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 ind~
viduals 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.
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&SAIR,INC.
2006 Balance Sheet
Assets
Current assets
Accounts receivable 708,400
Cash $ 441,000
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 .50 1.43 1.89
Quick Ratio .21 .38 .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 .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.
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 ind~
viduals 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.
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&SAIR,INC.
2006 Balance Sheet
Assets
Current assets
Accounts receivable 708,400
Cash $ 441,000
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 .50 1.43 1.89
Quick Ratio .21 .38 .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 .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.
2
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