Question

Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to assess 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 sold 29,336,446
Other expenses 5,105,100
Depreciation 1,804,220
EBIT $4,013,464
Interest paid 630,520
Taxable income $3,382,944
Taxes (35%) 1,353,178
Net income $2,029,766
 Dividends $610,000
 Retained earnings 1,419,766
S&S AIR, INC.
2014 Balance Sheet
Assets Liabilities and Owner's Equity
Current assets Current Liabilities
 Cash $456,435  Accounts payable $929,005
 Accounts receivable 733,125  Notes payable 2,121,350
 Inventory 1,073,180   Total current liabilities $3,050,355
  Total current assets $2,262,740
Long-term debt $5,500,000
Shareholder equity
 Common stock $400,000
Fixed assets $17,723,430  Retained earnings 11,035,815
 Net plant and equipment   Total equity $11,435,815
Total assets $19,986,170 Total liabilities and equity $19,986,170
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
Receivable 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%

QUESTIONS

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. Comment whether it is appropriate to use any of the following companies: Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.

Solution

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Boeing is possibly not the best aspirant company. \text{Boeing is possibly not the best aspirant company. }

While both companies manufacture airplanes, SS Air manufactures small,\text{While both companies manufacture airplanes, SS Air manufactures small,} commercial planes, while Boeing manufactures massive, passenger\text{commercial planes, while Boeing manufactures massive, passenger} jets. These really are two separate markets.\text{jets. These really are two separate markets.}

Furthermore, Boeing is deeply invested in the defense industry, as\text{Furthermore, Boeing is deeply invested in the defense industry, as} well as Boeing Capital, which sponsors planes.\text{well as Boeing Capital, which sponsors planes.}

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