When doing ratio analysis between two companies, which are the best to use?

Question

and why? Specifically, Southwest Airlines and Jet Blue.

Thanks:-)

Answer 1

My list of ratios is as following:

Quick ratio
Current ratio
Acid test
Net profit margin
Return on capital
Interest coverage
Debtor collection period

The actual ratios are to be found here along with a few more: http://en.wikipedia.org/wiki/Category:Financial_ratios

May I ask why you want to invest in the airline industry? Or are we talking finance studies?

If you are asking because of investing plans are you sure you want to get into the airline industry at the moment? Due to the climate change debates taking place in Europe a kerosene tax may be introduced in Europe. If this also occurs in the US many carriers will have a hard time keeping their heads above water... I don't want to discourage you but I would hate for you to buy high and have to see the price nose-dive...

At any rate knowing how to calculate the ratios correctly will help you see what is happening and will be able to help you make a wise decision!

I'd love to hear what you need this information for. You can reach me at [e-mail] or e-mail me via my profile!

Good luck at any rate!!

Answer 2

The beauty of using ratios is that they help you compare two or more stocks to see which is more attractive, or even an individual stock to see it it's attractive enough to warrant further due diligence. Some ratios are more informative & relevant to the industry, and will vary with the company's stage of growth. I wouldn't limit yourself to just a few ratios, because by studying more, rather than less, your understanding of the company's financial position and prospects for future stock price appreciation is better.

Having said that, start with price/sales, price/cash flow, price/book, trailing P/E, forward P/E, net profit margin, return on equity, debt/equity, PEG, current ratio and yield. Once you have a good understanding of what those ratios are telling you, you can then delve into other ones offering additional tidbits of information. Just remember, you need to have a good understanding of what the number is ultimately telling you. Otherwise, it doesn't matter how many, or which ones you use, because none of them will be useful if you don't know what they mean or how they're calculated.

Happy investing!