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 companys 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 companys 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 Cost of goods sold Other expenses Depreciation PBIT Interest PBT Tax (40%) NPAT Dividends Add to retained profits

R128 700 000 90 700 000 15 380 000 4 200 000 18 420 000 2 315 000 16 105 000 6 442 000 R 9 663 000 2 898 900 6 764 100

Ordinary shares Retained profits Shareholders equity Long-term debt Accounts payable Short-term debt Current liabilities

2008 Balance sheet 1 000 000 Net non-current assets 41 570 000 R42 570 000 Inventory R25 950 000 Accounts receivable Cash 4 970 000 Current assets 10 060 000 R15 030 000 R83 550 000

R72 280 000 4 720 000 4 210 000 2 340 000 R11 270 000

R83 550 000

Light Aeroplane Industry Ratios Lower Quartile 0,50 0,21 0,08 0,68 74,6 58,2 0,44 0,79 1,79 5,18 5,84 4,05% 6,05% 9,93% Median 1,43 0,38 0,21 0,85 59,3 37,2 0,52 1,08 2,08 8,06 8,43 6,98% 10,53% 16,54% Upper Quartile 1,89 0,62 0,39 1,38 33,5 25,9 0,61 1,56 2,56 9,83 10,27 9,87% 13,21% 26,15%

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 ratio Profit margin Return on assets (after tax) Return on equity

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 companys 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 Airs 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 noncurrent 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?