Running head: FINANCIAL PERFORMANCE AND HEALTH OF AN ORGANIZATION 1

Financial Performance and Health of an Organization Report

Southwest Airlines

Name

Southern New Hampshire University

FINANCIAL PERFORMANCE AND HEALTH OF AN ORGANIZATION 2

Table of Contents
FINAL PROJECT MILESTONE ONE - Module Three 3
Financial Performance and Health 3
A. Organizational Context 3
B. Recent Financial Performance 3
C. Current Financial Health 4
FINAL PROJECT MILESTONE TWO - Module Five 6
Success Factors and Risks 6
FINAL PROJECT MILESTONE THREE - Module Seven 7
Projections 7
FINAL PROJECT SUBMISSION - Module Nine 8
Business Opportunities 8
Executive Summary 9
References 11
Appendix A 12
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FINAL PROJECT MILESTONE ONE - Module Three

Financial Performance and Health

A. Organizational Context
Southwest Airlines is involved in providing scheduled air transportation services in the

United States as well as near-international markets. The provision of scheduled air transportation

services helps in setting the boundaries for business decisions since the company is usually

restricted in operating in the programmed locations. The company is organized and managed by

function. There are different individuals in the management of the organization based on the

functions that they carry out. The management of the organization has adopted a flexible

approach in its operations and associations with both workers and customers. The organization of

the company by function is critical in influencing accounting and financial information as well as

subsequent business decisions since every task is usually associated with the individuals

appointed in the positions.

B. Recent Financial Performance

The consolidated income statements for the company for the past three years indicate that

the company has been successful. This is because the net income for the company has been

increasing for the past three years. In 2015, the company made a net income of $2,181 million

while in 2016 the net income increased to $2,244 million. In the year 2017, the company’s net

income was $3,488 million, which also indicated an increase from the 2016 value. This being the

case, the company can be indicated to be performing strongly for the past three years (check

figure (a) in the appendix for a graph showing how the company has progressed in terms of net

income for the past three years.

From the consolidated cash flow statements of the company, it is evident that net cash

provided by operating activities was high in 2016 and decreased in 2017. The net cash provided
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by operating activities in 2015 was $3238 million while in 2016 it was $4293 million. This value

indicated an increase from the 2015 amount. Alternatively, in 2017, the net cash provided by

operating activities decreased to $3929 million. However, in the case of net cash flow from

financing activities, the values showed a constant increase for the past three years. In 2015, the

value was $1913 million while in 2016 it was $2272 million. Alternatively, the value was $2408

in 2017. On the other hand, net cash flow from financing activities was the highest in 2016, but

lowest in 2015. In 2015, the value was $1024 million and increased to $1924 million in 2016

only to decrease to $1706 in 2017 (figure (b), (c) and (d) in the appendix show this relation). The

cash provided by operating activities stands out since it provides the highest values in the cash

flow statements.

The organization’s underlying financial performance can be indicated to be higher than

that of the industry. This is evident from the company’s 2017 annual report. The 2016 and 2017

financial results indicated that the company had higher earnings, which translated to strong

performance in the stock market. The company led the industry in the two periods and the entity

was placed ninth in the entire S&P 500 for a period of five years that ended in 2017 (Southwest

Airlines, 2017). Therefore, the company can be indicated to be thriving in the industry.

C. Current Financial Health

The financial health of the company can be understood from the analysis of financial ratios such

as the current ratio and debt/equity ratio. The ratios are computed below as follows;
Current ratio = Current assets/ current liabilities
Current ratio = $4815 million / $6905 million
= 0.69
Debt/Equity ratio = Total liabilities / Total shareholders’ equity
= 14680/10430
= 1.41
From the current ratio, the company can be indicated to have higher current liabilities compared

to the current assets. Thus, in the short-term, the assets of the company cannot be used to support the

current operations of the entity. This implies that the financial position of the company is not so strong
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because it has to facilitate its short-term operations through debt. Alternatively, in the case of the

debt/equity ratio, it can be indicated that the company utilizes about 14% debt relative to its stock value.

Thus, the company does not use a lot of debt to facilitate its operations.
The organization has the right amount of cash as well as other resources that are important for

fueling future growth. The company has the right combination of resources since it is performing strongly

relative to other firms in the industry. Although Southwest Airlines has competitors such as JetBlue and

Frontier, it has profitability that is usually driven by decreasing costs as well as increasing passenger

revenue (Goldberg & Weiss, 2018). This being the case, the airline can be considered to have the right

resources meant for future growth. In case the organization does not have the right mix of cash and other

resources, it would not be in a position to outcompete its competitors. The resources that the company

has seem to be sufficient for future operations, but should not be misused in unworthy course.
According to The Value Investor (2018), Southwest Airlines reported its 45th year of

profits in a line. The great achievement is considered to be delivered by financial prudence as

well as operational excellence. The company has more than doubled its sales from $10 billion in

the year 2007 to approximately $21 billion in 2017 (The Value Investor, 2018). The market price

of the company’s stock is $60.82 (The Wall Street Journal, n.d). The company has a price-to-

earnings ratio of 10 (The Wall Street Journal, n.d). This implies that the investor perceptions

concerning the business’ future are that the firm will have a higher growth in the coming days.

FINAL PROJECT MILESTONE TWO - Module Five

Success Factors and Risks

Strategic Priorities

The organization’s financial and strategic priorities affect accounting procedures and

business decisions since they determine the course that the business should take. The direction

taken by the company may influence the success of the business since the course chosen may

support or fail the operations of the company. For instance, the management is efficiency-
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oriented and this may help in the realization of the company’s competitive advantage. The

company uses derivative contracts in managing its risks (Southwest Airlines, 2017).

Capitalization on Non-Financial Factors

The organization can capitalize on non-financial factors through different approaches. For

instance, in the case of patents, the company should review changes in government guidelines.

Federal as well as local governments have different checks and balances, which may tend to

cause disruptions to businesses in case an entity is not prepared (Ahmed, 2018). Such aspects

include patent laws. In the case of human resources, it is crucial for the Southwest Airlines to

consider market and external conditions, which may affect the operations of human resources.

Significant Internal Risks

A significant internal risk for the company is its low-cost structure. Although the low-cost

structure has helped in attaining a competitive advantage, it has made it difficult to enhance the

company’s industry cost position. This may influence the ability of the company to control its

costs (Southwest Airlines, 2017). Besides, any failure or delay in implementing the company’s

information may negatively influence its operations.

FINAL PROJECT MILESTONE THREE - Module Seven

Projections

Projected Consolidated Financial Opportunities

Year Net Income (in millions)

2015 $2,181
2016 $2244
2017 $3,488

From the consolidated financial statements, the net income for the company is as

presented in the table above. Assuming that the future net income is based on the performance
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for the three years and changes will be constant, then the projected net income for 2018 would be

as follows;

Projected net income for 2018 = (2181 + 2244 + 3488)/ 3

= $2638 million. In this case, a three-year moving average is assumed.

Projected net income for 2019 = (2244 + 3488 + 2638)/3

= $2790 million

Projected net income for 2020 = (3488 + 2638 + 2790)/3

= $2972 million

Projections for best and worst case scenario

In the best case scenario, for the coming year, the projected net income may be based on

the three-year moving averages so that it realizes the value $2638 million.

Projected net income for 2018 = (2181 + 2244 + 3488)/ 3

= $2638 million.

In the worst-case scenario, the profit may be influenced by a loss of company’s assets

worth 24 million. In this case, the projected net income will be less by 24 million

Projected net income for 2018 = (2638 – 24) million

= $2614 million.

Discussion of finding

There are different influences that may have an impact on a business. This being the case,

it may be assumed that the profitability of the company will remain constant, but change

depending on the situations that may emerge. The assumptions are consistent with the company’s

mission and priorities, but they may change any time. Alternatively, the assumptions may not be

attainable. Changing the assumptions will lead to a difference in the projected values.
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FINAL PROJECT SUBMISSION - Module Nine

Business Opportunities

Likely Investment Opportunities for the Organization

A likely investment opportunity for the organization entails being involved in

international transportation. This is because the company has already made considerable strides

in providing short-haul flight services. The basic features of the investment constitute the

company offering international flights in different countries and establishments in various

nations. This will help in increasing the profitability of the company as it would expand its

customer base.

Cost and Benefits of the New Investment

There will be different costs and benefits associated with the new investments. The costs

will include purchasing long-haul jets, acquiring licenses to operate in different countries, human

resources, and technology. The costs may be approximated to around $250 billion. Alternatively,

some of the benefits would include increased profitability, enhanced sales, and augmented

market share. The approximate costs and benefits will have the impact of changing the

projections in the spreadsheets.

Impact on Budgeting Decisions

The potential investment will have an impact of increasing budgeting for the company

and may influence related business decisions in case it is implemented. The investment will

require a lot of funds, whose returns may not be realized within a period of one year. However, in

the long-term, the company may be in a position to recoup its expenditure used in the

investment. Therefore, in the long-term, the investment is worth.

Executive Summary
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Southwest Airlines is involved in providing scheduled air transportation services in the

United States as well as near-international markets. The provision of scheduled air transportation

services helps in setting the boundaries for business decisions since the company is usually

restricted in operating in the programmed locations. Southwest Airlines reported its 45th year of

profits in a line. The great achievement is considered to be delivered by financial prudence as

well as operational excellence. The company is expected to continue making high profits in the

future based on its management plan. It is recommended that the company should consider

investing in international flights. This is because the company has resources that it can invest in

the project. The intended audience for the report is the investors of the company. In refining the

report further, the person that will be contacted is a financial analyst. This is because a financial

analyst will help in critically analyzing the investment decision.

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References

Ahmed, A. (2018). Non-Financial Factors in Accounting. Retrieved from

https://bizfluent.com/info-12042314-nonfinancial-factors-accounting.html.
Goldberg, R. & Weiss, E. (2018). Why Southwest Airlines’ competitive advantage might be

saying ‘no’. Washington Post. Retrieved from

https://www.washingtonpost.com/news/business/wp/2018/01/11/why-southwest-airlines-

competitive-advantage-might-be-saying-no/?noredirect=on&utm_term=.d7ffcdff9e9a.
Southwest Airlines. (2017). Southwest Airlines Co. 2017 Annual Report to Shareholders.

Retrieved from http://investors.southwest.com/~/media/Files/S/Southwest-

IR/Bookmarked%20Annual%20no%20blanks.pdf.
The Value Investor (2018). Southwest Airlines: Quality Has a Price. Retrieved from

https://seekingalpha.com/article/4143340-southwest-airlines-quality-price.

The Wall Street Journal. (n.d). Southwest Airlines Co. Retrieved from

https://quotes.wsj.com/LUV/financials.
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Appendix A

Figure (a) Net Income of Southwest Airlines for the Past Three Years

Figure (b)
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Figure (c)

Figure (d)