Question

In January 2016​, United Airlines​ (UAL) had a market capitalization of $ 20.54 ​billion, debt of $ 12.06 ​billion, and cash of  $ 5.36 billion. United Airlines had revenues of $ 38.27 billion. Southwest Airlines​ (LUV) had a market capitalization of $ 27.41​billion, debt of $ 3.16 ​billion, cash of $ 2.82 ​billion, and revenues of $ 19.69 billion. a. Compare the market​ capitalization-to-revenue ratio​ (also called the​ price-to-sales ratio) for United Airlines and Southwest Airlines. b. Compare the enterprise​ value-to-revenue ratio for United Airlines and Southwest Airlines. c. Which of these comparisons is more​ meaningful? Explain.

Answer 1

Answer a.

United Airlines:

Market Capitalization-to-Revenue Ratio = Market Capitalization / Revenue
Market Capitalization-to-Revenue Ratio = $20.54 billion / $38.27 billion
Market Capitalization-to-Revenue Ratio = 0.54

Southwest Airlines:

Market Capitalization-to-Revenue Ratio = Market Capitalization / Revenue
Market Capitalization-to-Revenue Ratio = $27.41 billion / $19.69 billion
Market Capitalization-to-Revenue Ratio = 1.39

Answer b.

United Airlines:

Enterprise Value = Market Capitalization + Debt - Cash
Enterprise Value = $20.54 billion + $12.06 billion - $5.36 billion
Enterprise Value = $27.24 billion

Enterprise Value-to-Revenue Ratio = Enterprise Value / Revenue
Enterprise Value-to-Revenue Ratio = $27.24 billion / $38.27 billion
Enterprise Value-to-Revenue Ratio = 0.71

Southwest Airlines:

Enterprise Value = Market Capitalization + Debt - Cash
Enterprise Value = $27.41 billion + $3.16 billion - $2.82 billion
Enterprise Value = $27.75 billion

Enterprise Value-to-Revenue Ratio = Enterprise Value / Revenue
Enterprise Value-to-Revenue Ratio = $27.75 billion / $19.69 billion
Enterprise Value-to-Revenue Ratio = 1.41

Answer c.

Enterprise Value to Revenue ratio is more meaningful, as Market Capitalization to Revenue ratio considers the Market Value of Equity only.