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CHAPTER 3
RATIO ANALYSIS AT S&S AIR
1. The calculations for the ratios listed are:
Quick ratio = ($2,262,740 – 1,073,180) / $3,050,355
Quick ratio = .39 times
Total asset turnover = $40,259,230 / $19,986,170
Total asset turnover = 2.01 times
Receivables turnover = $40,259,230 / $733,125
Receivables turnover = 54.91 times
Debt-equity ratio = ($3,050,355 + 5,500,000) / $11,435,815
Debt-equity ratio = .75 times
Times interest earned = $4,013,464 / $630,520
Times interest earned = 6.37 times
Profit margin = $2,029,766 / $40,259,230
Profit margin = .0504, or 5.04%
Return on equity = $2,029,766 / $11,435,815
Return on equity = .1775, or 17.75%
CHAPTER 3 C-2
2. 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
Bombardier is a Canadian company that builds business jets, short-range airliners and fire-fighting
amphibious aircraft and also provides defense-related services. It is the third largest commercial
Cirrus is the world's second largest manufacturer of single-engine, piston-powered aircraft. Its
Cessna is a well-known manufacturer of small airplanes. The company produces business jets,
3. 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
The turnover ratios are all higher than the industry median; in fact, all three turnover ratios are
The financial leverage ratios are generally below the industry median, but above the lower quartile.
The profit margin is below the industry median, however, not dramatically lower. The ROE is
Overall, S&S Air’s performance seems good, although the liquidity ratios indicate that a closer look
CHAPTER 3 C-3
Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the
industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio.
Ratio Good Bad
Current ratio Better at managing current
accounts.
May be having liquidity problems.
Quick ratio Better at managing current
accounts.
May be having liquidity problems.
Cash ratio Better at managing current
accounts.
May be having liquidity problems.
Total asset turnover Better at utilizing assets. Assets may be older and
depreciated, requiring extensive
investment soon.
