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 $1,654 -$493
2. Briefly describe the cash generation / usage activity of Southwest over this same time period.
From analyzing the statement of cash flow we get a good picture at Southwest’s cash usage over the three-year period. ...view middle of the document...
In 2009 Net income continued to suffer but the Cash collateral provided to fuel derivative counterparties resulted in a significantly smaller loss then the previous year (96% less). This $2,000 less loss contributed to the positive gain from operations.
In the three year financial period covered for Southwest a major economic recession occurred. We see Southwest investing roughly 30% less each year back into PPE. 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.
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 only spend money on necessities, airline flights not being one of them. The major drop in Operating and Net Income is evidence of this decrease in customer flight purchases. Also, we see Southwest having to issue 100% more debt then usual to keep operations afloat. They also do not have the funds to invest as much CAPEX as they normally do. Overall, they are operating in a very tough environment between the recession and the volatile oil prices.