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Financial Analysis - Southwest Airline Company

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Financial Analysis - Southwest Airline Company

Answer: Southwest Airlines Co.

To: Chief Finance Office

From: XYZ

Date: 10th July, 2019

Sub: Analysis of the use of the Assets

The ratios for the past 3 years with reference to the receivables, inventory and plant and machinery are as under;

Particulars

2016

2017

2018

Receivables Turnover Ratio

37.16

31.94

38.67

Average Collection Period

10

11

9

Inventory Turnover

46.13

39.34

38.09

Average Days in Inventory

8

9

10

Asset Turnover

1.19

1.14

1.12

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Analysis: On the basis of the above ratios calculated, the following conclusions can be drawn:

1. Collection of Receivables: The receivable turnover ratio has increased in the year 2018 in comparison to year 2016 and 2017 and collection period has decreased to 9 in comparison to 10 and 11 for 2016 and 2017 respectively. The ratio provides that the company has either tightened its credit policies, or have reduced the terms and have made efforts for collection of its receivables.

2. Management of Inventory: The average days in inventory has increased over the years 2016 to 2018 and the turnover ratio has decreased over the years. The inventory turnover ratio indicates how well a company is able to convert its inventory to cash and the average days indicates the days the inventory stays in the entity. The decrease in turnover ratio and increase in inventory days is indicative of the fact that the company is not able to manage its merchandise efficiently.

3. Utilization of the Assets: The Asset turnover ratio indicates the ability of the company of generating sales against its Assets. The higher the ratio, more favourable to the company. From the above statistics it is noticed that the ratios have decreased over the years and hence, efforts are required to increase the sales, since, in the year 2016, 1.19 times sales were generated and the same has reduced to 1.12.

4. Recommendation: Though the company has made efforts in collection of its receivables, further efforts are required to increase its sales, in order to improve its Inventory turnover and Asset Turnover ratio.

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