Question

Select a well-known publicly traded company from SP500: Southwest Airlines

Visit the company's website Calculate the DuPont Equation of the company and compare it with other major competitor, industry average. Explain what you see and how the management team can improve, in which area, be specific and provide recommendations.

Answer 1

DuPont analysis or Return on Equity (ROE) = Profit Margin x Asset Turnover Ratio x Equity Multiplier

As per Dec 2017 data:

Airlines	ROE	Profit Margin	Asset Turnover Ratio	Equity Multiplier
Southwest Airlines	36.97%	16.48%	0.87	2.58
American Airlines	49.77%	4.55%	0.82	13.33
Delta Air Lines	27.31%	8.67%	0.79	3.99
Industry Average	20.74%

• Operating efficiency, which is measured by profit margin, is better for Southwest Airlines compared to competitors as well as industry average. Hence, a better shareholders’ equity
• Asset use efficiency, which is measured by total asset turnover, is higher for Southwest Airlines which indicates how effectively it has used its existing assets to generate revenue. It means company is performing better than others
• Financial leverage, which is measured by the equity multiplier, is lowest for Southwest Airlines, indicating it has less debt in relation to its total assets and company finances the purchase of assets primarily through equity, much less on debt, as compared to others

Suggestions to Management:

• As Investors may want to maximise their return in the Airlines sector by choosing the highest returning stock, Southwest Airlines should continue maintaining its Financial leverage, rely more on Equity, than on Debt, encourage/ promote it’s brand name and performance, so that more Investors would be interested to positively invest in Southwest Airlines
• A better existing share holder’s will always lure investors and promoters to pro-actively invest in Southwest Airlines. This is a great advantage, as Southwest Airlines would be looking to expand it’s number of Airlines as well as type of Passenger planes, plus frequency of flights
• Southwest Airlines should concentrate well on utilising it’s currently available resources financial/ physical/ manpower etc. to draw maximum output and profit margins out of it. So that cumulative output and profits could exponentially raise when they increase number of assets and expand resources