S&S Air Inc. Mini Cas Essay
Question 1 Current Ratio = Current assets/current liabilities = $1,561,800/$2,085,000 = 0. 75 Quick (or acid-test) Ratio = (Current Assets – Inventory)/Current liabilities = ($1,561,800 – 740,800) /$2,085,000 = 0. 39 Cash Ratio = Cash + Cash equivalents/Current Liabilities = $315,000/$2,085,000 = 0. 15 Total asset turnover = Sales/Total assets = $21,785,300/$13,077,800 = 1. 67 times Inventory turnover = Cost of goods sold/Inventory = $15,874,700/740,800 = 21. 43 times Receivables turnover = Sales/Accounts receivable = $21,785,300/$506,000 = 43. 05 times
Total debt ratio = [Total assets – Total equity]/Total assets = [$13,077,800 – $7,192,800]/$13,077,800 = 0. 45 Debt/equity ratio = Total debt/Total equity = $5,898,096/$7,192,800 = 0. 82 OR= $0. 45/($1 – $0. 45) = 0. 82 Equity multiplier = Total assets/Total equity = $13,077,800/$7,192,800 = 1. 82 OR= $1/$0. 55 = 1. 82 Times interest earned ratio = EBIT/Interest = $2,171,900/341,600 = 6. 36 times Cash coverage ratio = [EBIT + Depreciation]/Interest = [$2,171,900 + $976,200]/ 341,600 = 9. 22 times Profit margin = Net income/Sales = $1,098,180/$21,785,300 = 5. 04% Return on assets (ROA) = Net income/Total assets = $1,098,180/$13,077,800 = 8. 40% Return on Equity (ROE) = Net income/Total equity = $1,098,180/$7,192,800 = 15. 27% Question 2 It would not be recommended to use Boeing as an aspirant company for comparison with S&S Air. This is because Boeing and S&S are in the same industry, but not the same market. While both companies manufacture airplanes, S&S Air manufactures small light airplanes for sale to individuals for recreational use, while Boeing manufactures large commercial aircrafts.
As these companies produce and compete in two very different markets, it does not make sense to use Boeing as an aspirant company in order to analyze the performance of S&S Air. Boeing is also a much larger company than S&S Air with a wider realm of operations. The operations of S&S Air and Boeing also differ greatly in the cycle time of their order and use of parts to the manufacture and delivery to the customer. S&S Air can build an aircraft to order in as little as 5 weeks, where Boeing could take up to 2 years to build a commercial aircraft from the order.
This means that the companies would have very different revenue collection and inventory cycles when compared. In order for an accurate comparison of ratios, the company used as an aspirant should be in the same market, and should be of similar size and operations, which Boeing is not. Bombardier Aerospace is a large company which designs, manufactures and supports innovative aviation products for the business, commercial, specialized and amphibious aircraft markets as well as jet travel solutions. They hold the number one position in business and regional aircrafts.
As Bombardier manufactures a variety of aircrafts, most of which are commercial, Bombardier would also not be recommended as an aspirant company. This is because Bombardier and S&S Air operate in different markets with very different products. Embraer S. A. is a Brazilian aerospace company that concentrates on operations in 4 business segments and markets: commercial aviation, executive jets, defense systems (military) and agricultural aircrafts. It is also one of the largest aircraft manufacturers in the world. Due to the size of the company and diversity in products and operations, Embraer is not recommended as an aspirant company.
Cirrus Aircraft is a smaller company that manufactures and sells a line of composite personal aircrafts for recreational use. Because Cirrus Aircraft and S&S Air are in the same market, these companies would very comparable in their operations, revenue collections and inventory cycle times. As the companies are also a similar size, they would be an excellent company to use as an aspirant company in preparing the ratio analysis for S&S Air. Cessna Aircraft Company is the leading designer and manufacturer of light and midsize business jets, utility turboprops and single engine aircrafts.
Although they are in the light aircraft market with S&S Air, they manufacture aircrafts for commercial use, rather than for recreational use. They also have a much larger range of products than S&S Air, which means that their operations and cycle times would most likely be different when compared. For this reason, it would be recommended that Cessna Aircraft Company is not used as an aspirant company. Of the companies listed, S&S Air is most similar in size, market and operations to Cirrus Aircraft, and should therefore use Cirrus as an aspirant company for comparison of the ratio analysis. Question 3
Short-term Solvency or Liquidity Measures When compared with the industry, the current ratio of S&S Air at 0. 75 is below the industry median of 1. 43. This may mean that S&S Air are having liquidity problems. When compared with the industry, the quick ratio of S&S Air at 0. 39 is just over the industry median of 0. 38. This indicates that S&S Air is not among the best or the worst at managing current accounts as indicated by liquidity. When compared with the industry, the cash ratio of S&S Air at 0. 15 is below the industry median of 0. 21. Again, this could indicate liquidity problems within S&S Air or may need
improvement in managing current accounts. Asset Management, or Turnover Measures When compared with the industry, the total asset turnover of S&S Air of 1. 67 times is well above the industry upper quartile of 1. 38 times. This indicates that S&S Air much better than the industry average at utilizing assets. When compared with the industry, the inventory turnover of S&S Air of 21. 43 times is well above the industry upper quartile of 10. 89 times. This indicates that S&S Air is much more efficient than the industry average at inventory management. When compared with the industry, the receivables turnover of S&S Air of 43.
05 times is well over the industry upper quartile of 14. 11 times. This shows that the collection of accounts receivable is a major strength of S&S Air when compared to the rest of the industry. Long-term Solvency Measures When compared with the industry, the total debt ratio of S&S Air of 0. 45 is just above the industry lower quartile of 0. 44. This indicates that S&S Air has less debt than the industry average and may be less likely to experience credit problems, but may not have an increase in shareholders return. When compared with the industry, the debt/equity ratio of S&S Air of 0. 82 is just over the industry lower quartile of 0.
79. Again, this indicates that S&S Air has less debt than the industry average of 1. 08. When compared with the industry, the equity multiplier of S&S Air of 1. 82 is just over the industry lower quartile of 1. 79. This once again indicates that S&S Air has less debt than the industry average and may be less susceptible to credit problems. When compared with the industry, the times interest earned ratio of S&S Air of 6. 36 times is between the industry lower quartile of 5. 18 times and the median of 8. 06 times. This indicates that S&S Air is below the industry average at covering its interest obligations.
When compared with the industry, the cash coverage ratio of S&S Air of 9. 22 times is above the industry median of 8. 43 times and below the upper quartile of 10. 27 times. This means that S&S Air has a greater ability to generate cash from operations than approximately 75% of the industry as well greater cash flow available to meet financial obligations. Profitability Measures When compared with the industry, the profit margin of S&S Air of 5. 04% is between the industry lower quartile of 4. 05% and the median of 6. 98%. This means that S&S Air is relatively lower in their ability to generate profits from sales when compared to the industry.
This may indicate that costs are too high or selling prices is too high. When compared with the industry, the return on assets of S&S Air of 8. 40% is between the industry lower quartile of 6. 05% and the median of 10. 53%. This means that S&S Air has a lower profit per dollar of assets than the industry average. When compared with the industry, the return on equity of S&S Air of 15. 27% is just under the industry median of 16. 54%. This indicates that S&S Air generated less profit per dollar of equity than the industry average. Inventory/Current liabilities = $740,800/$2,085,000 = 0. 35