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Unformatted text preview: Chapter 3 Ratios and Financial Planning at S&S Air
Input area: Sales COGS Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income Dividends Add to RE Assets Current Assets Cash Accounts rec. Inventory Total CA $441,000 708,400 1,037,120 $2,186,520 $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 $560,000 $977,452 Liabilities & Equity Current Liabilities Accounts Payable $889,000 Notes Payable 2,030,000 Total CL $2,919,000 Long-term debt Fixed assets Net PP&E Total Assets Output area: Question 1: 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 Return on equity 0.75 0.39 0.15 1.67 21.43 43.05 0.45 0.82 1.82 6.36 9.22 5.04% 8.40% 15.27% Shareholder Equity Common stock Retained earnings Total Equity Total L&E $5,320,000 $350,000 9,719,920 $10,069,920 $18,308,920 $16,122,400 $18,308,920 Question 2: Mark and Todd agree that a ratio analysis can provide a measure of the company's performance. Discuss whether it is appropriate to use any of the following companies as an aspirant company: Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company. Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company are probably not a good aspirant company. Even though all these companies manufacture airplanes, S&S Air manufactures small airplanes, while all of these other companies’ manufactures large, commercial aircraft. These are two different markets. Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company are probably not a good aspirant company. Even though all these companies manufacture airplanes, S&S Air manufactures small airplanes, while all of these other companies’ manufactures large, commercial aircraft. These are two different markets. Question 3: Compare the performance of S&S Air to the industry using the industry ratios (table, page 86). For each ratio, comment on why it might be viewed as positive or negative 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? S&S is below the median industry ratios for the current and cash ratios. This implies the company has less liquidity than the industry in general. However, both ratios are above the lower quartile, so there are companies in the industry with lower liquidity ratios than S&S Air. The company may have more predictable cash flows, or more access to short-term borrowing. If we created an inventory to current liabilities ratio, S&S Air would have a ratio that is lower than the industry median. The current ratio is below the industry median, while the quick ratio is above the industry median. This implies that S&S Air has fewer inventories to current liabilities than the industry median. S&S Air has fewer inventories than the industry median, but more account receivable than the industry since the cash ratio is lower than the industry median. The turnover ratios are all higher than the industry median; in fact, all three turnover ratios are above the upper quartile. This may mean that S&S Air is more efficient than the industry. The financial leverage ratios are all below the industry median, but above the lower quartile. S&S Air generally has less debt than comparable companies, but still within the normal range. The profit margin for the company is about the same as the industry median, the ROA is slightly higher than the industry median, and the ROE is well above the industry median. S&S Air seems to be performing well in the profitability area. Overall, S&S Air's performance seems good, although the liquidity ratios indicate that a closer look may be needed in this area. formance. Discuss r, Embraer, Cirrus pirant company. Even e other companies’ e 86). For each ratio, n inventory ratio are to the industry uidity than the industry er liquidity ratios than created an inventory to is below the industry current liabilities than an the industry since per quartile. This may lly has less debt than e industry median, and ility area. needed in this area. ...
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This note was uploaded on 04/29/2011 for the course FINANCE BA521 taught by Professor Mark during the Spring '11 term at Antelope Valley College.
- Spring '11