Essay about Southwest Airlines Case

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Matthew Catan September 22, 2015 ACC 380K | Smith Cash Flow Analysis 1. Prepare a table comparing the following metrics for Southwest Airlines for the years 2007 - 2009. Use reported numbers from the 2009 10-K. Southwest Calculations Year 2009 2008 2007 A Revenue $10,350 $11,023 $9,861 B Operating profit margin 2.53% 4.07% 8.02% C “Net” profit margin 0.96% 1.61% 6.54% D Accounts Receivable days 6.67 8.08 9.62 E Inventory days 9.51 9.82 11.10 F Trade creditor days 31.72 30.32 35.36 G Return on assets 0.70% 1.15% 4.27% H Return on common equity 1.90% 2.99% 9.63% I Cash Flow From Operations $985 -$1,521 $2,845 J Cash Flow From Investing -$1,569 -$978 -$1,529 K Cash Flow From Financing $330…show more content…
This can be viewed as a negative point because Southwest generates all of it’s revenue directly from it’s fixed assets (Planes) and if they are not re-investing into their main revenue driver it is hard to continue to grow sales. Financing Activates The main outlier seen in Southwest’s Financing section is in 2008. When the recession occurred southwest issued 100% more debt then the year prior (2007). The reason for this was because net income took such a hit (74% decrease) that they had to keep operations going by taking on more debt until business operations recovered and Net Income rose back to normal levels. 3. Describe the environment that Southwest is operating in and the reasons for the changes in cash generation / usage over the time period. Southwest is operating in a very tough environment during this time period. Oil prices start at $65 dollars a barrel in 2006 and rise all the way up to $140 a barrel by mid 2008. Then in mid 2008 Oil prices come crashing from $140 to $43 a barrel at the start of 2009. This volatility is very bad for a company like Southwest that has a huge portion of it’s operating cost tied to the price of oil. This is why we see a huge loss in the derivative hedging line in the Operating Cash Flow Statement. Also, the economy was in a major recession due to failure of many mortgagee-backed securities. As people’s discretionary income was eaten away they began to

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