Microsoft Word - Case Study 2 Ch3 SS Ai
CASE STUDY 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
eceived 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 prefa
icated 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 (next page). Chris has gathered
the industry ratios for the light airplane manufacturing industry.
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. 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, Em
aer, Ci
us Design Corporation, and Cessna Aircraft Company.
3. 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 cu
ent liabilities. How do you think S&S
Air’s ratio would compare to the industry average?
S&S AIR, INC.
2019 Income Statement
Sales $40,259,230
Cost of goods sold XXXXXXXXXX,336,446
Other expenses XXXXXXXXXX,105,100
Depreciation XXXXXXXXXX,804,220
EBIT $ 4,013,464
Interest XXXXXXXXXX,520
Taxable income $ 3,382,944
Taxes (40% XXXXXXXXXX,353,178
Net income $ 2,029,766
Dividends $ 610,000
Add to retained earnings XXXXXXXXXX,419,766
S&S AIR, INC.
2019 Balance Sheet
Assets Liabilities and Equity
Cu
ent assets Cu
ent liabilities
Cash $ XXXXXXXXXX,435 Accounts payable $ XXXXXXXXXX,005
Accounts receivable XXXXXXXXXX, XXXXXXXXXXNotes payable 2,121,350
Inventory 1,073, XXXXXXXXXXTotal cu
ent liabilities $ 3,050,355
Total cu
ent assets $ 2,262,740
Long-term debt $ 5,500,000
Fixed assets
Net plant and equipment $17,723,430 Shareholder equity Common stock $ XXXXXXXXXX,000
Retained earnings 11,035,815
XXXXXXXXXXTotal 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
Cu
ent ratio XXXXXXXXXX
Quick ratio XXXXXXXXXX
Total asset turnover XXXXXXXXXX
Inventory turnover XXXXXXXXXX
Total debt ratio XXXXXXXXXX
Debt–equity ratio XXXXXXXXXX
Financial leverage multiplier XXXXXXXXXX
Times interest earned XXXXXXXXXX
Net 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%