MiniCase02_Ch04
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Chapter 4 Mini Case 2 Ratios and Financial Planning at S & S Air Chris Gumede was recently hired by S&S Air to assist the company with its financial planning and to evaluate the company’s performance. Chris graduated from university five years ago with a finance degree. S&S Air was founded 10 years ago by friends Mark and Thandi. The company has manufactured and sold light aeroplanes 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 aeroplanes. The company has two models, the Birdie which sells for R2 530 000 and the Eagle which sells for R5 780 000. While 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 is able to complete the manufacture of an aeroplane 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 aeroplane may take one and a half to two years to manufacture once the order is placed. Mark and Thandi have provided the following financial statements. Chris has gathered the industry ratios for the light aeroplane manufacturing industry. S&S Air 2008 Financial Statements Income Statement Sales R128 700 000 Cost of goods sold 90 700 000 Other expenses 15 380 000 Depreciation 4 200 000 PBIT 18 420 000 Interest 2 315 000 PBT 16 105 000 Tax (40%) 6 442 000 NPAT R 9 663 000 Dividends 2 898 900 Add to retained profits 6 764 100 2008 Balance sheet Ordinary shares 1 000 000 Net non-current assets R72 280 000 Retained profits 41 570 000 Shareholders equity R42 570 000 Inventory 4 720 000 Long-term debt R25 950 000 Accounts receivable 4 210 000 Cash 2 340 000 Accounts payable 4 970 000 Current assets R11 270 000 Short-term debt 10 060 000 Current liabilities R15 030 000 R83 550 000 R83 550 000
Transcript of MiniCase02_Ch04
Chapter 4 Mini Case 2 Ratios and Financial Planning at S & S Air Chris Gumede was recently hired by S&S Air to assist the company with its financial planning and to evaluate the company’s performance. Chris graduated from university five years ago with a finance degree. S&S Air was founded 10 years ago by friends Mark and Thandi. The company has manufactured and sold light aeroplanes 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 aeroplanes. The company has two models, the Birdie which sells for R2 530 000 and the Eagle which sells for R5 780 000. While 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 is able to complete the manufacture of an aeroplane 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 aeroplane may take one and a half to two years to manufacture once the order is placed. Mark and Thandi have provided the following financial statements. Chris has gathered the industry ratios for the light aeroplane manufacturing industry.
S&S Air 2008 Financial Statements
Income StatementSales R128 700 000Cost of goods sold 90 700 000Other expenses 15 380 000Depreciation 4 200 000PBIT 18 420 000Interest 2 315 000PBT 16 105 000Tax (40%) 6 442 000NPAT R 9 663 000
Dividends 2 898 900 Add to retained profits 6 764 100
2008 Balance sheet
Ordinary shares 1 000 000 Net non-current assets R72 280 000Retained profits 41 570 000 Shareholders equity R42 570 000 Inventory 4 720 000Long-term debt R25 950 000 Accounts receivable 4 210 000 Cash 2 340 000Accounts payable 4 970 000 Current assets R11 270 000Short-term debt 10 060 000 Current liabilities R15 030 000 R83 550 000 R83 550 000
Light Aeroplane Industry Ratios
Lower
Quartile Median Upper Quartile
Current ratio 0,50 1,43 1,89 Quick ratio 0,21 0,38 0,62 Cash ratio 0,08 0,21 0,39 Total asset turnover 0,68 0,85 1,38 Inventory days 74,6 59,3 33,5 Receivables days 58,2 37,2 25,9 Total debt ratio 0,44 0,52 0,61 Debt-equity ratio 0,79 1,08 1,56 Equity multiplier 1,79 2,08 2,56 Times interest earned 5,18 8,06 9,83 Cash coverage ratio 5,84 8,43 10,27 Profit margin 4,05% 6,98% 9,87% Return on assets (after tax) 6,05% 10,53% 13,21% Return on equity 9,93% 16,54% 26,15%
Questions
1. Calculate the following ratios for S&S Air: current ratio, quick ratio, cash ratio, total asset turnover, inventory days, receivables days, total debt ratio, debt-equity ratio, equity multiplier, times interest earned, cash coverage, profit margin, return on assets and return on equity.
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? Why or why not?
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 by inventory divided by current liabilities. How do you think S&S Air’s ratio would compare to the industry average.
4. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?
5. S&S Air is planning for a growth rate of 20 per cent next year. Calculate EFN assuming the company operated at full capacity in 2008.
6. Although most assets can be increased as a percentage of sales, net non-current assets often must be increased in specific amounts since it is usually impossible or impractical to buy part of a new plant or machine. So, assume S&S Air cannot increase net non-current assets as a percentage of sales. Instead, whenever the company needs to purchase new manufacturing equipment, it must purchase in the amount of R30 000 000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?
