Question

Use Southwest Airlines' 2016 financial statement information, below to answer the following:

1. Calculate Southwest Airlines’ return on assets (ROA) for the year ending December 31, 2016.

2. Disaggregate Southwest Airlines' ROA into profit margin (PM) and asset turnover (AT). Explain what each ratio measures.

($ millions)
Total operating revenues	$20,425
Net income	2,244
Total assets, beginning of year	21,312
Total assets, end of year	23,286
Equity, end of year	8,441

Answer 1

1) Average Assets = (beginning Assets + ending Assets)/2

= ( $21312+23286)/2 = $ 22299

Req 1:

Return On Assets = Net Income / Average Assets

= $2244/22299

=10.06%.

2. ROA into profit margin (PM) and asset turnover (AT)

Profit Margin = Net Income / Sales

= $2244/20425 =10.9865 %

Assets Turnover Ratio = Sales / average Assets

= $20425/22299 =0.91596 times

Profit Margin ratio measures the percentage earnings on the Total revenues genenrated.

Assets turnover ratio measurees the number of times sales generated through Average total assets

Return on Total assets measures the % earnings on the average total assets of the business.