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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