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.

1. Determine which of the ratios provide the most key insights into the Southwest airline current level of performance. How can you assess whether the results of your calculations are positive or negative? Explain which of the ratios give you 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?

Ratio Formula What It Shows 1. Return on total assets Profits after taxes Total assets The net return on total investments of the firm or Profits after taxes + Interest Total assets The return on both creditors' and shareholders'investments 2. Return on stockholders' equity (or return on net worth) Profits after taxes Total stockholders' equity How profitably the company is utilizing shareholders' funds 3. Return on common equity Profits after taxes - Preferred stock dividends Total stockholders' equity - Par value of preferred stock The net return to common stockholders 4. Operating profit margin (or return on sales) Profits before taxes and before interest Sales The firm's profitability from regular operations 5. Net profit margin (or net return on sales) Profits after taxes Sales The firm's net profit as a percentage of total sales Table A-2 Liquidity Ratios Ratio Formula What It Shows 1. Current ratio Current assets Current liabilities The firm's ability to meet its current financial liabilities 2. Quick ratio (or acid-test ratio) Current assets Inventory Current liabilities The firm's ability to pay off short-term obligations without relying on sales of inventory 3. Inventory to net working capital Inventory Current assets - Current liabilities The extent to which the firm's working capital is tied up in inventory Table A-3 Leverage Ratios Ratio Formula What It Shows 1. Debt-to-assets Total debt Total assets Total borrowed funds as a percentage of total assets 2. Debt-to-equity Total debt Total shareholders' equity Borrowed funds versus the funds provided by shareholders 3. Long-term debt-to-equity Leverage used by the firm Long-term debt Total shareholders' equity 4. Times-interest-earned (or coverage ratio) Profits before interest and taxes Total interest charges The firm's ability to meet all interest payments 5. Fixed charge coverage Profits before taxes and interest + Lease obligations Total interest charges + Lease obligations The firm's ability to meet all fixed- charge obligations including lease payments Table A-4 Activity Ratios Ratio Formula What It Shows 1. Inventory turnover Sales Inventory of finished goods The effectiveness of the firm in employing inventory 2. Fixed-assets turnover Sales Fixed assets The effectiveness of the firm in utilizing plant and equipment 3. Total assets turnover Sales Total assets The effectiveness of the firm in utilizing total assets 4. Accounts receivable turnover Annual credit sales Accounts receivable How many times the total receivables have been collected during the accounting period 5. Average collecting period Accounts receivable Average daily sales The average length of time the firm waits to collect payment after sales Table A-5 Shareholders' Return Ratios Ratio Formula What It Shows 1. Dividend yield on common stock Annual dividend per share Current market price per share A measure of return to common stock- holders in the form of dividends 2. Price-earnings ratio Current market price per share After-tax earnings per share An indication of market perception of the firm; usually, the faster-growing or less risky firms tend to have higher PE ratios than the slower-growing or more risky firms 3. Dividend payout ratio Annual dividends per share After-tax earnings per share An indication of dividends paid out as a percentage of profits 4. Cash flow per share After-tax profits + Depreciation Number of common shares outstanding A measure of total cash per share avail- able for use by the firm