Ratios and Financial Planning in Tuxedo Air Inc - Paper Example

Introduction

Financial ratios are important because they aid in the comprehensive analysis of the three fundamental financial statements that organizations produce (Bull, 2007). In essence, the financial ratios are used in comparison of performance between sectors that are likely to compete with others. The following case study on Tuxedo Air Inc. explores about 14 financial ratios calculations for Tuxedo Air Inc. Calculating the ratios will then aid in ensuring that proper analysis of the company in relation to the industry is conducted. Therefore, the first part examines the ratios as well as explaining their positivity and negativity in relation to the industry while the second part is on choosing an aspirant company.

Part One: Tuxedo Air Inc. Financial Ratios and Analysis in Relation to the Industry

Current Ratio

The ratio is used to analyze the liquidity position of a company (Fridson, 2011). The amount of working capital available for a company is expressed in its current ratio. It is given by:

Current Ratio = Current Assets/Current Liabilities

Tuxedo Air Current Ratio = 1967860/ 2773050

= 0.710

Tuxedo Air Inc. current ratio is less than one. According to the company's financial statement, the total current liabilities are about 30% higher than the total available current assets. A company is relatively safe when the total current assets are relatively more or at least equal to the total current liabilities. The current ratio is lower than the median measure for the entire industry.

Quick Ratio

It is also called the acid test ratio; it is used to refine the current ratio by using the most liquid assets available to cover the liabilities in the company. It is given by:

Quick Ratio = Cash Equivalents+ Short-term Investments+ Accounts Receivable/ Current liabilities

Tuxedo Inc. Quick Ratio= 396900+ 637560/2773050

= 0.373

The quick ratio measure is important because it shows the ability of a company to cover current liabilities with the working assets it already has. The fact that inventory is not included shows that the conservative nature of the quick ratio measure. From the light airplane financial ratios table, it is observed that Tuxedo Air's quick ratio is in the median range of industry numbers. It can be concluded that Tuxedo Air is at per with industry numbers therefore not alarming.

Cash Ratio

The cash ratio measures only the current cash equivalents held by the company in order to refine the former current and quick ratios. It is given by:

Cash Ratio = Cash+ Cash-equivalents + Invested funds/ Current liabilities

Tuxedo Inc. Cash Ratio = 396900/2773050

= 0.143

The light airplane industry median cash ratio is about 0.2 percent. This means that the cash and cash equivalent assets for Tuxedo Inc. are about 0.7 points below the median measure for the industry. It shows a negative turn for cash flow in the company. The cash ratio for Tuxedo is relatively low compared to the industry.

Total Asset Turnover

It is ratio that deals with the assets of the company only. By examining the sales in comparison to the total assets, it is easy to see the performance of company sales in relation to the total average assets held. It is given by:

Total Asset Turnover = Net sales/ Total Asset

Tuxedo Inc. TAT = 36599300/17379480

= 2.102

Tuxedo Air Inc.'s total asset turnover is positive compared to the industry median. The industry median shows that the industry holds a total asset turnover of about 0.62. Therefore, the asset turn over shown by median is about 3 times more than the light airplane industry asset turn over.

Inventory Turnover

Like the asset turnover ratio, the inventory turnover ratio compares the movement of goods sold and the average inventory the company is operating on. It is given by:

Inventory turnover = Cost of Goods Sold/Average inventory

Tuxedo Inc. Inventory Turnover = 26669496/933400

=28.572

The measure of efficiency given by inventory turnover shows Tuxedo Inc.'s to be highly efficient in its sales and inventory process. The inventory turnover is for Tuxedo Air is about 3 times higher than the upper ratio given for the industry and about 5 times higher than the median. The inventory operation process is efficient for the light airplane industry.

Receivables Turnover

It is a measure of the efficiency with which a company receives its net receivable accounts. It shows how regular the company collects from its potential debtors. The ratio is given by:

Receivables Turnover = Net Credit Sales/ Average Accounts Receivable

Tuxedo Receivable Turnover = Tuxedo's credit sales are not given and it's therefore relatively difficult to determine the receivables turnover. However, the total sales compared to the accounts receivable show that the company is efficient on collecting debt. Consequently, having credit sale numbers would aid in accuracy.

Total Debt Ratio

It is a ratio that shows the amount of leverage a company is operating on. A lower ratio shows that a company is not as dependent on borrowed money. The ratio is given by calculating:

Total Debt Ratio= Total Liabilities/ Total Assets

Tuxedo's Total Debt Ratio = 17379480/17379480

=1.000

The debt ratio for Tuxedo Inc. is about 0.5 points above the light airplane industry median. It shows that the company has a balanced asset to liability position which is relatively dangerous owing to the different expenses the company is likely to incur. Raising fixed assets will help to improve the leverage position of the company.

Debt Equity Ratio

The measure shows how much shareholders in the company have been willing to contribute compared to the liabilities the company has incurred from suppliers and lenders. It is calculated by:

Debt-Equity Ratio = Total liabilities/ Shareholders' Equity

Tuxedo Debt-Equity Ratio = 17379480/9556430

=1.820

The measure shows about 2 times more liabilities that the total equity available for the company. The ratio above puts Tuxedo Inc. about 0.80 points above the median debt-equity ratio given by the industry. The high number shows that the company is required to increase their equity significantly, probably by inviting more shareholders on board.

Equity Multiplier

It is a measure of the assets the company has verses the amount of equity available for the company. Equity multiplier is given by:

Equity Multiplier= Total Assets/ Total Equity

Tuxedo Equity Multiplier = 17379480/9556430

=1.820

The light plane industry average given for equity multiplier is relatively lower than the median shown in the industry. For this reason, it can be concluded that most of the industry uses more debt than equity for daily operations and purchases. However, Tuxedo Air Inc. is observed to have a positive in relation to the higher industry indicator for equity multiplier.

Times Interest Earned

The above ratio is basically used to calculate solvency in a company (Schoenebeck, 2011). A company that wants to find out the impending bankrupt situation uses the TIE ratio. It is given by:

TIE = EBIT/ Interest Expense

Tuxedo Air TIE = 3648604/573200

= 6.365

Compared to the light plane industry median, the TIE value for Tuxedo Air Inc.is about two whole points lower than the industry. The number shows that Tuxedo is operating at industrial average but still has a 6 times interest on the company's before tax income. High numbers of Tie show that Tuxedo on a positive note.

Cash Coverage Ratio

Like the other cash flow ratio, the above ratio determines the amount of cash available to pay any outstanding interest rates. It is given by:

Cash Coverage Ratio = EBIT+ Non-Cash Expenses/ Interest Expense

Tuxedo Air Cash Coverage Ratio = [3648604+ 4641000]/ 573200

= 14.462

According to the table on light airplane industry ratios, Tuxedo Air's cash coverage ratio is 5 points than the industry average. It is interesting that it is also about 3 times better than the upper quartile for the industry. Maintaining the cash coverage ratio well above unity shows that the cash for operations is sufficient to pay interests incurred.

Profit Margin

It is a ratio that lets a company understand the profit margin compared to the sales they make. It is calculated by:

Profit Margin = Net Income/ Net Sales

Tuxedo Profit Margin = 1845242/9929804

= 0.186

Tuxedo Inc. has about 18% on its net profit margin. The sales the company makes are enough to cover the expenses and return an average of its sales expense (Walsh, 2009). One solution that the company would use to increase its profit margin is to reduce the expenses incurred after sales; these may include the cost of goods as well as other expenses. Compared to the industry, Tuxedo Inc. has a relatively high margin by about 10%.

Return on Assets

As the name suggests, the ratio would be important for Tuxedo Air to consider the income it receives over the average total assets that the company owns. It is calculated by:

Return on Assets = Net Income/ Total Assets

Tuxedo Return on Assets= 1845242/17379480

= 0. 106

The return on assets numbers shows that Tuxedo Inc. receives about 10% return on its total assets available. The percentage is encouraging compared to the light airplane industry that gives a median return on assets of about the same amount. This shows that Tuxedo is playing on the industry's potential for return on assets. Increasing net income will increase the percentage return on assets.

Return on Equity

The ratio compares the total net income received by a company and the available total shareholders' equity in the company. It is given by calculating:

Return on Equity = Net Income/ Total Shareholders' Equity

Tuxedo return on Equity = 1845242/ 9556430

= 0.19

Tuxedo Inc. return on equity is about 19%, compared to the industry; the percentage is 3% higher than the median given for the light airplane industry. For this reason, Tuxedo air can be said to be operating above average level but slightly below the upper quartile for the whole industry.

Part Two: Choosing an Aspirant Company

Tuxedo Air Inc. is a company that is primarily involved in the manufacture of light aircraft for individual pilots or private companies. Typically, it takes the company about five weeks to finish an order compared to Boeing which might take about two years to complete a commercial aircraft after it is ordered. For this reason it is important for Mark and Jack to choose a company that close to its prospects as an aspirant company. The following features should guide their choice:

• The company should have been in existence for more than ten years before Tuxedo Air Inc.
• The aspirant company should be involved in light aircraft manufacture.
• The aspirant company should be relatively larger than Tuxedo Air Inc (Troy, 2014).

Bombardier would therefore, is not a good choice as an aspirant company. The reason is Bombardier has been in operation for about 60 years more than Tuxedo Inc. and have managed to be highly diversified in their field.

The best aspirant company to choose would be Piper Aircraft. Piper produces the same light aircraft and is more diversified. An analysis of Piper Aircrafts market share will make it appropriate to use as an aspirant company. In the same way, the Jet lease features that XOJET uses would be important in thinking about diversification endeavors in the long-term (Walsh, 2009). Tuxedo Air could both manufacture and lease aircraft to create more revenue.

References

Bull. R. (2007). Financial Ratios, 1st Edition. New York: Elsevier Publishing.

Fridson. M .S. (2011). Financial Statement Analysis: A Practitioner's Guide. New York: John Wiley & Sons Publishing.

Schoenebeck. K. P. (2011). Interpreting and Analyzing Financial Statements. New York: Pearson Publishing.

Troy. L. (2014). Almanac of Business and Industria...