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Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Southwest Airlines Co (NYSE:LUV). With a market valuation of US$33.2b, LUV is a safe haven in times of market uncertainty due to its strong balance sheet. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for LUV, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
View our latest analysis for Southwest Airlines
How much cash does LUV generate through its operations?
LUV’s debt levels surged from US$3.1b to US$3.5b over the last 12 months – this includes both the current and long-term debt. With this rise in debt, LUV’s cash and short-term investments stands at US$3.7b for investing into the business. Moreover, LUV has produced cash from operations of US$4.2b over the same time period, leading to an operating cash to total debt ratio of 118%, signalling that LUV’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LUV’s case, it is able to generate 1.18x cash from its debt capital.
Can LUV meet its short-term obligations with the cash in hand?
With current liabilities at US$7.7b, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$5.4b, with a current ratio of 0.7x.
Does LUV face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 35%, LUV’s debt level may be seen as prudent. This range is considered safe as LUV is not taking on too much debt obligation, which may be constraining for future growth. We can test if LUV’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LUV, the ratio of 105x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like LUV are considered a risk-averse investment.
Next Steps:
LUV has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure LUV has company-specific issues impacting its capital structure decisions. You should continue to research Southwest Airlines to get a more holistic view of the stock by looking at: