Financial case study
Southwest Airlines
Kenneth Wu, Meng Wu, Ruoyi Zhao
Business-101-12
Edward Hennessey, Stephanie Tran
10/26/12
9 Pages
Sales
Cost of Sales COGS
Gross profit
Net income (loss)
Inventory
Cash
Total current assets
Long term debt
Total equity
Total assets
Yahoo,
Finance.
"Southw
est
Airlines
Co.
(LUV)Inc
ome
Stateme
nt."
Yahoo
n.pag.
Yahoo
Fiance.
Database
. 25 Oct
2012.
<http://fi
nance.ya
hoo.com
/q/is?s=L
UV
Income
Stateme
nt&annu
al>.
Yahoo,
Southwest Airlines Co
2011
2010
15,658,000
12,104,000
9,745,000
6,784,000
7,792,000
6,746,000
178,000
459,000
401,000
243,000
829,000
1,261,000
4,345,000
4,279,000
3,107,000
2,875,000
6,877,000
6,237,000
18,068,000
15,463,000
Percent Change
22.70%
43.60%
13.40%
-61.20%
39.40%
-52.10%
1.50%
7.50%
9.30%
14.40%
Change
$3,554,000
$2,961,000
$1,046,000
$(-281,000)
$158,000
$(-432,000)
$66,000
$232,000
$640,000
$2,605,000
Current ratio
Debt to owners equity ratio
Profit margin
ROI
Inventory turnover
Southwest Airlines Co
2011
$0.96
162%
1%
2%
24.3x
2010
$1.29
148%
3.80%
7%
27.9x
Industry (Airlines ) Financial Average
2011
2010
$1.99
$1.93
117%
113%
1.00%
1.00%
4.40%
4.50%
24.67x
25.2x
Difference
2011
$(-1.03)
45%
none
-2.40%
-.37x
2010
$(-0.64)
35%
2.80%
2.50%
2.7x
Mchugh, Nickels. Understanding Business. 10th. 17. United states: Mcgraw Hill, 482-485. Print.
Corporation, Microbilt. "Airlines Financial." Hoovers n.pag.Hoover. Database. 25 Oct 2012. <http://subscriber.hoovers.com/H/industry360/financials.html?industryId=1600
Debt to equity ratio Total Liability/Owners equity
2011
11,191,000/6,877,000 =162%
Current Ratio Current assets/ Current Liabilities
4,345,000/4,533,000 =$.96
Profit Margin Net income/Net sales
178,000/1,658,000
= 1%
178,000/6,877,000
=2%
9,745,000/401,000
=24.3x
ROI Net Income after taxes/Total owner equity
Inventory Turnover
Cost of goods sold/Average inventory
Mchugh, Nickels. Understanding Business. 10th. 17. United states: Mcgraw Hill, 482-485. Print.
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Southwest Airlines Co. (LUV)
-NYSE
8.72
0.11(1.25%) 3:16PM EDT - Nasdaq Real Time Price
Add to Portfolio
Balance Sheet
1
Get Balance Sheet for:
View: Annual Data | Quarterly Data
Period Ending
GO
All numbers in thousands
Dec 30, 2011 Dec 30, 2010 Dec 30, 2009
Assets
Current Assets
Cash And Cash Equivalents
829,000
1,261,000
1,114,000
2,315,000
2,277,000
1,479,000
Net Receivables
562,000
409,000
460,000
Inventory
401,000
243,000
221,000
Other Current Assets
238,000
89,000
84,000
4,345,000
4,279,000
3,358,000
-
-
-
12,127,000
10,578,000
10,634,000
970,000
-
-
Intangible Assets
-
-
-
Accumulated Amortization
-
-
-
626,000
606,000
277,000
-
-
-
18,068,000
15,463,000
14,269,000
2,053,000
1,602,000
1,461,000
644,000
505,000
190,000
1,836,000
1,198,000
1,044,000
Short Term Investments
Total Current Assets
Long Term Investments
Property Plant and Equipment
Goodwill
Other Assets
Deferred Long Term Asset Charges
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Total Current Liabilities
4,533,000
3,305,000
2,695,000
Long Term Debt
3,107,000
2,875,000
3,325,000
Other Liabilities
910,000
465,000
493,000
2,641,000
2,581,000
2,302,000
Minority Interest
-
-
-
Negative Goodwill
-
-
-
11,191,000
9,226,000
8,815,000
Deferred Long Term Liability Charges
Total Liabilities
Stockholders' Equity
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Preferred Stock
-
-
-
Common Stock
808,000
808,000
808,000
5,395,000
5,399,000
4,971,000
Retained Earnings
Treasury Stock
(324,000)
Capital Surplus
1,222,000
Other Stockholder Equity
(224,000)
(891,000)
(963,000)
1,183,000
1,216,000
(262,000)
(578,000)
Total Stockholder Equity
6,877,000
6,237,000
5,454,000
Net Tangible Assets
5,907,000
6,237,000
5,454,000
Currency in USD.
Southwest Airlines Co. (LUV)
-NYSE
8.71
0.12(1.36%) 3:17PM EDT - Nasdaq Real Time Price
Add to Portfolio
Income Statement
Get Income Statement for:
View: Annual Data | Quarterly Data
Period Ending
1
GO
All numbers in thousands
Dec 30, 2011 Dec 30, 2010 Dec 30, 2009
Total Revenue
15,658,000
12,104,000
10,350,000
Cost of Revenue
7,866,000
5,358,000
4,667,000
Gross Profit
7,792,000
6,746,000
5,683,000
-
-
-
6,250,000
5,122,000
4,805,000
Non Recurring
134,000
8,000
-
Others
715,000
628,000
616,000
-
-
-
693,000
988,000
262,000
Operating Expenses
Research Development
Selling General and Administrative
Total Operating Expenses
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
(188,000)
Earnings Before Interest And Taxes
505,000
894,000
329,000
Interest Expense
182,000
149,000
165,000
Income Before Tax
323,000
745,000
164,000
Income Tax Expense
145,000
286,000
65,000
-
-
-
178,000
459,000
99,000
Minority Interest
Net Income From Continuing Ops
(94,000)
67,000
Non-recurring Events
Discontinued Operations
-
-
-
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
-
-
Other Items
-
-
-
178,000
459,000
99,000
-
-
-
178,000
459,000
99,000
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
Currency in USD.
1. What is meant by liquidity? Did the company experience and increase or a decrease
in liquidity over the two year period evaluated? What impact do these liquidity figures have on
the company’s long term and/or short term performance?
Liquidity describes how fast an asset can be converted to cash. Liquidity ratios measure a
company’s ability to turn assets into cash to pay its short term debts. So it is an important data
for a company. The company experienced a decrease in liquidity over the two years. In the short
term, the company with a current ratio of 2 or better is considered a safe risk for lenders granting
short-term credit. Since Southwest Airlines have a ratio of $0.96 it’s not a safe investment for
lenders which would mean they won’t have much loans in the short term which would affect the
short term performance. If they current ratio does not increase then long term performance would
start getting bad as well because they can’t get loans.
2. What is meant by Profit Margin? Did the company experience an increase or
decrease in profit margin over the two year period evaluated? What impact do these Profit
Margin figures have on the company’s long term and/or short term performance?
Profit margin is the amount by which revenue from sales exceeds costs in a business.
This data could tell us whether the firm is doing as well as its competitors in generating profit
from sales. The company experienced a 2.8% decrease in profit margin over two years. There
isn’t a lot of profit but there are still gains. So the short term and long term performance isn’t
doing too bad as of now but at the same time with profits this small the performance isn’t doing
very well either. For the long term performance the company definitely wants to see higher profit
margin than 1% if they want to see a performance impact. In the short term there is still profit but
they have lost profit from last year so the performance is dropping but short term shouldn’t really
look too bad.
3. What is measured in a Debt to Equity ratio? Did the company experience a change in
its leverage over the two year period evaluated? What impact do these Debts to Equity figures
have on the company’s overall long term and short term performance?
Debt to Equity ratio measure the degree to which a firm relies on borrowed funds to fund
its operations. The company experienced a 14% increase in their leverage over the two year
period evaluated. The impact for the debt to equity ratio in the short term performance is terrible.
The company has more debt than equity which means there is a high risk to lenders. The
financial average for the airline industry is at 117% for 2011 45% less than Southwest airlines
which means the company has way more debt than average. The debt also increased from 2010
to 2011 which indicate a growing trend in debt. The long term performance is also going to
suffer because of the sheer amount of debt to pay off. The company definitely needs to reduce
their debt.
4. How does inventory and inventory turnover affect liquidity? Did the company
experience and increase or decrease in inventory turnover?
Having too much inventory sitting idle earns no money in fact it cost money so it can’t be
converted into cash which would affect liquidity. Inventory turnover measure the speed in which
inventory gets converted into cash or liquidity. The company experienced a decrease of 3.6x
from 2010 to 2011.
Cited page
Yahoo, Finance. "Southwest Airlines Co. (LUV)Income Statement." Yahoo n.pag. Yahoo
Fiance. Database. 25 Oct 2012. <http://finance.yahoo.com/q/is?s=LUV Income
Statement&annual>.
Yahoo, Finance. "Southwest Airlines Co. (LUV)Balance sheet." Yahoo n.pag. Yahoo Fiance.
Database. 25 Oct 2012. <http://finance.yahoo.com/q/bs?s=LUV Balance Sheet&annual>.
MacAyeal, John. "Southwest Airlines Co Balance sheet."Hoovers n.pag. Hoover. Database. 25
Oct 2012.
<http://subscriber.hoovers.com/H/company360/balanceSheets.html?companyId=1137700000000
0>.
MacAyeal, John. "Southwest Airlines Co Income Statement." Hoovers n.pag. Hoover. Database.
25 Oct 2012.
<http://subscriber.hoovers.com/H/company360/incomeStatements.html?companyId=113770000
00000>.
Corporation, Microbilt. "Airlines Financial." Hoovers n.pag.Hoover. Database. 25 Oct 2012.
<http://subscriber.hoovers.com/H/industry360/financials.html?industryId=1600
Mchugh, Nickels. Understanding Business. 10th. 17. United states: Mcgraw Hill, 482-485. Print.