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BUSINESS ANALYTICS
Business Analytics: Ratio Analysis
The ratios captured in Table 1 below would come in handy in efforts to assess Southwest Airlines current performance level.
Ratios
Formula
2021
2020
Profitability Ratios:
i. Return on Total Assets (ROA)
............................
ii. Return on Stockholders Equity (ROE)
Profits after Taxes/Total Assets
..............................................
Profits after Taxes/Total Stakeholders Equity
977,000/ 36,320,000 = 0.03
................
977,000/ 10,414,000 = 0.09
-3,074,000/ 34,588,000 =
-0.09
.....................
-3,074,000/ 8,876,000
= -0.35
Liquidity Ratio: Current Ratio
Current Assets/Current Liabilities
18,036,000/ 9,164,000 = 1.97
15,173,000/ 7,506,000 = 2.02
Leverage Ratio: Debt-to-Assets Ratio
Total Debt/Total Assets
12,281,000/ 36,320,000 = 0.34
12,199,000/ 34,588,000 = 0.35
Activity Ratio: Total Assets Turnover
Sales/Total Assets
15,790,000/ 36,320,000 = 0.43
9,048,000/ 34,588,000 = 0.26
Shareholders Return Ratio: Dividend Payout Ratio
Annual Dividend Per Share/After-Tax Earnings Per Share
0.18/1.61 = 0.11
0.18/-5.44 =
-0.03
Table 1
NB: Figures in thousands (except financial ratio computations ratios, EPS and DPS)
Discussion
It would be prudent to note that as per the most recent financial statements of Southwest Airlines, an assessment of the various ratios indicate that the airline performed better in the year under consideration (2021) than it did in the previous year (2020). This is more so the case with regard to the return on assets ratio and return on equity ratio. Thus, in addition to having improved its efficiency in as far as the utilization of its assets in profit generation (as indicated by growth in return in total assets) is concerned, the airline also managed to increase the profits earned for every dollar that stockholders have invested (as indicated by growth in return on equity). This is essentially an indication of an airline or commercial enterprise recovering from the negative impact of the COVID-19 pandemic. The liquidity and leverage ratios are within acceptable limits an indication that there is no risk of the airline defaulting on its obligations both short-term and long-term.
In essence, the formation of strategic alliances has certain risks and benefits. There would be need for Southwest Airlines to be cognizant these risks and benefits if it seeks to form a strategic alliance. When it comes to risks, Southwest...…the first option is concerned, the airline would have to pay more in terms of interest payments. When it comes to equity financing, investors are likely to shy away from borrowing to invest in the airline (or any business for that matter) at this time. Therefore, in my opinion, the current financial climate is not favorable in as far as the acquisition of capital to pursue an aggressive value-enhancement strategy is concerned.
In comparison to the present interest rates, I am of the opinion that the interest rate that would be most realistic should be around 8%. The influx of capital if Southwest Airlines decides to borrow would likely affect the debt-to-assets ratio, which happens to be a leverage ratio. In basic terms, leverage ratios seek to assess a firms long-term solvency. As Hitt, Ireland and Hoskisson (2016) indicate, the debt-to-assets ratio could be defined as the total borrowed funds as a percentage of total assets. Thus, in the case of…
References
Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. (2016). Strategic Management: Competitiveness and Globalization. Cengage Learning.
Monica, P.R. (2022, Dec 11). The Fed will raise rates again. But it’s playing with fire. CNN Business. https://edition.cnn.com/2022/12/11/investing/stocks-week-ahead/index.html
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