# FIN 571 Southwest Financial

**Topics:**Financial ratio, Financial ratios, Balance sheet

**Pages:**12 (1040 words)

**Published:**April 13, 2015

Southwest Financial Reports

FIN/571

April 6, 2015

John Triplett, CPA

Southwest Financial Reports

Efficiency Ratios: There are a number of ways for companies to determine the efficiency of their operations. It is a good way for investors to see if a company is doing a good job with their operations as well. There are a number of different ratios that can be used to come up with different measures of efficiency. Most of these ratios deal with the turnover of cash. Additionally, most of the numbers used to calculate these ratios can easily be found on the balance statement of the company. This paper will address the financials of Southwest Airlines. The first chart (below) shows some of the financial ratios that have been calculated for the company ranging from 2005 to 2014.

Leverage Ratios: The term “financial leverage refers to the use of debt in a firm's capital structure” (Parrino, Kidwell, & Bates, 2012, pg. 5). The purpose of leverage ratios is to measure the ability for a company to meet its long term financial debts and identify the extent of using debt over equity. In other words, leverage ratios indicate the level of debt and ability to pay off these debts. This information is critical for managers, shareholders, and creditors since they want to assess the organizations debt situation. By analyzing Southwest’s leverage ratio, one can identify their financial situations pertaining to debts.

Liquidity/Financial Health

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

2013-12

2014-12

Latest Qtr

Current Ratio

0.94

0.90

0.92

1.03

1.25

1.29

0.96

0.91

0.79

0.74

0.74

Quick Ratio

0.72

0.69

0.63

0.72

1.03

1.13

0.76

0.71

0.63

0.57

0.57

Financial Leverage

2.13

2.09

2.42

2.89

2.61

2.48

2.63

2.66

2.64

2.98

2.98

Debt/Equity

0.21

0.24

0.30

0.71

0.61

0.46

0.45

0.47

0.34

0.36

0.36

After evaluating the leverage ratios for Southwest between 2011 through 2014, one can determine that they still have to meet their obligations. The current ratio demonstrates that they do not have enough assets to cover their debt. The quick ratio demonstrates that Southwest does not have enough quick assets to rapidly cover their debt. The financial leverage ratio demonstrates that Southwest has been aggressive in financing its operations with debt. Finally, the low debt to equity ratio demonstrates financial stability in the company. Overall, Southwest has some obligations to meet however, they aren’t too far from covering those debts. Profitability Ratio:

Profitability Ratios

12/31/2014

12/31/2013

12/31/2012

12/31/2011

ROA % (Net)

5.75

>

3.97

>

2.29

>

1.06

>

ROE % (Net)

16.1

>

10.52

>

6.05

>

2.71

>

ROI % (Operating)

22.68

>

12.59

>

5.98

>

6.85

>

EBITDA Margin %

15.34

>

12.3

>

9.57

>

7.64

>

Calculated Tax Rate %

37.44

>

37.63

>

38.54

>

44.89

>

Revenue per Employee

402,027

>

394,794

>

371,586

>

344,951

>

Profitability ratios specify Southwest Airlines profits. Basically, is management efficiently using the firm’s assets to generate sales and manage the firms operations? Higher the ratios equal better performance. Market value ratios: “to find out how the stock market evaluates a firm’s liquidity, efficiency, leverage and profitability” (Parrino, Kidwell, and Bates, 2012). Market value ratios are extremely important shareholder. As the market rises, so does their earnings. After analyzing the different ratios, it would conclude that Southwest is doing very well. Liquidity Ratios: Liquidity ratios use the ratio to determine a company’s ability to pay off its short-term debt obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover the short-term debt. As you can see from the chart below, Southwest Airlines is very strong financially and has a lot of liquid assets/cash...

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