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. Since then, he has been employed in the finance department of a Fortune 500 company. 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 $103,000, and the Eagle, which sells for $178,000. Sales Cost of goods sold Other expenses Depreciation EBIT S&S AIR, INC. 2021 Income Statement $37,038,492 27,629,530 4,696,692 1,659,882 Interest Taxable income Taxes (25%) Net income Dividends Add to retained earnings $565,000 1,289,232 $ 3,052,388 580,078 $ 2,472,310 618,078 $ 1,854,232 Page 095 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 BALANCE SHEET Assets Liabilities and Equity Current assets Current liabilities Cash $ 419.970 Accounts payable Accounts receivable 674,475 Notes payable $ 854,685 1,951,642 Inventory 988,129 Total current liabilities $ 2,806,327 Total current assets $ 2,082,574 Long-term debt $ 5,100,000 Fixed assets Net plant and equipment Total assets $16,305,556 Shareholder equity Common stock Retained earnings Total equity $18,388,130 Total liabilities and equity $ 410,000 10,071,803 $10,481,803 $18,388,130 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 company's 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, and Cirrus Aircraft Corporation. 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 Air's ratio would compare to the industry average? Light Airplane Industry Ratios Lower Quartile Median Upper Quartile Current ratio Quick ratio .50 1,43 1.89 .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%