Southwest Airlines (NYSE:LUV) manages debt well through turmoil

According to old-school investors like Warren Buffett, airlines are notoriously bad companies. They have high costs, low profit margins and, as we have seen in 2020, are very sensitive to exogenous events.

However, that doesn’t mean they can’t be an investment opportunity in certain situations, especially if they use debt as sensibly as Southwest Airlines Co.(NYSE:LUV).

Click here for our latest analysis of Southwest Airlines

2021 annual results:

  • EPS: $1.65 (compared to a loss of $5.44 in fiscal 2020).
  • Income: $15.8 billion (up 75% from FY2020).
  • Net revenue: $977.0 million (up $4.05 billion from fiscal 2020).
  • Profit margin: 6.2% (compared to a net loss in fiscal year 2020).

Revenue is in line with analysts’ estimates. Earnings per share (EPS) beat analysts’ estimates by 1.3%.

Over the next year, revenue is expected to grow by 39%, compared to a growth forecast of 49% for the airline industry in the United States.

After recovering in 2020 and early 2021, Southwest returned more than half of those earnings. Still, the stock fared much better than the broader market in January, remaining flat for the first 4 weeks.

Reflecting on the earnings results, CFO Tammy Romo noted rising fuel costs and additional cost pressures from Omicron and winter weather. In addition, the company continues to experience inflationary cost pressures, primarily in labor costs and airport-related costs. Still, strong leisure demand and the new co-brand card deal with Chase contributed to a fourth-quarter profit of $85 million.

In the meantime, we highlight Southwest Airlines’ operating model as an advantage in the current environment. They operate point-to-point, with fewer stops and more direct flights. They also maintain smaller airports, providing a less crowded experience during the pandemic. Finally, they are domestically focused, so less exposed to international travel restrictions.

Expose debt

As you can see below, at the end of December 2021, Southwest Airlines had $10.7 billion in debt, up from $9.80 billion a year ago. Click on the image for more details.

However, he has $15.5 billion in cash, which offsets this, leading to net cash of $4.78 billion.

NYSE: Debt to Equity History January 31, 2022

How healthy is Southwest Airlines’ balance sheet?

The latest balance sheet data shows that Southwest Airlines had liabilities of $9.16 billion due within the year and liabilities of $16.7 billion due thereafter. In compensation for these obligations, it had liquid assets of 15.5 billion US dollars as well as receivables valued at 1.36 billion US dollars due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of US$9.05 billion.

Southwest Airlines has a substantial market capitalization of US$25.4 billion, so it could very likely raise funds to lighten its balance sheet should the need arise. But we want to keep our eyes peeled for indications that its debt is too risky. Despite its notable liabilities, Southwest Airlines has clean cash, so it’s fair to say that it doesn’t have a lot of debt. The balance sheet is the area to focus on when analyzing debt. Always, the company’s future profitability will decide whether Southwest Airlines can strengthen it over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Last year, Southwest Airlines was not profitable on an EBIT level, but managed to increase its revenue by 75%, to $16 billion.

How risky is Southwest Airlines?

Although Southwest Airlines posted a loss in earnings before interest and taxes (EBIT) in the last twelve months, it made a statutory profit of $977 million. So if you consider it has net cash, plus statutory earnings, the stock probably isn’t as risky as it looks, at least in the short term.

The good news for Southwest Airlines shareholders is that its revenue growth is strong, making it easier to raise capital when needed. Overall, although airlines are a risky business, it seems to manage debt better than many others.

The balance sheet is the obvious starting point for analyzing debt levels. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Southwest Airlines you should be aware.

If you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks right away.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.

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