Debt equity ratios?

[Tim47SIP]

I am having trouble trying to figure out the real meaning in regards to airlines operations concerning debt equity ratios. I am in a MAS program and the book was talking about CO having a 7:1 ratio while Delta carried a 3:1 a year or two ago. It gave me the impression that the 3:1 was better. It also made reference to a company that had a 1:1 ratio and therefore should not try to expand as there would not be enough capital to do that?? I asked the professor what it was and he didn't have a clue. Could someone in the know explain this to me. Thanks. Tim.

 

[Daedalus]

Debt-to-equity ratios is one measure used by financial analysts to determine the financial health of a company. It is normally calculated by taking total liabilities and dividing that number by shareholder equity. The smaller the ratio the better the financial basis of a company. Unfortunately, in the airline business this ratio is normally very skewed toward the high numbers you've seen. A 7 to 1 ratio would indicate that the airline has seven times the debt versus its equity amount. That is something I wouldn't be very proud of, but in this capital intensive business it comes with the territory. If you run the numbers for airlines like UAL and AMR it'll give you a good scare!