Read and answer the question and including “remarks”. Individual assignment.

5%
of Grade. Due Week 5, Class 2

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.
S&S AIR, INC.
2014 Income Statement
Sales   $40,259,230

Cost of goods    29,336,446

sold
Other expenses     5,105,100

Depreciation     1,804,220

EBIT   $ 4,013,464

Interest      630,520

Taxable income   $ 3,382,944

Taxes (40%)     1,353,178

Net income   $ 2,029,766

  Dividends $  610,000  

  Add to retained  1,419,766  

earnings
S&S AIR, INC.
2014 Balance Sheet
Assets Liabilities and Equity
Current assets  Current liabilities  
  Cash $   456,435  Accounts payable $   929,005
  Accounts     733,125  Notes payable   2,121,350
receivable
  Inventory   1,073,180     Total current $ 3,050,355
liabilities
    Total current $ 2,262,740    
assets
   Long-term debt $ 5,500,000
Fixed assets     
  Net plant and $17,723,43 Shareholder equity $   400,000
equipment 0 Common stock
     Retained earnings  11,035,815
       Total equity $11,435,815
Total assets $19,986,17 Total liabilities and $19,986,170
0 equity
 
Light Airplane Industry Ratios
  Lower Quartile Median Upper 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 .44     .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% 10.53% 13.21%
Return on equity 9.93% 18.14% 26.15%

Page 90
QUESTIONS
1. Using the financial statements provided for S&S Air, calculate each of the ratios listed in the table below for
the light aircraft industry. Add remarks as to what your analysis shows you.
Light Airplane Industry Ratios comparison to S&S

Lower Quartile Median Upper Quartile S&S Air X Remarks X

Current ratio .50 1.43 1.89 .74

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 27.34

Receivables turnover 6.27 9.82 14.11

Total debt ratio .44 .52 .61

Debt–equity ratio .68 1.08 1.56

Cash coverage ratio 5.84 9.41 10.27

Profit margin 4.05% 5.10% 7.15% 5.04

Return on assets 6.05% 10.53% 13.21%

Return on equity 9.93% 18.14% 26.15%

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. A. Would you choose Boeing as an aspirant company? B. Why or
why not?

3. 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: A.Bombardier, B.Embraer, C. Cirrus Design Corporation,
and D. Cessna Aircraft Company. Look up each company on the internet and tell us what you find on these
companies as compared to S&S Air.
A.

B.

C.

D.