Question 1.
The liquidity and profitability ratios are essential in giving insight into the current
financial performance of Southwest Airlines. The liquidity ratios like the quick ratios and the
current ratio assure whether a firm can settle the current debts obligations. On the other hand,
profitability ratios include the net profit margin, operating profit margin, and the return on total
assets (Hitt et al., 2017). These ratios are critical in ascertaining whether Southwest Airlines is
generating enough profits to finance its expenses.
One can determine whether the calculations yield positive or negative results through the
general rule that any ratios surpassing 1.0 are positive while ratios below 1.0 are negative. In
addition, one can rule out a negative outcome by comparing ratios obtained by the industry
averages. Some ratios that can indicate an area of concern regarding the current Southwest
Airlines strategy include the low liquidity ratios, low profitability ratios, high leverage ratios, or
low activity ratios.
Low liquidity ratios, marked by ratios below 1.0, indicate that Southwest Airlines cannot
meet short-term financial obligations accruing to the firm. Cases of low operating profit margin
and low net profit margin can suggest that the Airline is obtaining reduced income from various
operations conducted by the Airline. The low-profit margin and low net profit margin can also
indicate that the Airline is making losses. Regarding the activity ratios like low total asset
turnover, the ratio suggests that the current Southwest Airlines strategy is underutilizing the
firm's assets. The underutilization of the company assets challenges the ability of the firm to
generate revenues effectively. The high leverage ratios, which are also critical in the evaluation
of the Airline, indicate the firm is operating on negative net worth. These ratios help inform that
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the financing of Southwest Airlines is through debt. The percentages help ascertain any
ineffectiveness of the Airline's strategy and the likelihood of running bankrupt or seizing to
operate.
Question 2.
A strategic alliance within the field of business refers to a mutual agreement between two
or more firms to work together to achieve shared objectives. The coalition is key to realizing the
shared goals, which would otherwise be unattainable if one firm was to commit to the objectives
independently. Through a strategic alliance that enjoys different benefits, the alliance is also
prone to some risks. If Southwest Airlines were to enter into a strategic partnership based on
profitability ratios, it would be inclined to some risks.
Some of the risks of forming alliances based on the firm's profitability ratios include the
firm's size, timing problems, and failure to consider long-term strategies of the firm. In regards to
the organization's size, small firms tend to record higher profitability ratios than larger firms.
However, in a real sense, larger businesses are more profitable compared to smaller firms. In
regards to the timing problem, the profitability of some firms is based on seasonal factors. This
situation means that the ratios might be below at different times, while at other times, the
business might record low ratios. The timing risk also indicates that the services or products of
the company might be profitable at a particular time while also at risk of being absolute in the
future. Another threat to forming strategic alliances based on profitability ratios is that
profitability ratios do not consider the prevailing long-term activities of the organization that
might deem it profitable in the future.
Amongst the five ratios, leverage ratios are the most likely to show immediate information to
analyze the effectiveness of a strategic alliance. The leverage ratios outline the sources of the
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organization's capital, either from shareholder equity or debt. The balance is also essential in
providing a long-term outline regarding the financial position of the organization.
Question 3.
As the COVID pandemic ravages different economies globally, it makes it difficult for
Southwest Airlines to obtain capital to fund an aggressive value-enhancement strategy. The
traveling business has been highly affected by the travel restrictions and risk for spreading the
virus, which has seen a reduction in the number of travelers. Under this type of environment,
creditors are demanding assurances and well-thought strategies that will guarantee the creditors'
support. Capital for financing a value-enhancement plan can, however, be obtained from private
equity loan lenders. Based on the prevailing interest rates, an interest rate of 3% would be better.
The quick ratios will be affected by the inflow of capital as this ratio indicates the capability of
the business to settle short-term debt obligations.
Part Two
Calculations for Southwest Airline Financial ratios based on the financial data posted by
(Southwest Airlines, 2020) annual 2020 report to shareholders.
A1.
Return Total Assets = Profits after taxes/Total assets
3074\34,588 =0.088
At 8.88%, it indicates that the Airline enjoys a good return on its asset investment. Over 20%
percent ROA would suggest that the firm is excellently utilizing its assets to generate profit.
A2.
Current Ratios = Current assets/ Current Liabilities (Amount in Millions)
15,173/ 7506 = 2.02
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A current ratio between 1.5 to 3.0 generally indicates a good percentage indicating the firm's
ability to cater to its current financial liabilities.
A3.
Debt-to-assets = Total debt/ Total assets
10,111/34,588 = 0.29
The ratio indicates that 29% of Southwest Airline assets have been financed through borrowing.
A4.
Total Assets Turnover = Sales/ Total assets
4336/34,588 = 0.125
The ratio indicates that Southwest Airlines generated $ 0.125in sales for every $1 in total assets.
This result means that there is inefficiency in the ability of the firm to use its assets to generate
sales.
A5.
Dividend Pay-out Ratio = Annual dividends per share/ After tax earnings per share
0.180/5.44 = 0.0033
The results mean that Southwest Airlines pays 3.3% of its net income to the firms' shareholders
while re-investing 96.75% to the business.
