Case One: Ratio Analysis at S&S Air Inc.Chris Guthrie was recently hired by S&S Air Inc., to assist the company with its

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Case One: 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 Max 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 Page 1 of 6company has two models; the Birdie, which sells for GHS 53,000, and the Eagle, which sells for GHS 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 placedMark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry. S&S AIR, INC. 2021 Income StatementGHS SalesCost of goods sold Other expenses Depreciation EBITInterestTaxable Income Taxes (40%)Net incomeDividendsAdd to retained earnings30,499,420 22,224,580 3,867,500 1,366,680 3,040,660 478,240 2,562,420 1,024,968 1,537,452 GHS560,000 977,452 Page 2 of 6 AssetsAccounts receivable InventoryTotal currentassetsFixed assetsNet plant and equipmentTotal assetsCurrent ratioQuick ratioCash ratioTotal asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit marginReturn on assetsGHS441,000 708,4001,037,120 2,186,52016,122,400 18,308,920Liabilities and Equity GHSS&S AIR, INC. 2021 Balance Sheet Current assets CashCurrent liabilities Accounts payable Notes payable889,000 2,030,000 Total currentliabilities 2,919,000 Long-term debtShareholder equityCommon stock Retained earningsTotal equityTotal liabilities and equityUpper Quartile1.89 0.62 0.39 1.3810.89 14.11 0.61 1.56 2.56 9.83 10.27 9.87% 13.21%5,320,000350,000 9,719,920 10,069,920 18,308,920 Light Airplane Industry Ratios Lower Quartile Median 0.50 1.43 0.21 0.38 0.08 0.21 0.68 0.85 4.89 6.15 6.27 9.82 0.44 0.52 0.79 1.08 1.79 2.08 5.18 8.06 5.84 8.43 4.05% 6.98% 6.05% 10.53% Page 3 of 6Return on equity 9.93% 16.54% 26.15%QUESTIONS:1. UsingthefinancialstatementsprovidedforS&SAir,calculateeachoftheratios 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, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.3. ComparetheperformanceofS&SAirtotheindustry.Foreachratio,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? Page 4 of 6Case Two: Planning for Growth at S&S Air (Continuation of Case One)After Chris completed the ratio analysis for S&S Air , Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here: S&S Air, Inc. 2021 Income Statement SalesCost of goods sold Other expenses Depreciation EBITInterestTaxable Income Taxes (40%)Net incomeDividendsAdd to retained earningsGHS 30,499,420 22,224,5803,867,500 1,366,680 3,040,660478,240 2,562,420 1,024,968 1,537,452 GHS 560,000 977,452 Page 5 of 6 S&S Air, Inc. 2021 Balance Sheet AssetsGHSCurrent assetsCash 441,000 Accounts receivable 708,400 Inventory 1,037,120Liabilities and EquityGHS Total current assets Fixed assetsNet plant and equipmentTotal assetsQUESTIONS:2,186,52016,122,40018,308,920Current liabilities Accounts payable Notes payableTotal current liabilitiesLong-term debtShareholder equity Common stock Retained earningsTotal equity Total liabilities and889,000 2,030,000 2,919,0005,320,000350,000 9,719,920 10,069,920 equity 18,308,920 1. CalculatetheinternalgrowthrateandsustainablegrowthrateforS&SAir. What do these numbers mean?2. S&SAirisplanningforagrowthrateof12percentnextyear.Calculatethe EFN for the company assuming the company is operating at full capacity. Can the company’s sales increase at this growth rate?3. Mostassetscanbeincreasedasapercentageofsales.Forinstance,cashcanbe increased by any amount. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of GHS 5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?Page 6 of 6
Case One: 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 Max 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 Page 1 of 6company has two models; the Birdie, which sells for GHS 53,000, and the Eagle, which sells for GHS 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 placedMark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry. S&S AIR, INC. 2021 Income StatementGHS SalesCost of goods sold Other expenses Depreciation EBITInterestTaxable Income Taxes (40%)Net incomeDividendsAdd to retained earnings30,499,420 22,224,580 3,867,500 1,366,680 3,040,660 478,240 2,562,420 1,024,968 1,537,452 GHS560,000 977,452 Page 2 of 6 AssetsAccounts receivable InventoryTotal currentassetsFixed assetsNet plant and equipmentTotal assetsCurrent ratioQuick ratioCash ratioTotal asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit marginReturn on assetsGHS441,000 708,4001,037,120 2,186,52016,122,400 18,308,920Liabilities and Equity GHSS&S AIR, INC. 2021 Balance Sheet Current assets CashCurrent liabilities Accounts payable Notes payable889,000 2,030,000 Total currentliabilities 2,919,000 Long-term debtShareholder equityCommon stock Retained earningsTotal equityTotal liabilities and equityUpper Quartile1.89 0.62 0.39 1.3810.89 14.11 0.61 1.56 2.56 9.83 10.27 9.87% 13.21%5,320,000350,000 9,719,920 10,069,920 18,308,920 Light Airplane Industry Ratios Lower Quartile Median 0.50 1.43 0.21 0.38 0.08 0.21 0.68 0.85 4.89 6.15 6.27 9.82 0.44 0.52 0.79 1.08 1.79 2.08 5.18 8.06 5.84 8.43 4.05% 6.98% 6.05% 10.53% Page 3 of 6Return on equity 9.93% 16.54% 26.15%QUESTIONS:1. UsingthefinancialstatementsprovidedforS&SAir,calculateeachoftheratios 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, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.3. ComparetheperformanceofS&SAirtotheindustry.Foreachratio,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? Page 4 of 6Case Two: Planning for Growth at S&S Air (Continuation of Case One)After Chris completed the ratio analysis for S&S Air , Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here: S&S Air, Inc. 2021 Income Statement SalesCost of goods sold Other expenses Depreciation EBITInterestTaxable Income Taxes (40%)Net incomeDividendsAdd to retained earningsGHS 30,499,420 22,224,5803,867,500 1,366,680 3,040,660478,240 2,562,420 1,024,968 1,537,452 GHS 560,000 977,452 Page 5 of 6 S&S Air, Inc. 2021 Balance Sheet AssetsGHSCurrent assetsCash 441,000 Accounts receivable 708,400 Inventory 1,037,120Liabilities and EquityGHS Total current assets Fixed assetsNet plant and equipmentTotal assetsQUESTIONS:2,186,52016,122,40018,308,920Current liabilities Accounts payable Notes payableTotal current liabilitiesLong-term debtShareholder equity Common stock Retained earningsTotal equity Total liabilities and889,000 2,030,000 2,919,0005,320,000350,000 9,719,920 10,069,920 equity 18,308,920 1. CalculatetheinternalgrowthrateandsustainablegrowthrateforS&SAir. What do these numbers mean?2. S&SAirisplanningforagrowthrateof12percentnextyear.Calculatethe EFN for the company assuming the company is operating at full capacity. Can the company’s sales increase at this growth rate?3. Mostassetscanbeincreasedasapercentageofsales.Forinstance,cashcanbe increased by any amount. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of GHS 5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?Page 6 of 6
Case One: 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 Max 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 Page 1 of 6company has two models; the Birdie, which sells for GHS 53,000, and the Eagle, which sells for GHS 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 placedMark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry. S&S AIR, INC. 2021 Income StatementGHS SalesCost of goods sold Other expenses Depreciation EBITInterestTaxable Income Taxes (40%)Net incomeDividendsAdd to retained earnings30,499,420 22,224,580 3,867,500 1,366,680 3,040,660 478,240 2,562,420 1,024,968 1,537,452 GHS560,000 977,452 Page 2 of 6 AssetsAccounts receivable InventoryTotal currentassetsFixed assetsNet plant and equipmentTotal assetsCurrent ratioQuick ratioCash ratioTotal asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit marginReturn on assetsGHS441,000 708,4001,037,120 2,186,52016,122,400 18,308,920Liabilities and Equity GHSS&S AIR, INC. 2021 Balance Sheet Current assets CashCurrent liabilities Accounts payable Notes payable889,000 2,030,000 Total currentliabilities 2,919,000 Long-term debtShareholder equityCommon stock Retained earningsTotal equityTotal liabilities and equityUpper Quartile1.89 0.62 0.39 1.3810.89 14.11 0.61 1.56 2.56 9.83 10.27 9.87% 13.21%5,320,000350,000 9,719,920 10,069,920 18,308,920 Light Airplane Industry Ratios Lower Quartile Median 0.50 1.43 0.21 0.38 0.08 0.21 0.68 0.85 4.89 6.15 6.27 9.82 0.44 0.52 0.79 1.08 1.79 2.08 5.18 8.06 5.84 8.43 4.05% 6.98% 6.05% 10.53% Page 3 of 6Return on equity 9.93% 16.54% 26.15%QUESTIONS:1. UsingthefinancialstatementsprovidedforS&SAir,calculateeachoftheratios 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, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.3. ComparetheperformanceofS&SAirtotheindustry.Foreachratio,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? Page 4 of 6Case Two: Planning for Growth at S&S Air (Continuation of Case One)After Chris completed the ratio analysis for S&S Air , Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here: S&S Air, Inc. 2021 Income Statement SalesCost of goods sold Other expenses Depreciation EBITInterestTaxable Income Taxes (40%)Net incomeDividendsAdd to retained earningsGHS 30,499,420 22,224,5803,867,500 1,366,680 3,040,660478,240 2,562,420 1,024,968 1,537,452 GHS 560,000 977,452 Page 5 of 6 S&S Air, Inc. 2021 Balance Sheet AssetsGHSCurrent assetsCash 441,000 Accounts receivable 708,400 Inventory 1,037,120Liabilities and EquityGHS Total current assets Fixed assetsNet plant and equipmentTotal assetsQUESTIONS:2,186,52016,122,40018,308,920Current liabilities Accounts payable Notes payableTotal current liabilitiesLong-term debtShareholder equity Common stock Retained earningsTotal equity Total liabilities and889,000 2,030,000 2,919,0005,320,000350,000 9,719,920 10,069,920 equity 18,308,920 1. CalculatetheinternalgrowthrateandsustainablegrowthrateforS&SAir. What do these numbers mean?2. S&SAirisplanningforagrowthrateof12percentnextyear.Calculatethe EFN for the company assuming the company is operating at full capacity. Can the company’s sales increase at this growth rate?3. Mostassetscanbeincreasedasapercentageofsales.Forinstance,cashcanbe increased by any amount. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of GHS 5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?Page 6 of 6
Case One: 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 Max 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
Page 1 of 6
company has two models; the Birdie, which sells for GHS 53,000, and the Eagle, which sells for GHS 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. 2021 Income Statement
GHS
Sales
Cost of goods sold Other expenses Depreciation EBIT
Interest
Taxable Income Taxes (40%)
Net income
Dividends
Add to retained earnings
30,499,420 22,224,580 3,867,500 1,366,680 3,040,660 478,240 2,562,420 1,024,968 1,537,452
GHS560,000 977,452
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Assets
Accounts receivable Inventory
Total current
assets
Fixed assets
Net plant and equipment
Total assets
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
GHS
441,000 708,400
1,037,120 2,186,520
16,122,400 18,308,920
Liabilities and Equity GHS
S&S AIR, INC. 2021 Balance Sheet
Current assets Cash
Current liabilities Accounts payable Notes payable
889,000 2,030,000
Total current
liabilities 2,919,000
Long-term debt
Shareholder equity
Common stock Retained earnings
Total equity
Total liabilities and equity
Upper Quartile
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%
5,320,000
350,000 9,719,920 10,069,920 18,308,920
Light Airplane Industry Ratios Lower
Quartile Median 0.50 1.43 0.21 0.38 0.08 0.21 0.68 0.85 4.89 6.15 6.27 9.82 0.44 0.52 0.79 1.08 1.79 2.08 5.18 8.06 5.84 8.43 4.05% 6.98% 6.05% 10.53%
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Return on equity 9.93% 16.54% 26.15%
QUESTIONS:
1. UsingthefinancialstatementsprovidedforS&SAir,calculateeachoftheratios 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, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.
3. ComparetheperformanceofS&SAirtotheindustry.Foreachratio,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?
Page 4 of 6
Case Two: Planning for Growth at S&S Air (Continuation of Case One)
After Chris completed the ratio analysis for S&S Air , Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here:
S&S Air, Inc. 2021 Income Statement
Sales
Cost of goods sold Other expenses Depreciation EBIT
Interest
Taxable Income Taxes (40%)
Net income
Dividends
Add to retained earnings
GHS 30,499,420 22,224,580
3,867,500 1,366,680 3,040,660
478,240 2,562,420 1,024,968 1,537,452
GHS 560,000 977,452
Page 5 of 6
S&S Air, Inc. 2021 Balance Sheet
Assets
GHS
Current assets
Cash 441,000 Accounts receivable 708,400 Inventory 1,037,120
Liabilities and Equity
GHS
Total current assets Fixed assets
Net plant and equipment
Total assets
QUESTIONS:
2,186,520
16,122,400
18,308,920
Current liabilities Accounts payable Notes payable
Total current liabilities
Long-term debt
Shareholder equity Common stock Retained earnings
Total equity Total liabilities and
889,000 2,030,000 2,919,000
5,320,000
350,000 9,719,920 10,069,920
equity 18,308,920
1. CalculatetheinternalgrowthrateandsustainablegrowthrateforS&SAir. What do these numbers mean?
2. S&SAirisplanningforagrowthrateof12percentnextyear.Calculatethe EFN for the company assuming the company is operating at full capacity. Can the company’s sales increase at this growth rate?
3. Mostassetscanbeincreasedasapercentageofsales.Forinstance,cashcanbe increased by any amount. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of GHS 5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?
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