According to the latest annual financial reports of the Southwest airlines, the current liabilities of the company are divided into accounts payable, accrued liabilities, air traffic liability, and current maturities of long-term debt. The accounts payable for the 2018 financial period were $1416, while the accrued liabilities were $1749, while air traffic liability was $4134, and the current maturities of long-term debt were $606 (Southwest Airlines Company, 2019).
Times-interest-earned ratio= EBIT/Interest expense
=3206/131
=24.47
The company has a high times-interest-earned ratio of 24.47, which depicts that the company has a great capacity for repaying its interest expenses. The high ratio also portrays that the company has high solvency; hence, it can comfortably meet its long-term debt obligations. The company’s long-term debt at the year-end is $2771 (Southwest Airlines Company, 2019). This is a reduction from the previous year’s long-term debt, which was at $3320.
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The debt to equity ratio of Southwest airlines has been calculated for the two financial periods of 2017 and 2018. The debt to equity ratio for the end of the financial period of 2018 is 1.66 while that of 2017 was 2.34. This indicates an improvement in the uptake of debt by the company, given that the debt to equity ratio reduced from 2.34 to 1.66. The average industry debt to equity ratio is 3.76 (CSIMarket Company, 2019). As such, Southwest Airlines has an acceptable debt to equity ratio because it is below the industry average.
This depicts that the company does not rely heavily on debt capital, which can result in adverse financial risks. The company has also reduced its debt capital in the current financial period as compared to the financial year of 2017. The good debt to equity ratio of the company also depicts the financial strength of the airline because of its capacity to utilize shareholder’s equity for capital together with acceptable debt financing.
References
CSIMarket Company. (2019). Airline industry financial ratios . Retrieved from https://csimarket.com/Industry/Industry_bd.php?ind=1102
Southwest Airlines Company. (2019). Company reports. Retrieved from http://www.southwestairlinesinvestorrelations.com/financials/company-reports/annual- reports
