IIBMS – Ration Analysis at S&S Air, Inc.
CASE 2: Ration Analysis at S&S Air, Inc. IIBMS – Ration 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 planes. 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 air-plane 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. 2006 Income Statement Sales $21,785,300 Cost of goods sold 15,874,700 Other expenses 2,762,500 Depreciation 976,200 EBIT $ 2,171,900 Interest 341,600 Taxable income $ 1,830,300 Taxes (40%) 732,120 Net income $ 1,098,180 Dividends $439,272 Add to retained earnings 658,908 S&S Air, Inc. 2006 Balance Sheet Assets Liabilities and Equity Current assets Cash Account receivable Inventory Total current assets Fixed assets Net plant and equipment Total assets $ 315,000 506,000 740,800 $ 1,561,800 $11,561,000 $13,077,800 Current liabilities Accounts payable Notes payable Total current liabilities Long-term debt Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity $ 635,000 1,450,000 $2,085,000 $3,800,000 $ 250,000 6,942,800 $ 7,192,800 $13,077,800 Light airplane Ratios Lower Quartile Median Upper Quartile Current ratio Quick ratio Cash ratio Total asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit margin Return on assets Return on equity 0.50 0.21 0.08 0.68 4.89 6.27 0.44 0.79 1.79 5.18 5.84 4.05% 6.05% 9.93% 1.43 0.38 0.21 0.85 6.15 9.82 0.52 1.08 2.08 8.06 8.43 6.98% 10.53% 16.54% 1.89 0.62 0.39 1.38 10.89 14.11 0.61 1.56 2.56 9.83 10.27 9.87% 13.21% 26.15% Questions: Using the financial statements provided for S&S Air calculate each of the ratios listed in the table for the light aircraft industry. 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, Cirrus Design Corporation, and Cessna Aircraft Company. 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? IIBMS – Ration Analysis at S&S Air Inc. At Global Study Solutions, we take immense pride in our ability to offer specialized support to students pursuing various programs at IIBMS (Institute Indian Institute of Business Management & Studies). 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