Question

In mid-2012 United Airlines (UAL) had revenues of $37.4 billion, market capitalization of $6.8 billion, $12.4 billion in debt and $7.3 billion in cash. At the same time Southwest Airlines (LUV) had revenues of $17.0 billion, market capitalization of $6.6 billion, $3.3 billion in debt and $3.3 billion in cash.

1. Compare the market capitalization to revenue ratio (the same as price to sales per share) for UAL and LUV.
2. Compare the enterprise value to revenue ratio for UAL and LUV.
3. Discuss which of these comparisons is more meaningful and why.

Answer 1

a. Market Capitalisation to Revenue Ratio for UAL =6.8/37.40 =18.18% or 0.18
Market Capitalisation to Revenue Ratio for LUV =6.6/17 =38.82% or 0.39
b. Enterprise to Revenue ratio UAL =(Market Capitalisation+Debt-Equity)/Revenue =(6.8+12.4-7.3)/37.4=0.32
Enterprise to Revenue ratio LAL =(Market Capitalisation+Debt-Equity)/Revenue =(6.6+3.3-3.3)/17=0.39
c. Market Capitalisation to Revenue ratio is better because it utilises only equity and not any leverage or debt .Leverages skews the results for Enterprise to Revenue ratio.