Ratio Analysis Business Analytics Analysis

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BUSINESS ANALYTICS Business Analytics: Ratio AnalysisThe ratios captured in Table 1 below would come in handy in efforts to assess Southwest Airline’s current performance level.RatiosFormula20212020Profitability Ratios:i. Return on Total Assets (ROA)............................ii. Return on Stockholder’s Equity (ROE)Profits after Taxes/Total Assets..............................................Profits after Taxes/Total Stakeholder’s Equity977,000/ 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= -0.35Liquidity Ratio: Current RatioCurrent Assets/Current Liabilities18,036,000/ 9,164,000 = 1.9715,173,000/ 7,506,000 = 2.02Leverage Ratio: Debt-to-Assets RatioTotal Debt/Total Assets12,281,000/ 36,320,000 = 0.3412,199,000/ 34,588,000 = 0.35Activity Ratio: Total Assets TurnoverSales/Total Assets15,790,000/ 36,320,000 = 0.439,048,000/ 34,588,000 = 0.26Shareholders’ Return Ratio: Dividend Payout RatioAnnual Dividend Per Share/After-Tax Earnings Per Share0.18/1.61 = 0.110.18/-5.44 =-0.03Table 1NB: Figures in thousands (except financial ratio computations ratios, EPS and DPS)DiscussionIt 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.

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When it comes to risks, Southwest…

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…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 firm’s 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….....

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