S&S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and sold light airplanes 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 airplanes. The company has two models, the birdie, which sells for US$53, 000, and the Eagle, which sells for US$78, 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 airplane 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 airplane may take one and one-half to two years to manufacture once the order is placed. Mark and Todd have provided the following financial statements. They have also gathered the industry ratios for the light airplane manufacturing industry.

S&S Air Inc. Income Statement for the year ended 31st December 2016 (GHC)
Sales 15,444,000
Cost of goods sold 10,884,000
Other expenses 1,845,600
Depreciation 504,000
EBIT 2,210,400
Interest 277,800
Taxable income 1,932,600
Taxes (40%) 773,040
Net income 1,159,560
Dividends 347,868
Add. To retained earnings 811,692

S&S Air Inc. Statement of Financial Position as at 31st December 2016 GHC 

Non-current assets
Net plant and equipment 8,673,600

Current assets
Inventory 566,400
Accounts receivable 505,200
Cash 280,800
Total Current Assets 1,352,400
TOTAL ASSETS 10,026,000

EQUITY AND LIABILITIES
Shareholder equity
Common stock 120,000
Retained earnings 4,988,400
Total equity 5,108,400

Non-current liabilities
Long-term debt 3,114,000
Total non-current liabilities 3,114,000

Current liabilities
Accounts payable 596,400
Notes payable 1,207,200
Total current liabilities 1,803,600
Total liabilities 4,917,600
TOTAL EQUITY AND LIABILITIES 10,026,000

Light Airplane 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 turnover. 4.89. 6.15 10.89
Receivables turnover. 6.27. 9.82 14.11
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. 6.05%. 10.53% 13.21%
Return on equity. 9.93%. 16.54%. 26.15%

Required
a. In view of the high reviews for safety and reliability that their products have received, would you say that S&S Air has lower credit risk than the industry’s median?
b. Calculate ten ratios and evaluate them to support your conclusion.
c. Note that marks will be awarded for the following: introduction, mechanics and style, arguments made and conclusion.

Answer rating: 100% (QA)

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