The current ratio tells you the liquidity of a company based on assets that are readily available to be converted to cash in relation to the liabilities owed within the year.
Abigail Kilgore
Current Ratio = current assets / current liabilities
Quick Ratio = quick assets / current liabilities
Quick assets = 8249 – 730 – 521 – 1262 = 62019
Current assets = 8249
Current Liabilities = 20204
Current Ratio = 8249 / 20204 = 0.41
Quick Ratio = 5736 / 20204 = 0.28
Industry Current Ratio = 1.0
Industry Quick Ratio = 0.9
The current ratio tells you the liquidity of a company based on assets that are readily available to be converted to cash in relation to the liabilities owed within the year. For Delta, their current ratio is 0.41 which does not indicate strong financial health as their liabilities owed are much higher than their convertible assets. It is also low compared to the industry average of 1.0. It does not surprise me the average is this as it is a difficult industry to maintain high cash balances or inventory. The quick ratio removes the prepaid expenses and inventory from the total assets to ensure assets measured can be converted into cash quickly. This removed about a third of Delta’s current assets, making their quick convertibles even smaller. The industry average is 0.9, meaning it should only equate to a 10% difference, making Delta stick out for the bad in the industry. Delta is not in a strong financial position to be able to cover all their current liabilities.
Since 2019, Delta has increased their current and quick ratio to within range of the industry averages (Delta Air Lines… n.d.). In 2019, when this data was last reported on their financials, the Boeing 737 MAX was grounded. Luckily, Delta did not fly this plane so there were no impacts to their assets, but this would impact the industry average. Several other airlines would have seen an increase in their current assets as they sold off parts of their fleet increasing cash balances. However, depending on how long it took to sell the inventory, it may not be obvious on their statements. Delta has maintained a steady balance of current liabilities year after year, but from 2019 to 2020 increased their total assets by $8 billion, increasing their current ratio to .94 (Delta Air Lines… n.d.).
Delta has included a contingent agreement they have for inventory acquisition and if there is a breach or termination of contract prior to the expiration date they will receive a penalty. The probability of this occurring is very low and so it is not included on the financial statement. Another contingent liability listed in the notes is the performance awards. These are dependent upon Delta achieving specific financial goals. They will include losses for legal proceedings deemed probable that they will lose. At the bottom of the page, Delta listed out all of the insurance they have that would cover the different liabilities that could be considered contingent.
They did not have anything listed on their consolidated balance sheet under commitments and contingencies but in a separate note they address their future aircraft purchase commitments. The one thing I disagree with is they should have recorded the performance awards because those are usually able to be estimated as it’s a percentage of one’s salary. Overall, they did an okay job outlining potential contingencies that were not recorded.
The omission of performance awards is a large expense that would be excluded, leaving the balance sheet representing a higher net income than is true.
Overall, this does not change my assessment of the company. The vast majority of their expenses come from inventory and maintenance and their assets are currently bouncing back from the pandemic, meaning it will all balance itself out.
Reference
Delta Air Lines Current Ratio 2006-2021: DAL. Macrotrends. (n.d.). https://www.macrotrends.net/stocks/charts/DAL/delta-air-lines/current-ratio
Answer preview to the current ratio tells you the liquidity of a company based on assets that are readily available to be converted to cash in relation to the liabilities owed within the year.
APA
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