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Southwest Airline Financial Analysis Essay

856 Words4 Pages

Common-Size financial statements of Southwest Airline for 2016
Item Income Statement ($ Million) Common-Size Income Statement (%)
Total Revenue 20,425 100%
Cost of Revenues 6,132 30.02%
Gross Profit 14,293 69.697%
Operating Expenses 10,533 51.6%
Operating Income 3,760 18.4%
Interest Expense 75 0.45%
Provision for Taxes 1,303 6.4%
Net Income 2,244 10.99%

Vertical Analysis for Southwest Airline for 2016
Item Balance Sheet ($ Million) Percentage of Total Assets (%)
Total Assets 23,286 100%
Cash 3,305 14.2%
Receivables 546 2.34%
Inventories 337 1.44%
Deferred income taxes 477 2.2%
Property, plant and equipment 17,044 73.2%
Liabilities 14,845 63.8%
Stockholders' equity 8,441 36.3%

Horizontal of Southwest Airline Income Statement ($ Million) …show more content…

Relevant rations
1. Profitability ratios for Southwest Airline for 2016
Gross Margin= 70%
Operating margin=18.41%
EBT Margin=17.37%
Net profit Margin 10.99%
The above ratios indicate that Southwest Airline is a highly profitable business. Therefore, the acquisition of such a business will bring a major financial benefit to the acquiring company.
2. Solvency Ratio for Southwest Airline for 2016
Solvency Ratio = (Net Income + Depreciation)/Total Liabilities
(2,244+9,420)/ 114,845
=78.6%
The solvency ratio for Southwest Airline indicates that the company can easily be dissolved, because the company has sufficient capacity to cater for its long-term debts.
3. Liquidity Ratio for Southwest Airline for 2016
Current Ratio= 66%
Quick Ratio= 56%
The above liquidity ratios are healthy, indicating that Southwest Airline is highly liquid in the short-term, at a quick ratio of 50%, while also indicating that it is also liquid in the long-term, at a current ratio of 54%.
4. Leverage Ratios for Southwest Airline for …show more content…

6. Graphically trend the net income and cash flow from operations over the last five years
A graph of the net Income Trend for Southwest Airlines (2011-2016) in $ Millions A graph of the Cash Flow from Operations Trend for Southwest Airlines (2011-2016) in $ Millions

Based on a comparison of the income statement to the statement of cash flows, the greatest differences between net income and cash flow from operations is notable for the years 2011-2012 and then for the years 2015-2016. For the period 2011-2012, there was a notable rise in the cash flow from operations from an initial $1,385 million in 2011 to $2,064 in 2012, resulting in a huge increase of net income by 136.5%. On the other hand, there was a huge cash flow growth for the period 2015-2016, where the cash flow increased from the initial $3,238 million in 2015 to a massive $4,293 in 2016, which was a cash flow growth of $1,055 million in just one year. This big change was brought about by the increase of the airline’s deferred taxes from the initial $ -109 million in 2015 to a massive $455 million in 2016, thus increasing the liquid cash flows for the company in 2016 (Morningstar, Inc.,

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