Southwest and United - Essay Example

This report provides an insightful study and a comparative analysis of the two companies Southwest airlines and United airlines. As both the companies belong to the same industry, this report has been devised with a consideration to compare their financial performance with the help of the annual reports for the year 2005. The fact that the United airlines filed for bankruptcy in the year 2002 is greatly evident in the current financial position of the company. This report evaluates the factors as to the differences in the financial performance of the two companies.

The financial analysis in this report provides the detailed comparison of both the companies' financial position and performance based on the data obtained from the companies' financial statements with respect to profitability, liquidity, solvency and investment. It first of all presents a ratio analysis and then identifies major factors that have precipitated the different results for the two countries. Ratio analysis is the pre-eminent technique to evaluate a company's performance and figure out major problems (Meigs & Meigs).

Riahi-Belkaoui propounds that financial ratios serve the analysts in making the information in financial statements interpretable for the various users of financial statements. In the same vein, this paper will assess and analyse the financial position and performance of the two companies Southwest airlines and United airlines with the help of a broad array of financial ratios using financial data available from the two companies' annual reports.Profitability Analysis Profitability analysis is the first step in evaluating any company's financial position.

Most of the financial statement users happen to be interested in knowing the potency of a company in terms of enhancing its ability to earn profit for the stakeholders. Riahi-Belkaoui says, "the profitability ratios portray ability of the firm to efficiently use the capital committed by stockholders and lenders to generate revenues in excess of expenses" (11). The analysis to assess the profitability of Southwest and United airlines has been done with the help of following ratios.RatiosSouthwestUnitedOperating Profit Margin10.81%(1.26%)Net Profit Margin11.52%(121.87%)Return on Capital Employed12.28%(1.13%)Return on Assets3.85%(109.48%) Mcmenamin says that the Operating Profit Margin Percentage evaluates the percentage of profit earned by a company on sales after the production and distribution activities.

It reveals how well the company manages its expenses so as to attain maximum profit out of its total sales for its shareholders. Southwest's operating profit ratio of 10.81% reflects that the company loses about 90% of its operating revenues in meeting its various operating expenses. United airlines on the other hand, fails to manage its operating expenses that leads the company towards operating loss of 1.26%. Despite the fact that the company's operating revenue for the year 2005 is much greater than that of the Southwest, it fails to retain it as profit for its shareholders.

The Net Profit margin shows what percentage of profit a company earns on its sales. It reveals the profit retained by a company after accounting