Chris Gumede was recently hired by S&S Air to help the company with its financial planning and to evaluate the company's performance. Chris graduated from college five years ago with a degree in finance. S&S Air was founded 10 years ago by friends Mark and Thandi. The company has manufactured and sold light aircraft during this period and the company's products have received very high reviews for their safety and reliability. The company has a niche market where it sells primarily to people who own and fly their own planes. The company has two models, the Birdie, which sells for R2,530,000, and the Eagle, which sells for R5,780,000. Although the company manufactures aircraft, its operations are different from those of commercial aircraft companies. S&S Air builds aircraft to order. By using pre-fabricated parts, the company can complete aircraft manufacturing in just five weeks. The company also receives a deposit for each order, as well as another partial payment before the order is completed. By contrast, a commercial aircraft can take one and a half to two years to manufacture once the order is placed. Mark and Thandi provided the following financial statements. Chris has compiled industry ratios for the light aircraft manufacturing industry. A commercial aircraft can take one and a half to two years to manufacture once the order is placed. Mark and Thandi provided the following financial statements. Chris has compiled industry ratios for the light aircraft manufacturing industry. A commercial aircraft can take one and a half to two years to manufacture once the order is placed. Mark and Thandi provided the following financial statements. Chris has compiled industry ratios for the light aircraft manufacturing industry.

S&S Air Financial Statements2008

Statement of income

Sales R128 700 000

Cost of goods sold 90,700,000

Other expenses 15,380,000

Depreciation 4,200,000

BIT 18 420 000

Interest 2,315,000

PBT 16 105 000

Tax (40%) 6 442 000

NPA R 9 663 000

Dividends 2,898,900

Add to retained earnings 6,764,100

Balance 2008

Common shares 1,000,000 Net non-current assets R72 280,000

Retained earnings 41,570,000

Shareholders' equity R42 570,000 Inventory 4,720,000

Long-term debt R25,950,000 Accounts receivable 4,210,000

Cash 2,340,000

Accounts payable 4,970,000 Current assets R11 270,000

Short-term debt 10,060,000

Current liabilities R15 030 000

R83 550 000 R83 550 000

Light Aircraft Industry Relations

Lower quartile Median Upper quartile

Current ratio 0.50 1.43 1.89

Fast 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 days 74.6 59.3 33.5

Accounts receivable days 58.2 37.2 25.9

Total debt ratio 0.44 0.52 0.61

Debt ratio 0.79 1.08 1.56

Equity multiplier 1.79 2.08 2.56

Times accrued interest 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 (after tax) 6.05% 10.53% 13.21%

Return on equity 9.93% 16.54% 26.15%

Questions

1. Calculate the following ratios for S&S Air: Current Ratio, Quick Ratio, Cash Ratio, Total Asset Turnover, Days Inventory, Days Receivable, Total Debt Ratio, Debt-Equity Ratio, Equity Multiplier, times interest earned, cash coverage, profit margin, return on assets, and return on equity.

2. Mark and Todd agree that a ratio analysis can provide a measure of company performance. They have chosen Boeing as a candidate company. Would you choose Boeing? Why or why not?

3. Compare S&S Air's performance to the industry. For each relationship, comment on why it might be seen as positive or negative in relation to the industry. Suppose you create an inventory ratio calculated by inventory divided by current liabilities. How do you think S&S Air's ratio would compare to the industry average?

4. Calculate the internal growth rate and the sustainable growth rate for S&S Air. What do these numbers mean?

5. S&S Air is planning for a 20 percent growth rate next year. Calculate EFN assuming that the company operated at full capacity in 2008.

6. Although most assets can be increased as a percentage of sales, net non-current assets often must be increased by specific amounts, since it is usually impossible or impractical to purchase part of a new plant or machine. Therefore, assume that S&S Air cannot increase non-current assets as a percentage of sales. Instead, whenever the company needs to buy new manufacturing equipment, it must buy it in the amount of R 30,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilisation for the company next year?