Compare the market capitalization-to-revenue ratio

In January 2016, United Airlines (UAL) had a market capitalization of $20.6 billion, debt of $11.9 billion, and cash of $5.2 billion. United Airlines had revenues of $37.9 billion. Southwest Airlines (LUV) had a market capitalization of $27.5 billion, debt of $3.2 billion, cash of $3.0 billion, and revenues of $19.8 billion.

a. Compare the market capitalization-to-revenue ratio (also called the price-tosales 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.

Consider a retail firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million.

a. What is the firm’s current ROE?

b. If the firm increased its net profit margin to 4%, what would its ROE be?

c. If, in addition, the firm increased its revenues by 20% (while maintaining this higher profit margin and without changing its assets or liabilities), what would its ROE be?

 

Solution:

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