The selected company for this discussion is Southwest Airlines Co. The company was formed by Herb Kelleher in 1967. It was formerly known as Air Southwest Co. but was later renamed to its current name in 1971. The company is an airline carrier for passengers mainly offering flight services in Mexico, the United States, and the South American continent. From 2015 to 2017, the net income had an upward trend but in 2018 the revenue declined alarmingly from $3,357,000,000 to $2,465,000,000 (Yahoo Finance, 2019). Surprisingly, the revenue streams from 2015 to 2018 had increased, meaning the company expenses increased causing the decrease in net income. It is basing on these revelations the discussion herein is developed to critically analyze Southwest Airline's financial stability by examining the balance sheet items.
Question one
The balance sheet format used by Southwest Airlines is mainly the classified balance sheet. The reason for concluding that the format is classified is based on the presentation of assets, liabilities and owners’ equity as individual accounts which are easily readable. It breaks the balance sheet items into subcategories which are easier for a financial statement user to read and understand. Southwest Airlines, for example, has divided the balance sheet items as current and long-term. Both the assets and liabilities parts are divided into current and long term categories, which are further broken down to subcategories. The advantage of utilizing classified format is that it enables users to carry out various financial analysis such as current ratio, which is critical for determining the financial wellbeing of a company.
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Question two
As of 2018, the largest current asset was cash and cash equivalents worth $1,854,000,000. This was an improvement from 2017, where cash and equivalents amounted to $1,495,000,000. When it comes to liabilities, the largest current liability was accounts payable amounting to $1,416, 000,000, which was an increase from 2017. In 2017, the current liabilities amounted to $1,320,000,000.
Question three
Current ration = current assets/current liabilities
2018
Current assets= $5,028,000,000
Current liabilities= $7,905,000,000
=5,028,000,000/7,905,000,000
=0.6361
2017
Current assets= $4,815,000,000
Current liabilities= $6,863,000,000
=4,815,000,000/6,863,000,000
=0.7016
2016
Current assets=$4,498,000,000
Current liabilities= $6,844,000,000
=4,498,000,000/6,844,000,000
=0.6572
Question four
Looking at the firm current ratio, it is evident that the ratio worsened as compared to 2017. In 2018, the ratio was 0.6361 which was a reduction from 0.7016 for the year 2017. In 2017, the ratio had improved slightly from 0.6572 in 2016 to 0.7016 in 2017. The ratios reveal that the company is facing financial problems since it cannot meet its current obligations using the readily available resources. The company liabilities over the years have been way beyond the expected limit, revealing the company has difficulties meeting its current obligations. A firm that has a current ratio of less than one means it is having financial problems since it does not have enough money to pay its current liabilities. The firm will be forced to borrow to finance its current obligations or looking for other viable alternatives.
The recommended current ratio is a ratio above one. A ratio above one reveals a company is financially stable and is in a position to discharge its current obligations without having cash problems throughout the year. A ratio below one is a manifestation of big cash problems before the year ends. It is this situation that Southwest Airlines is in, despite reports showing that the company has been profitable and is on upward growth (Pollet, 2019).
References
Pollet, K. 2019. Southwest: A well-run company with plenty of growth. Seeking Alpha [online]. Retrieved from https://seekingalpha.com/article/4239142-southwest-well-run-company-plenty-growth
Yahoo Finance, 2019. Southwest Airlines Co. (LUV).Yahoo Finance [online]. Retrieved from https://finance.yahoo.com/quote/LUV/financials?p=LUV
