Using ratios and information given for republic airways holdings inc and subsidi

Question

Using ratios and information given for republic airways holdings inc and subsidiaries, an airline company, analyze the capital structure, long-term solvency, and profitability of republic airways as of 2013. Chapter 5, Problem 5.12 on page 255 in the textbook. Fraser, L.M. and Ormiston, A. (2015). Understanding Financial Statements (11th ed.). Prentice Hall. Financial  

Financial Ratios 2013 2012 Leverage Debt ratio 83.2% 86.0% Long-term debt to total capital 77.4% 77.3% Times interest earned (times) 1.7% 1.4% Cash interest coverage (times) 3.2% 2.8% Fixed charge coverage (times) 1.3% 1.2% Cash flow adequacy (times) 30.0% 0.8% Profitability 14.2% 12.2% Operating profit margin 2.0% 3.7% Net profit margin 17.9% 16.0% Cash flow margin 80.0% 1.4% Return on assests 4.8% 10.0% Return on equity 7.4% 6.0% Cash return on assets Other infomration Cashflow from operations (milions of $) $    240.6 $               220.8 Revenues (milions of $) $ 1,346.5 $            1,377.4

Explanation / Answer

Capital Structure:

The debt ratio of the company reduced from 86% in 2012 to 83.2% in 2013.

In 2013, 83.2% of its total asset is financed by debt. Total liabilities is 83.2% of total assets

Out of total capital 77.4% is long term debt.

The equity portion of the capital is very low and the company is highly leveraged.

The risk to the company is very high

Long term solvency:

Times interest earned is 1.7 times. It indicates the ability of the company to meet its obligations

The Earning before tax and interest is 1.7 times the interest obligation.

High debt ratio combined with low times interest earned indicates that the company may find difficult to meet its debt service obligation.

Profitability:

The profitability of the company as indicated by Net Profit margin (17.9%) is high. However, this needs to be compared with the industry average

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