Question

Compare the ratios for each company against each other and draw a conclusion about each of the ratios. Interpret the meaning of the ratio in relation to your companies.

South West Airlines (2019) In millions

Payout Ratio = Cash Dividends on Common Stock / Net Income

= .372/2.3 / 2,300 *   = 16.17% ( cash dividend taken from cash flow statement)   

Return on Common Stockholder's Equity = Net Profit - Preferred Dividend / Average Common Stokholder's Equity

= (2,300 -0 ) / (17,945 +15,967)/2 = 2,300 / 16,956 = 13.56%

Times Interest Earned = Net income + Interest Expenses + Income Tax Expenses / Interest Expenses

= (2,300 + 118 + 779 ) / 118 = 27.09

American Airlines (2019) In millions

Payout Ratio = Cash Dividends on Common Stock/Net Income

0.40/3.80= 10.5% (cash dividend taken from cash flow statement)

Return on Common Stockholder’s Equity = Net Profit - Preferred Dividend / Average Common Stockholder’s Equity

= (1686-0) / (3,945+4,964)/2= 1,686 / 4,445.5 = 37.85%

Times Interest Earned = Net income + Interest Expenses + Income Tax Expenses / Interest Expenses

= (1,686+1,095+570) / 1095 = 3.06

Answer 1

The dividend payout ratio represents the portion of net income that is distributed to the stockholders' as a dividend. South West Airlines has a payout ratio of 16.17% which is higher than the American Airlines payout ratio of 10.50%. It means South West Airlines is paying more part of its earning as compared to American Airlines as dividends.

Return on common stockholder's equity ratio measures the performance of the company to generate the incomes for the common stockholders'. South West Airlines has a return on common stockholders' ratio of 13.56% whereas, American Airlines has a return on common stockholders' ratio of 37.58%, which is greater than the South West Airlines. It implies that in terms of producing profit to stockholders', American Airlines is a more successful company as compared to South West Airlines.

Times Interest Earned ratio represents the portion of the income of a company that is going to be used to meet the future interest expenses. South West Airlines has a times interest earned ratio of 27.09 times, while American Airlines has only 3.06 times. a higher ratio is favorable for a company as it implies that the company has less risk of solvency. Thus, South West Airlines is better than American Airlines in terms of the times' interest earned ratio.