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 McKendree University 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 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 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 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 financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry.

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.

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 Aircraft Corporation, and Cessna Aircraft Company.

3. 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 Airs ratio would compare to the industry average?

S&S AIR, INC.

2022 Income Statement

Sales $45,198,110

Cost of Goods Sold 32,203,420

Other Expenses 3,890,750

Depreciation 1,625,315

EBIT $ 7,478,625

Interest 550,112

Taxable Income $ 6,928,513

Taxes (25%) 1,732,128

Net Income $ 5,196,385

Dividends $ 600,000

Add to Retained Earnings 4,596,385

S&S AIR, INC.

2022 BALANCE SHEET

ASSETS LIABILITIES AND EQUITY

Current Assets Current Liabilities

Cash $ 526,963 Accounts Payable $1,071,856

Accounts Receivable 844,594 Notes Payable 2,436,553

Inventory 1,232,161 Total C.L. $3,508,409

Total C.A. $2,603,718

Long-term Debt $6,300,000

Fixed Assets Shareholders Equity

Net Plant and Equip. $19,881,945 Common Stock $ 460,000

Retained Earnings 12,217,254

Total Equity $12,677,254

Total Assets $22,485,663 Total Liab. & Equity $22,485,663

Light Airplane Industry Ratios

Lower Upper

Quartile Madian Quartile

Current Ratio .50 1.43 1.89

Quick Ratio .21 .35 .62

Cash Ratio .08 .21 .39

Total Asset Turnover .68 .85 1.38

Inventory Turnover 4.89 6.15 10.89

Receivables Turnover 6.27 9.82 14.11

Total Debt Ratio .41 .52 .61

Debt-equity Ratio .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% 9.53% 13.21%

Return on Equity 9.93% 15.14% 19.15%