Key Business Ratio: Allegiant - Essay Example

In 2007 the net margin (net income/sales) of the company was 8.74%. Based on the company's yearly growth prediction of above 10% the company was not able to meet its profitability targets, but it still perform better than the industry average of about 2% (Bachman). One of the weaknesses of the company’s growth strategy is that it does hedge adequately against the risk of higher fuel costs. In the article, the readers of the material learned that the company utilized a fleet that was on average 18 years old.

The utilization of old inefficient planes hurt the company’s operating efficiency. A company that takes great pride in its ability to lower costs has an inherent and systematic deficiency in its cost structure. Gasoline represents the second largest cost for a typical airline after only the cost of labor of the airplane's crews and administrative personnel. Another business risk of the company is its dependence on the middle class as its primary business prospect. The firm is forgetting about the virtues of targeting business travelers.

A higher retention rate of business clients could help the company create value over time. Ratio analysis is a financial diagnostic tool that can help a business analyst determine the financial performance of a particular common stock or privately owned business. In the fiscal year 2007, the debt-to-equity ratio of Allegiant was 0.93. The metric is good because the company has more total equity than total debt. In comparison with the industry standard of 1.48, the company has a more flexible capital structure that can be utilized in the future to acquire capital and spur further growth (Dun & Bradstreet).

The firm’s quick ratio (current assets / current obligations) is even better at 1.75. A low current ratio decreases the business risk for an investor because it provides assurances that the company can meet its current obligations. The company most likely issues corporate paper such as bonds at a lower cost than other players in the industry. Two financial ratios that determine the ability of the management team to exploit its resources to achieve a greater level of profitability are return on equity (ROE) and return on assets (ROA).

The return on equity of Allegiant is 14.98% and a return on equity of 7.77%. The ROA and ROE industry standards for these two metrics are 4.1% and 12% (Dun & Bradstreet). The company has superior profitability than other companies competing in the air transportation industry. The long-term strategy of the company of being adapt to changes in the environment by cutting its service delivery chain from 365 to 100 days was a smart business move that allowed the firm to react more adequately to the petroleum cost factor which is a volatile cost variable. In the future investing in fuel-efficient newer aircraft would help the company better deal with the fuel consumption costs.