equity $ 400,000 11.035,815 $11.435.815 $19.986,170 Total assets $19.986.170 Light Airplane Industry Ratios Lower Upper Quartile Median Quartile Current 50 1.43 1.89 ratio Quick ratio 21 35 .62 Cash ratio 08 21 39 Total asset .68 85 1.38 turnover Inventory 4.89 6.15 10.89 turnover Receivables 6.27 9.82 14.11 turnover Total debt 44 52 .61 ratio Debt- 68 1.08 1.56 equity ratio Equity 1.68 2.08 2.56 multiplier Times 5.18 8.06 9.83 interest earned Cash 5.84 9.41 10.27 coverage ratio Profit 4.05% 5.10% 7.1596 Return on 60596 10 5396 13.219 9.9396 18.14% 26.15% Return on equity JESTIONS 1. Using the financial statements provided for S&S Air, calculate the Current Ratio, Total Asset Turnover, Debt-Equity Ratio, Profit Margin and Return on Equity 2. Compare the performance of S&S Air to the industry. For each ratio, 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 Air's ratio would compare to the industry average