Instructions
Ratio Analysis
This is your opportunity to play detective and do some financial statement analysis. Please select any publicly traded company. Choose from that are good starting points for your research:
- Mergent Online, (Use this, Apple Inc.)
- Business Insights: Global,
- Business Source Ultimate, and
- ABI/INFORM Collection.
In addition to using at least one database article or report from the CSU Online Library, you may also use any reliable website, such as the company’s web page.
For the company you select, find the annual report and the financial ratio information for the following ratios:
- debt-to-equity,
- current ratio,
- return on equity,
- quick ratio,
- working capital ratio,
- price-earnings ratio, and
- Earnings per share.
Essay on Corporate Finance
Introduction
Southwest Airlines Co. is one of the most awarded airlines in the world. It has 121 airports in over 11 countries. It recently celebrated its 50th Anniversary in 2021. Southwest Airlines started its operation in 1971 with Herb Kelleher and Rollin King. Southwest Airlines started flying with a short route, Later it grows up to 115.4 million passengers a year. The company has nearly 56,500 employees working with it. It seems the company had a good strategy initially as in a very short period it grows from a small company to a leading company. The initial strategy of the company was to offer a chap rate for the ticket to attract the customers, by offering a $13 per ticket while other competitors were offering $26 (southwestairlinesinvestorrelations.com, 2022). Southwest Airlines also known as Southwest, is now a global company with its business outside the United States. In the beginning, the main goal was to attract more customers to the company, especially business travelers. In the current strategy, Southwest increased its ticket price a little low price for the people who used to travel regularly no matter what the economic condition is.
The debt-To-Equity ratio (D/E):
The debt-to-equity ratio measures the amount of equity and debt a company is having to finance its assets. Southwest Airlines Company’s debt-to-equity ratio is 1.0301 which States that lower risk is associated with the company. This also states that the company has more equity than the debt which attracts investors the most.
Current ratio:
It is a liquidity ratio that shows the company’s capacity to pay short-term obligations or dues within a year. Here Southwest Airlines Company’s current ratio is 1.9681 which is a healthy ratio and this States that the company won’t fail to pay back its liabilities.
Return of equity:
Return on equity is the measure of a company’s net income divided by its shareholders’ equity. In this case, Southwest Airlines Company’s return on equity is 9.3816 which is an average ratio and it states that the company may face little difficulty to pay back its debts.
Quick Ratio:
The QR shows a company’s ability to pay its current liabilities. Southwest Airlines Co.’s Quick ratio is 1.91 which means the business is healthy and can pay its liabilities.
Working Capital Ratio:
The working capital ratio a financial ratio indicates how capable a company is to pay its current financial obligations. Southwest Airlines Co. Working capital ratio i.e. 1.9681 shows how efficiently the company is performing and is capable enough to pay its financial obligations.
Price-Earnings Ratio:
P/E ratio generally shows how much the market wants to pay for the stock based on past and future earnings. Southwest’s Price-Earnings Ratio (26.78) is considered expensive and has a higher stock price.
Earnings per Share:
Generally, Earnings per Share show the profitability of the company. The higher the EPS will be the more profitable the company is. Southwest’s EPS is $1.60 which means it’s giving moderate profit to its investors.
Conclusion
Financial ratios are the parameters to determine a firm’s health and to suggest alternative approaches to improve the financial health of a company. In conclusion, the service companies such as Southwest Airlines Co. do not have the cost of goods sold as it has intangible goods I.e. the service it offers to the public. The service companies can adopt this financial ratio analysis to measure the performance of the business and its position in the market. From the financial ratios, it can be concluded that the company is performing well and is in a healthy condition. It is capable enough to repay all its current dies as well as its future liabilities. The company’s earnings per share are very low. The company should use the buyback method to decrease its outstanding shares which will lead increase in earnings per share (Armen, 2013, p.27).
References
Armen, S. (2013). PERFORMANCE ASSESSMENT OF MAJOR US AIRLINES VIA CASH FLOW RATIOS. Annals of The University of Oradea, Economic Science Series, 22(2).
macrotrends.net (2022). Southwest Airlines PE Ratio 2010-2022 Retrieved from: https://www.macrotrends.net/stocks/charts/LUV/southwest-airlines/pe-ratio [Retrieved on 2nd May 2022]
southwestairlinesinvestorrelations.com (2022). Company Overview Retrieved from: https://www.southwestairlinesinvestorrelations.com/our-company/company-overview [Retrieved on 2nd May 2022]
