Fin 571 - Interpreting Financial Results
Autor: bdalman • May 6, 2016 • Term Paper • 835 Words (4 Pages) • 757 Views
Interpreting Financial Results
Brian Dalman
FIN/571
April 18, 2016
Paul Stevens
Interpreting Financial Results
The financial health of a company is detailed within three documents that provide the necessary information required to evaluate the financial condition: the balance sheet, the income statement, and the cash flow statement. Analyzing financial statements includes the use of financial ratios. McHugh, McHugh, and Nickels (2010) state “Ratio analysis is the assessment of a firm’s financial condition, using calculation and financial ratios developed from the firm’s financial statements” (p. 473). Southwest Airlines (SWA) is a publicly traded company with financial reports that track annual performance. This information is compared against the airline industry benchmark.
A company’s short term ability to convert assets into cash to cover debt is referred to as liquidity. Two ratios are used when evaluating liquidity, the current ratio, and the quick ratio. The current ratio looks at current assets divided by current liabilities. As a general guideline, a current ratio of 2.0 or higher indicates the company has at least twice as many assets as it does liabilities. The quick ratio uses cash, cash equivalents, and accounts receivable divided by liabilities. The quick ratio of 1.0 or higher is considered as acceptable financial performance. As shown in Table A, SWA’s current ratio is below the guideline of 2.0 or higher. The values indicate that the ability to meet short-term financial obligations has decreased in three consecutive years for SWA and is worse than the industry average.
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Table A ("Investor Relations", 2015). ("Airline Industry", 2016). |
The leverage ratio is intended to evaluate a company’s debt level and is the proportion of company's total liabilities to stockholder's equity. The number indicates how much a company owes of total liabilities for one dollar of stockholder's equity and is often a measure of risk. The lower the number, the stronger the balance sheet of the company. As shown in Table B, SWA’s leverage ratio is 1.01 for 2015. The values indicate a strong balance sheet in spite of a slight increase in the last three years for SWA. Values are substantially better than the industry average.
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