Question

In January 2016​, United Airlines​ (UAL) had a market capitalization of $ 20.57 ​billion, debt of $ 11.92 ​billion, and cash of $ 5.37 billion. United Airlines had revenues of $ 39.37 billion. Southwest Airlines​ (LUV) had a market capitalization of $ 27.44​billion, debt of $ 3.24 ​billion, cash of $ 2.85 ​billion, and revenues of $ 19.94 billion.

a. Compare the market​ capitalization-to-revenue ratio​ (also called the​ price-to-sales ratio) for United Airlines and Southwest Airlines.
b. Compare the enterprise​ value-to-revenue ratio for United Airlines and Southwest Airlines.
c. Which of these comparisons is more​ meaningful? Explain.

Answer 1

a.

UAL price-to-sale ratio: 0.52

LUV price-to-sale ratio: 1.38

=> The price-to-sale ration of LUV is higher than the price-to-sale ratio of UAL.

b.

UAL enterprise-to-revenue ratio: 0.69

LUV enterprise-to-revenue ratio: 1.40

=> The enterprise-to-revenue ratio of LUV is higher than the enterprise-to-revenue ratio of UAL.

c.

The comparison of enterprise-to-revenue is more meaningful because it takes into account the company's debt while price-to-sale ratio does not; which means that the comparison includes the consideration of the level of debts, thus fully account for the level of asset except cash that takes to create a dollar of revenue.

Step-by-step explanation:

Calculation notes for (a) and (b):

(a)

UAL price-to-sale ratio = 20.57/39.37 = 0.52;

LUV price-to-sale ratio: 27.44/19.94 = 1.38.

(b)

UAL enterprise-to-revenue ratio = ( 20.57 + 11.92 - 5.37)/39.37 = 0.69;

LUV enterprise-to-revenue ratio: (27.44 + 3.24 - 2.85) / 19.94 = 1.40.