Benchmark- Financial Analysis

Benchmark- Financial Analysis

Ratio category	Ratio selected	Formula	Value of the ratio for Southwest Airlines in 2022
Profitability	Net profit margin	Profit after taxes/Sales	2.26%
Liquidity	Current ratio	Current assets/Current liabilities	1.42
Leverage	Debt-to-equity	Total debt/Total equity	0.76
Activity	Total assets turnover	Sales/Total assets	0.67
Shareholder return	Price-earnings ratio	Current market price per share/After-tax earnings per share	41.65

The ratios calculated above are deemed to be providing the most key insights into the company’s current level of performance. Notably, this is so because they evaluate the company’s performance from various dimensions, which include profitability, liquidity, leverage, activity, and shareholder return. According to Hitt et al. (2019), the five dimensions comprehensively reflect any given organization’s performance. Assessing whether the results of the calculations above are positive or negative entails two approaches. First, the results should be compared to those of previous fiscal periods. If the values for the ratios have improved from the last financial period, the results will be considered positive. However, if there has been a decline across the comparison between various fiscal periods, the results will be considered negative. Need help with your assignment ? Reach out to us. We offer excellent services.

Second, the results can be assessed, whether positive or negative, by comparing them to those of other competing firms and by comparing the industry average values for the ratios. If the value of the ratios is higher than those of competitors and the industry average, they will be considered positive. On the contrary, the results will be considered negative if the ratios’ values are below those of other competitors and the industry average. From the ratios calculated above, the net profit margin ratio is a reason for concern for the current strategy. Notably, this is so because the net profit margin is relatively low and raises questions on whether the current strategy impacts profitability, which is a crucial concern for the company.

There are various benefits that a strategic alliance between Southwest Airlines and other companies can bring. First, the company is likely to enhance its customer base through strategic partnerships and thus enhance its profitability position. Second, a strategic alliance between the company and other firms will be a risk mitigation measure. For instance, if the company fails to meet its maturing obligations as and when they fall due, the alliance partners can help settle the commitments. Third, a strategic alliance will help the company enter the new market from which the strategic alliance partners originate. Essentially, this will boost the company’s sales and, thus, its profitability.

On the other hand, a strategic alliance may bear certain risks to Southwest Airlines Company. Notably, sharing essential aspects such as ratios and intellectual properties can harm the company. For example, the company may be at risk of competitors learning its tactics courtesy of strategic alliance partners leaking such information. Also, if one partner in the strategic alliance decides to leave, it can lead to the formation of a potential competitor. Forming a strategic alliance can reduce profitability ratios, such as the net profit margin ratios and gross profit margin. Essentially, this is the case when the strategic alliance partners have a high cost of goods sold and other expenses. From the five ratios analyzed above, profitability and liquidity ratios will reveal immediate information on the effectiveness of the formed alliance. The effectiveness can be identified in the ratio change observed upon forming the strategic alliance.

Today’s financial climate is agile, with solid competition between firms to achieve aggressive value-enhancement strategies. One way to cope with the situation entails obtaining the capital necessary to fund strategic objectives. Such capital can be acquired through funds from lending institutions such as banks through a loan. Additionally, capital can be obtained from selling shares to the general public and, in turn, be used to fund the value-enhancement strategy. Thus, it is clear that capital can be obtained from two primary sources, which include debt and equity (Park & Kim, 2021). The company should assess its financial performance before deciding whether to acquire capital through debt or equity. The debt-to-equity leverage ratio, analyzed above, is essential in this aspect, with the one that is lower in the capitalization of the company being the best option.

The current interest rates average between 6% and 8% in the United States. Therefore, the real interest rate Southwest Airlines will likely incur to obtain debt funding will be around 7%. Borrowing the capital into the firm will impact the company’s leverage and profitability ratios. Essentially, the net profit margin will reduce due to an increased interest expense, while the debt-to-equity ratio will also increase. An increase in the debt-to-equity ratio will indicate that borrowed funds significantly finance the company’s operations.

References

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2019). Strategic management: Concepts and cases: Competitiveness and globalization. Cengage Learning.

Park, G., & Kim, D. (2021). The Influence of the Founder’s Social Competence and Social Capital on Access to Funding Sources. Asia-Pacific Journal of Business Venturing and Entrepreneurship, 16(1), 21-35.

ORDER A PLAGIARISM-FREE PAPER HERE

We’ll write everything from scratch

---

Assessment Description
The purpose of this assignment is to evaluate the financial condition and performance of the firm you and your CLC group members have selected for analysis.
Refer to Tables A-1 through A-5 in Appendix II of the text for the operational definitions of and formulas for numerous common financial ratios, including profitability, liquidity, leverage, activity, and shareholders’ return. Using these formulas, complete at least one ratio from each of the five categories, though you may apply as many of the ratios for which you can find the required information in the firm’s financial reports. On your calculations page, specify for which formulas you are solving.

In an assessment of approximately 750 words, address the following:
1. Determine which of the ratios provides the most key insights into the firm’s current level of performance. How can you assess whether the results of your calculations are positive or negative? Explain which of the ratios gives you a reason to be concerned with the organization’s current strategy and why.
2. The Organizational and Operational Plans assignment references the possible benefits and risks of forming a strategic alliance. What would be the risks of forming a strategic alliance in terms of the firm’s profitability ratios? Which of those five ratios is most likely to reveal immediate information for analysis of the alliance’s effectiveness?
3. Considering today’s financial climate, how likely is it that the organization could acquire the capital necessary to support an aggressive value-enhancement strategy? From where would that capital originate? Compared to current interest rates, what do you believe is a realistic interest rate the firm might incur? Which of the liquidity ratios will be impacted by the influx of capital, if borrowed?
Submit your calculations with your written response.