Question

Analysis

Please explain why the ratio moved over the last three year (numerator bigger; nominator lower; or both, etc) Explain in depth.

Pick a ratio that has a pattern from Delta Airlines and Southwest Airlines, compare both ratios and tell me why we see the changes. Include table or graph to illustrate your explanations

Southwest Airlines	Year	Year	Year
Account receivable turnover	2015	2016	2017
Sales/account receivable	44.05	35.74	0
Current ratio
Current ratio= CA/CL	0.54	0.66	0.7
Debt to equity ratio
Debt/Equity	1.9	1.76	1.41
Profit margin in %
Net income/sales	0.12	0.12	0.18
Return on Investments
(Investment revenue-Investment cost)/Investment Cost %	0.006	0.015	0.02

Delta Air Lines	Year	Year	Year
Account receivable turnover	2015	2016	2017
Sales/account receivable	20.15	19.20	17.35
Current ratio
Current ratio= CA/CL	0.52	0.49	0.42
Debt to equity ratio
Debt/Equity	3.90	3.17	2.83
Profit margin in %
Net income/sales	11.12	11.03	8.67
Return on Investments
(Investment revenue-Investment cost)/Investment Cost %	26.02	22.63	15.40

Answer 1

Accounts Receivable ratio:

Southwest Airlines: AR ratio is decreasing from 2015 (44.05) to 2016 (35.74). As per Avg collections days also increased from 8.28 days to 10.21 days. It shows collection no of days are reduced average 2 days.

Delta Air Lines : AR ratio is decreasing from 2015 (20.15) to 2016 (19.20) to 2017(17.35). As per Avg collections days also increased from 18.11 days to 19.01 days and 17.35 respectively.

A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly. A high receivables turnover ratio might also indicate that a company operates on a cash basis.

A low receivables turnover ratio might be due to a company having a poor collection process, bad credit policies, or customers that are not financially viable or creditworthy.

Current ratio= CA/CL: :

That measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. Acceptable current ratios vary from industry to industry and are generally between 1.5% and 3% for healthy businesses. ... When a current ratio is low and current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities)

As per Table Southwest Airlines: Current Ratio is increasing and Delta Air Lines current ratio is decreases.

Debt equity ratios:

A high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate that a company is not taking advantage of the increased profits that financial leverage may bring. Companies the maximum acceptable debt-to-equity ratio is 1.5-2 and less. For large public companies the debt-to-equity ratio may be much more than 2, but for most small and medium companies it is not acceptable. US companies show the average debt-to-equity ratio at about 1.5

As per Table decreased for both the companies. Debt equity is more than 1.5 for both the business.

ROI (Return on Investment): ROI measures the gain or loss generated on an investment relative to the amount of money invested. ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company's profitability or to compare the efficiency of different investments.

As per Table Southwest Airlines: ROI is increasing and Delta Air Lines current ratio is decreases.

Profit Margin: There is no change for first 2 years in Southwest airlines and next year it was increased. But for Delta airlines decreases for 2 years.

10% Margin is considered is average and 20% is considered as high as per industry standard. However in this profits are an above 10% for first 2 years and 3rd year 18% for South west Airlines. For Delta Airlines first 2 years above 10 % and 3rd year reduced to 8..67%.

Compare to all rations for 2 companies.

Southwest Airlines is stable business compare to west Air lines business.