S&S AIR, INC. CASE STUDY

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 college five years ago with a finance degree. He has been employed in the finance department of a F0rtune 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 $53,000, and the Eagle, which sells for $78,000.

While 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. 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

2019 Income Statement

Sales $26,501,600

Cost of goods sold $19,780,200

Other expenses $3,166,700

Depreciation $864,500

EBIT $2,690,200

Interest $479,200

Taxable Income $2,211,000

Taxes (21%) $464,310

Net Income $1,746,690

Dividends $270,600

Additions to retained earnings $1,476,090

S&S AIR, INC

2019 Balance Sheet

Assets Liabilities and Equity

Current Assets Current Liabilities

Cash $481,852 Accounts payable $944,698

Account receivable $2,025,778 Notes payable $1,909,248

Inventory $1,634,820 Total current Liab $2,853,946

Long-term debt $5,060,000

Total Current Assets $4,142,450 Shareholder equity

Common stock $190,000

Fixed Assets Retained earnings $12,295,202

Net plant and Total Equity $12,485,202

equipment $16,256,698

Total Assets $20,399,148 Liabilities and equity $20,399,148

Light Airplane Industry Ratios

Lower Quartile Median Upper Quartile

Current Ratio 0.50 1.43 1.89

Quick Ratio 0.64 0.84 1.05

Cash Ratio 0.08 0.21 0.39

Total asset turnover 0.068 0.85 1.13

Inventory turnover 4.89 6.15 10.89

Receivable turnover 6.27 9.82 11.51

Total debt ratio 0.31 0.52 0.61

Debt-equity ratio 0.58 1.08 1.56

Equity multiplier 1.58 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% 6.75% 8.47%

Return on assets 6.05% 10.53% 13.21%

Return on equity 9.93% 16.54% 26.15%

Questions

1. Calculate the ratios for S&S Air that are shown for the 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?
3. Company 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 by inventory divided by current liabilities. How do you think S&S Airs ratio would compare to the industry average?
4. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?