ch3 - Chapter 3 Ratios and Financial Planning at S&S...

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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 $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 Dividends Add to RE $560,000 $977,452 Assets Current Assets Cash Accounts rec. Inventory Total CA Liabilities & Equity Current Liabilities Accounts Payable $889,000 Notes Payable 2,030,000 Total CL $2,919,000 $441,000 708,400 1,037,120 $2,186,520 Long-term debt Fixed assets Net PP&E Shareholder Equity Common stock Retained earnings Total Equity $18,308,920 $350,000 9,719,920 $10,069,920 Total L&E $16,122,400 Total Assets $5,320,000 $18,308,920 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 0.53 1.82 6.36 9.22 0.05% 0.08% 0.15% 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. Boeing is probably not a good aspirant company. Even though both companies manufacture airplanes, S&S Air manufactures small airplanes, while Boeing manufactures large, commercial aircraft. These are two different markets. Additionally, Boeing is heavily involved in the defense industry, as well as Boeing Capital, which finances airplanes. Boeing is probably not a good aspirant company. Even though both companies manufacture airplanes, S&S Air manufactures small airplanes, while Boeing manufactures large, commercial aircraft. These are two different markets. Additionally, Boeing is heavily involved in the defense industry, as well as Boeing Capital, which finances airplanes. 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 you 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 less inventory to current liabilities than the industry median. S&S Air has less inventory than the industry median, but more accounts receivable than the industry since the cash ratio is lower than the industry median. The total asset turnover ratio and the inventory and receivables days are all better than the industry median; in fact, all three 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 Air manufactures small lly, Boeing is heavily e 86). For each ratio, n inventory ratio are to the industry uidity than the industry er liquidity ratios than u created an Inventory is below the industry rrent liabilities than the industry since the cash in fact, all three ratios try. lly has less debt than e industry median, and ility area. needed in this area. ...
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This note was uploaded on 06/16/2011 for the course FIN 521 taught by Professor Varney during the Spring '11 term at Andrew Jackson.

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