Balance Sheet

The AMR Corporation has the highest debt to fairness ratio (Google, 2010). The company with the lower debt to rectitude ratio in the meantime is Southwest Airlines. AMR Corporation might have chosen to have a high debt to equity ratio because it believes that it can know to experience rapid growth and sales in their business. They took on such a huge amount of debt because they believed that the interest rate would prove to be tame and reasonable given the level of sales they will experience. AMR Corporation is very affirmative with its outlook in short.The amount of debt the company has taken is very dangerous. It is self-assertive that they redress it cancelled immediately to lower the chances of getting bankrupted in case they cant manage the monthly payments. The opposite can be say of Southwest airlines. The company is expecting lower sales volume or profit margin that is why they keep their debt levels to a minimum (Welsh, 1996). The company is well know for its cheap an d no frills flight that is why they know they will have a lower profit margin. The company is trying to protect itself from any authorisation danger.In the event their sales level would drop even more, the increased obligation to pay their debts would not be as heavy. This strategy is suitable for Southwest Airlines because they be providing economical flights for their passenger. The company relies on volume to make their sales and not on a high profit margin. The company does not want their quash profit margin to be eaten up by huge debt interest rates (Harvey, 1995). We can infer from the financial ratio that they intend to grow organically and not by outside financing. The debt level they have is perceived to be very manageable.They are merely taking advantage of debt to provide a bill of added income generating assets. The bulk of their growth and capital needs would all be derived from their sales. The Continental Airlines is somewhat in between the two extreme types of co mpanies. They are aggressive exuberant to take considerable debt but not too optimistic as to reach 4. 25 in their long precondition debt obligation to equity. Their long term debt to equity ratio is merely 1. 8 which seems small enough compared to AMR corporation. It can be inferred that the continental corporation has a moderate outlook compared to the two others.Continental is optimistic enough to take advantage of loans to increase their coverage and business operations (Gold, 2006). They are not overly optimistic however to borrow more than in two ways the amount of their own equity. The economic situation has to be favorable for them to be able to pay their debts. They are not in a dangerous gravel however, like AMR Corporation with extreme amounts of debts. The AMR Corporation in contrast has to experience several years of extremely profitable operations in order to pay off their debt obligations.The debt ratios of the three companies are basically indicating the same thi ng. The only difference with the debt ratio from debt to equity ratio is the base figure used in the denominator. The debt to equity ratio is more accurate in describing the situation of the company because it uses the actual equity invested by investors (Revsine, 2004). The ratio does not take into account the liabilities as split up of the assets to be used for the computation. Naturally, the ratio for debt to equity will be bigger than the ratio using just the plain asset figure. The interpretation of the ratios remains basically the same.The meaning of the ratio is still the capability of the company to pay off its debts relative to its assets. In case of bankruptcy, the ratio indicates whether the company is capable of paying off the debt amount by selling all of its assets. References Google, (2010), Southwest Airlines http//www. google. com/finance? q=southwest+airlines Google, (2010), AMR Airlines http//www. google. com/finance? q=NYSEAMR Google, (2010), Continental Airlin es http//www. google. com/finance? q=NYSECAL&fstype=ii Damodaran, A. , (2005), Finding the make up Financing Mix The Capital Structure Decision, http//pages.stern. nyu. edu/adamodar/pdfiles/cfovhds/capstr. pdf Welsh, I. , (1996), A Primer on Capital Structure, The John E. Anderson Graduate School of Management, University of California, Los Angeles Gold, J. , (2006), Reducing a Companys Beta- A brisk Way to Increase Shareholders Value, Journal of Applied Corporate Finance, , Vol. 18, No. 4 (Fall) Harvey, C. , (1995), The Capital Structure and Payout Policy, WWWFinance, http//www. duke. edu/charvey/Classes/ba350/capstruc/capstruc. htm Revsine, (2004), Financial Analysis and Reporting, New York, Pearson Hall