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. 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. 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? 3. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean? 4. S&S Air is planning for a growth rate of 12 percent next year. Calculate the EFN for the company assuming the company is operating at full capacity (Hint: beside sales also assume that Costs of goods sold, Other expenses, all company assets and Accounts payable grow with 12%). Can the company's sales increase at this growth rate? S&S AIR, INC. 2012 Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income Dividends $560,000 Add to retained earnings 1,285,242 $36,599,300 26,669,496 4,641,000 1,640,200 $ 3,648,604 573,200 $ 3,075,404 1,230,162 $ 1,845,242 Assets Current assets Cash Accounts receivable Inventory Total current assets S&S AIR, INC. 2012 Balance Sheet Liabilities and Equity Current liabilities $ 396,900 Accounts payable $ 844,550 637,560 Notes payable 1,928,500 933,400 Total current liabilities $ 2,773,050 $ 1,967,860 Long-term debt $ 5,050,000 Fixed assets Net plant and equipment $15,411,620 Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity $ 322,500 9.233.930 $ 9,556,430 $17,379,480 Total assets $17,379,480 08. .21 .68 6.15 Light Airplane Industry Ratios Lower Quartile Median Current ratio 1.43 Quick ratio .35 Cash ratio Total asset turnover .85 Inventory turnover 4.89 Receivables turnover 6.27 9.82 Total debt ratio 52 Debt-equity ratio 79 1.08 Equity multiplier 1.79 2.08 Times interest earned 5.18 Cash coverage ratio 5.84 8.43 Profit margin 4.05% 6.98% Return on assets 6.05% 10.53% Return on equity 9.93% 16.54% Upper Quartile 1.89 .62 .39 1.38 10.89 14.11 .61 1.56 2.56 9.83 10.27 9.87% 13.21% 26.15%