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 evaluate its 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 ten 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 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 and 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.

2011 Income Statement

Sales $30,499,420

Cost of goods sold $22,224,580

Other expenses $ 3,867,500

Depreciation $ 1,366,680

EBIT $ 3,040,660

Interest $ 478,240

Taxable income $ 2,562,420

Taxes (40%) $ 1,024,968

Net income $ 1,537,452

Dividends $ 560,000

Add to retained earnings $ 977,452

S&S AIR, INC.

2011 Balance Sheet

Assets

Current assets

Cash $ 441,000

Accounts receivable $ 708,400

Inventory $1,037,120

Total current assets $2,186,520

Fixed assets

Net plant and equipment $16,122,400

Total assets $18,308,920

Liabilities and Equity

Current liabilities

Accounts payable $ 889,000

Notes payable $2,030,000

Total current liabilities $2,919,000

Long-term debt $5,320,000

Shareholder equity

Common stock $ 350,000

Retained earnings $9,719,920

Total equity $10,069,920

Total liabilities and equity $18,308,920

Light Airplane Industry Ratios

Lower Quartile Median Upper Quartile

Current ratio 0.50 1.43 1.89

Quick 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 turnover 4.89 6.15 10.89

Receivables turnover 6.27 9.82 14.11

Total debt ratio 0.44 0.52 0.61

Debt-equity ratio 0.79 1.08 1.56

Equity multiplier 1.79 2.08 2.56

Times interest earned 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 6.05% 10.53% 13.21%

Return on equity 9.93% 16.54% 26.15%

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. (10 Points)

2. Mark and Todd agree that a ratio analysis can measure the company's performance. Compare the performance of S&S Air to the industry. For each ratio, comment on why it might be positive or negative relative to the industry. How do you think S&S Air's ratio would compare to the industry average? (10 Points)