The higher the ratio for asset turnover, the more effective the company is using its assets to produce
sales. It appears that Southwest is reasonably using their assets. They do not have excess turnover,
which would signal the company is strapped for cash, and their turnover is not too low which would
mean they have a shortage of cash and other assets. It appears that Southwest has remained relatively
stable over the past five years. When comparing Southwest to the industry, they are equal or just slightly
above the industry average in asset turnover. Like Asset Turnover, the higher the number of the Pretax
Return on Operating Income, the better the company is doing using their assets to produce operating
income.
The most popular profitability ratio is Earnings Per Share (EPS). This is one of the easier ratios to use
when comparing companies because many firms include this ratio on their Income Statement. Earning
per share gives a picture of the current net income in a particular period to the number of outstanding
shares of stock.8
Southwest’s earnings per share has steadily increased over the past five years. The
Earning Per Share increased 52.6 percent from 1996 to 1997. Southwest’s earnings per share appears to
be around the industry median. In November of 1997 Southwest offered a 3 for 2 stock split. Prior
year’s earnings have been recalculated to include the stock split.9
Two factors that contributed to the
higher 1997 earnings per share are operating income and operating expenses. In 1997, Southwest’s
operating income increased by 12.1 percent. Operating expenses increased only 7.8 percent even though
capacity (available seat miles) increased 9.2 percent. One expense that can affect net income and
consequently earnings per share is the cost of jet fuel. Jet fuel accounts for 15 percent of Southwest’s
expenses. The cost of jet fuel is volatile and depends on many outside factors. Fuel and oil expenses
per available seat mile decreased 6.7 percent in 1997. Southwest believes they will benefit from lower
fuel costs into the first quarter of 1998. Research analysts estimate that Southwest earnings per share
will increase to $1.66 per share for 1998 and $1.81 per share for 1999.