They measure the ability of a company to meet its current debts. They show if a company has sufficient cash to carry on its business for the next few months. | |Industrial Average |2011 |2010 |2009 |2008 |2007 | |Current Ratio |1.15 |0.44 |0.49 |0.25 |0.22 |0.21 | |Quick Ratio |1.06 |0.40 |0.45 |0.22 |0.19 |0.18 |
Table1. Liquidity Ratios
The current and quick ratios of the industrial average are both over 1. They indicate that the entire airline service industry is possessing more than $1 of current asset to meet $1 of its short-term debt. These high current and quick ratios were attractive to creditors but the investors would consider these ratios as less productiveness and less effectiveness. By comparing the current and quick ratios of the company and the industrial average, the company had both ratios lower than the industrial average’s, which were more attractive to investors. The current ratio shows that the company has $0.44 of current asset for every $1 of current liabilities, so there is only $0.44 for every dollar of current debt. This low current ratio indicates less liquidity, implying a greater reliance on operating cash flow and outside financing to meet short-term obligation. An increasing trend of the current ratio means the company has been increasing its amount of current assets over current liabilities. It is good for the creditors since a higher ratio indicates a better ability to meet current debt. The quick ratio is more conservative than the current ratio since it includes only the more liquid current assets, excluding the inventory and the prepaid expense because they cannot be easily converted back into cash. The company has a low quick ratio and that means it has $0.4 for $1 current debt. Shareholders would like to see these low current and quick ratios since they think an investment with less liquidity has greater productivity. However, the creditors would like to see a higher ratio since it means that the company has enough current assets to repay and meet its short-term obligations.
Financial Leverage Ratios
They measure the degree which a company is employing financial leverage and partially indicates a firm’s ability to meet its long-term debt obligations such as making interest and principal payments. | |Ind. Avg. |2011 |2010 |2009 |2008 |2007 | |Debt-to-Asset Ratio |50.83% |49.19% |50.01% |61.89% |65.68% |60.67% | |Debt-to-Equity Ratio |150.60% |197.86% |208.24% |566.56% |776.88% |419.43% | |Times Interest Earned Ratio |0.13 |4.0797 |4.9660 |N/A |N/A |N/A |
Table 2. Financial Leverage Management Ratios
The Debt-to-Asset Ratio shows that 49.19% of the company’s total assets were financed with debt in 2012. If Debt-to-Asset Ratio equals to 1, it indicates that all of the assets are financed with debt. In Dec 2011, the company has 49.19% of its assets to meet short obligations. The Debt-to-Asset Ratio has decreased since 2008, this shows that the company’s equity cushion against the operating losses are getting bigger. Credit would like to see this leverage ratio decreasing because it shows that the company has more sufficient asset to meet its debt. But the investor would consider it as an inefficient investment. Meanwhile, the Debt-to-Equity Ratio was 197.86%. It shows that the company has $1 equity when it has $1.9786 debt. This high Debt-to Equity...