Question

Hello,
i need a 1.5 Pages report about southwest airlines, the paper should discuss 6 ratios of the company, explaining what these numbers are telling us, we are not required to do calculation or show how we solved them, just mention 6 ratios and explain them, and how investors are affected and what information it gave us to improve our business.

**the ratios could be found in any general website.

Answer 1

Southwest Airlines is a major American airlines headquartered in Dallas, Texas and is considered to be the world's largest low-cost carrier. The company is listed at NYSE and currently trading at 54.48 dollars per share. Is the company an attractive bet for investors at these levels. We will attempt to understand the current financial position of the company by understanding six different ratios of the company. The six ratios which we will use are: Current ratio, Debt/Equity Ratio, Asset turnover ratio, Gross Profit ratio, Net profit ratio and Price earning ratio. Following data table contains all the above ratios of the company from last 3 financial years.

Annual Data	31-Dec-18	31-Dec-17	31-Dec-16
Current Ratio	0.63	0.7	0.65
Debt/Equity Ratio	0.51	0.52	0.52
Asset Turnover Ratio	0.83	0.84	0.87
Gross Profit Ratio	33.04	35.33	36.69
Net Profit Ratio	11.22	15.87	10.75
Price earnings ratio	10.78	11.09	13.81

Current Ratio:

This ratio is a liquidity ratio that measures company's ability to pay short-term obligations which are due within one year. The industrial average of current ratio is around 0.34 and Southwest airlines average current ratio is 0.66. A higher current ratio is always more favorable than a lower current ratio because it shows the company can more easily make current debt payments. So, Southwest airlines stands in a good position considering the current ratio.

Debt/ Equity Ratio:

The debt to equity ratio is also a liquidity ratio that compares a company's total debt to total equity. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders). Each industry has a different debt to equity ratio benchmark. A lower debt to equity ratio usually implies more financial stability. Some industries tend to use more debt financing than other. For an investors perspective it is always preferred that debt to equity should be less than 1 for all the sectors apart from banking and finance sector companies.

Southwest airlines average debt to equity ratio is at 0.51 which can be considered fairly stable. Also, company has been reducing debt from their balance sheet which makes it more attractive for investment.

Asset Turnover Ratio:

It is an efficiency ratio which measures a company's ability to generate sales from its assets by comparing net sales with average total assets. Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most likely have management problems. For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year. In other words, the company is generating 1 dollar of sales for every dollar invested in assets.

As southwest airlines is dependent on their assets it is important for them to have high asset turnover ratio. Average asset turnover ratio is 0.84 i.e. Southwest is generating 0.84 cents behind every dollar in assets. This ratio indicates that the company is not growing with its full capacity and their is scope for them to improve.

Gross Profit Ratio and Net Profit Ratio:

Gross profit ratio is a profitability ratio and it measures how efficiently a company uses its materials and labor to produce and sell products profitably. This ratio shows management and investors how profitable the core business activities are without taking into consideration the indirect costs. This gives a key insight into how healthy the company actually is. As we can see that gross profit of Southwest is consistently decreasing from 36.69 to 33.04 in the last three years. Industrial average of gross profit margin is around 50% which is higher than the average of Southwest. So, their are more attractive options available for investors to choose from.

Net profit margin is gross profit adjusted with all the indirect costs. The industrial net profit margin average is 18% for airlines industry. Southwest's average net profit margin is 12.61 which less than the industrial average. This ratio also implies that their are more attractive companies with better profitability ratio available for investment.

Price Earning Ratio:

This ratio is considered to be the most important ratio for investors as it is used for valuing a company. This ratio shows if the company's share price is overvalued of undervalued. The average PE ratio of every sector is different. The industrial average of airlines sector is around 19. Southwest's average PE ratio is at 11.90 which implies that the company's valuation is lesser than that of other players in the industry.

Summary:

To summarize, we can see that Southwest is a company which has potential to grow if the management find a way to use their assets in a more efficient manner. Currently, company is undervalued meaning that it is attractive for investment at current levels. If company somehow manages to increase their profitability, than their is a good chance that investor can get great returns out of this investment.