The Southwest Airlines Company was founded in 1971 by Rolling King and Herb Kelleher; by the then, the company used to serve specific regions of San Antonio, Houston, and Dallas. It has eventually become the first company to offer programs of frequent miles in the mid-1980s. This was used by the long distance travelers to bank their traveled miles, which could later be used as free credits. In 1984, it was named as the most successful company in terms of the services it offers to its customers. The company adopted the profit sharing system in the entire United States in 1971; this plan has enabled its employees to own approximately 10% of all the company’s stock. On the other hand, 87% of the whole airline was unionized; ideally, pilots were represented by the association of pilots.

1. Short-Term Solvency or Liquidity Ratio

The current ratio of a company is calculated by dividing the company’s current assets by its current liabilities. Ideally, current ratio is meant to identify the capability of a company to settle its current short-term debts and other related liabilities. Basically, these are considered to be obligations of finance, which have lasted for less than a year. Thus, coming up with a comparison of both the current liabilities and assets illustrates the basic ability of a company to be regarded as solvent. The recent ratio taken at one implies that the current book value of assets is basically the same as the book value of the current liabilities. For any company to stand high chances of attracting other investors, it has to have a  current ratio of 2:1, which implies that the rate of its assets is two times more than the number of its liabilities. On the other hand, if the current ratio of a particular company is less than one, it probably indicates that the company faces changes of settling its financial short-term obligations. If the current ratio is regarded as too high, then it implies that the company might not be using its assets in relation to the financing facilities regarded to as the short–term ones in a proper way.

Current assets table of Southwest Airlines


December 30, 2012

December 30, 2011

Cash and its equivalents



Investments of short term



Receivable net









Total current assets



Current liabilities table of Southwest Airlines


December 30, 2012

December 30,2011

Payable accounts



Long term debts






Total current liabilities



The current assets of Southwest Airlines as of December 30, 2012, are $4,227,000, while the current assets as of December 30, 2011 are $4,345,000. On the other hand, the current liabilities of the Southwest Airlines as of December 30, 2012 were $4,650,000, while those of December 30, 2011, were $4,533,000.                                                                

The current ratio as of 30th December 2012 is 4,227,000/4,650,000=0.91 as of 30th December 2011 is 4,345,000/4,533,000=0.96

2. Long-Term Solvency or Financial Leverage Ratio

Long-term solvency refers to the ability of a company to settle its current and future obligations and debts. Basically, solvency ratios are of a greater importance to the long-term stakeholders and creditors; thus, this category is attached to the conditions of the long-term success of any business or firm. This implies that a company should be in a position of paying off its debts and service its debt interests; on the other hand, the company should also be in a position to pay the whole principal, when its debts mature. The total debt ratio of a particular company serves the purpose of measuring how the assets of the firm are financed by the debts. On the other hand, total debt ratio is regarded to serve both the ratio of debts and the ratio of solvency. Moreover, the leverage ratio indicates the proportional equity of the stakeholders and the sum of debts used in financing the assets of the company. If the equity ratio is equal to 5, then, most probably, it implies that holders of the debts have an upper rate of 5 times more with regard to claiming of the assets than the holders of equity. After repaying a debt of -1.5% the Southwest Airlines Company saw an improvement in its total debts in three consecutive quarters to 0.46. This is considered to be above the total debt equity; though the company improved with regard to total debt to equity, it was considered as being on the lowest position, as compared to other companies.

A table of equity ratios of the Southwest Airlines

Total debt to equity

30th Sep 2012

30th June 2012

31st March 2012

31st December 2012

30th September 2011







Total debt






Total debt to equity






Overall ranking






3. Asset Utilization or Turnover Ratio

Asset turnover ratio is also referred to as the ratio of efficiency, which implies that it is used to measure the company’s capability of generating sales from assets. In addition, asset utilization ratio provides a platform for calculating the earned revenue in total for every amount of money received for the assets owned by the company. The inventory turnover of the Southwest Airline Company saw a major increase due to its inventory build up. The ratio had subsequently decreased to 13.4, a figure which was totally below the average of the company. On the other hand, the processing period of inventory increased from 26 days to 27 days between the  June, 30 and September 30, 2012. As compared to other related sectors of transportation, there are approximately five more companies, which are performing better than the Southwest Airlines Company; however, the general ranking of the company improved from being number 85 to number 77.

A table of inventory turnover for the Southwest Airlines Company


30th September 2012

30th June 2012

31st March 2012

31st December 2011

30th September 2011

Inventory growth






Cost of sale






Inventory turnover ratio






Total ranking






Average inventory period of processing






4. Profitability Ratios

Profitability ratios are considered to be among the major aspects of financial metrics, which are usually used for assessment in any firm or business in order to identify its ability to generate earnings with regard to its costs and other related expenses within a specified duration of time. In addition, if the company has higher total values as compared to its major competitors, or has the same value, then the entire company would be considered to be making an appropriate progress.

Profit margin shows all the amount of money in terms of income that the company earns per dollar of its entire sales. The final ratio is calculated by dividing the net income by all sales. On the other hand is a representation of the total revenue in percentage that a company manages to keep as its profit after the final account of both the variable and fixed costs. Its main purpose is to be used for internal comparison due to the varying profit margins among various industries. Ideally, a very narrow margin in profit implies that there is an increase in volatile earnings; on the contrary, the huge profit margins and fixed cost for firms play very important role in reducing the chances of a fall in sales, which might result into net loss. When calculated, the Southwest Airlines’ margin profit the net income of $421 million and sales of 0.49 times were used. Thus, the ratio equals to 2.46%. If to compare this figure to the same ratio of other firms, it clearly indicates that the Southwest Airlines Company’s profit margin is very low.

5. Market Value Ratios

It is considered to be the equations that enable a person to come up with a comparison of the recent stoke price with the indicator of finance with regard the financial statement of the company. Basically, the amount of money a company earns per share is the one used as the basic indicator. Similarly, the market value ratio plays a role in examining the status of economy of the company in the entire market place. It presents the management board with the best idea of how investors perceive the whole company. Price earnings ratio is mathematically calculated through division of the recent market price of each stock by how much a share is paid for. The current price earnings ratio of the Southwest Airlines Company keeps fluctuating and depreciating. The actual ratio in 2012 was 22.41; however, the number is estimated to go down to as low as 8.48 by the year 2015.

A table of price earnings ratio of the Southwest Airlines Company

Date range

Price per share

March 15, 2013


March 14, 2013


March 13, 2013


March 12, 2013


March 11, 2013


March 8, 2013


March 7, 2013


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