Executive Level Financial Analysis of RenDi Corporation - Research Paper Example

?Executive level financial report research paper for RenDi Corporation 0 Executive Summary This is a report that gives a comprehensive analysis andevaluation of the prevailing financial and stock performance of Southwest Airlines in relation to the profitability, solvency, liquidity and stability of the company. To make the achievability of the report’s aim feasible, a number of methods of analysis were used. Collectively, the methods of analysis can be grouped as being qualitative and quantitative. Specifically however, financial ratio trends and industry comparatives, capital spending, stock growth, credit rating service valuations, bond rating valuations among others were all catered for. Results from the analysis of data, shows clearly that Southwest Airlines has made greater strides to becoming a market force in the aviation industry by keeping at par with average industry ratios (Mazzeo, 2003). The fact that the company’s ratios are not so high above industry average however means that entrusting it with a five year long commitment would not be advisable. It can therefore be concluded that the prospects of the company in its current state with effect from the year 2009 is neutral. This means that the performance of the company is neither below average nor above average. Based on this, the major recommendation that is put across is for RenDi Corporation to enter into a short term commitment of a maximum period of three years with Southwest Airlines. 2.0 Overview of Southwest Airline as an aviation company From a humble beginning in 1971 where Southwest Airline operated with only three (3) Boeing 737 aircrafts in Texas, the company has today grown to be a major force in the air transport industry. It is refreshing to note that the company currently operates a total of five hundred and fifty (550) Boeing 737 aircrafts with other standby aircrafts for emergency service delivery. By a random and non-itemized evaluation, it would be true to argue that the company has made a lot of important progress that are worth commending. One important area that continues to be a major competitive advantage of the company over key competitors has to do with the corporate attention that the company gives to customers. Such customer satisfaction culture has continued to build a paradigm around the company whereby customers who have tried other competitors become convinced of the quest to keep doing business with Southwest Airlines because of the customer satisfaction they guarantee. Another major area of competitive advantage has to do with the corporate responsibility of the company, which has been directed at keeping a safe and green environment. This particular vision of the company is kept alive by the use of environmental friendly sources of fuel. One of such sources of fuel has been identified to include renewable synthetic diesel fuel, which has lately proven to be very effective and efficient in the air transport business. To RenDi Corporation, the latter is an opportunity to establish firm business lines and linkages with Southwest Airlines and thus this comprehensive research report to test the authenticity of the performance rate of the company. 3.0 An evaluation of Southwest Airline's financial performance for the period 2009, 2010, & 2011 3.1 Profitability Within the period of 2009 to 2011, Southwest Airline has given different and varying indications of its ability to generate income and subsequently maintain growth. First, it can be seen that the company responses sharply to prevailing global economic trend. This is because unlike 2008 where the net income of the company was US$179 million, this dropped to a woeful US$99 million by the end of 2009 when the global economic crunch was at its peak (Southwest One Report, 2010, p. 7). In 2010 and 2011, the profit of the company in terms of net income increased steadily over 2009 but not earlier years like 2006 and 2007 mainly because the recessionary recovery were not completely over. In the year 2011 for instance, the profit of the company recorded in terms of net income was US$459 million (Southwest One Report, 2012, p. 4). What these data mean for the profitability of the company is that the company’s profitability is not dependent on internal manipulations and control but on global economic trends. This is a risky situation for profit sustainability. 3.2 Solvency Based on the trend of the company’s flow of net income through quantitative data, there could be a qualitative inference that the company’s ability to pay of its duties and financial obligatory to creditors cannot be wholly guaranteed on a long term basis. This is because according to Erin (2010), companies that do not have enough internally generated means of raising funds always stand the risk of owing their debtors heavily when global economic climates are not favorable. Consolation can however be taken from the fact that the company has showed greater commitment towards a savings habit whereby the company saves so much through off-industrial investment to ensure that during years where genera profits are low, funds raised through their other investments can cater for external debts and other third parties (Southwest One Report, 2010, p. 13). 3. 3 In terms of financial performance, it could be said that Southwest is in a position to maintaining very high positive cash flow even when it is faced with the difficult task of fulfilling all immediate obligations. This analogy is made in connection with the expenditure and income balance of the company. According to the official financial reports produced by the company and appropriately indexed as part of this report, it can be seen that the company has a relatively lower expenditure rate if compared to other major competitors in the industry. For instance it can be noticed that less than 35% of all accrued revenues go into expenditure or spending (Keeler, 2002). What this means in the light of liquidity is that the company can always produce positive cash flow such that it will be in a position to honor its financial obligations against new companies who may go into short term and medium term commitments with them. 3.4 Stability Judging exclusively from the financial performance rate of Southwest Airlines, it can be said that Southwest Airlines has prospects for financial stability but not on long term basis. The reason behind this assertion sterns from the fact that the company has not put in place enough internal fund generation mechanisms to ensure that the company does not dance according to the rhythm of the global economic trend. It is said that the stability of the company could be ideal for short term and medium term because the company makes a lot of saving and investment on its profits. However, should there be a long term financial crisis. This savings cannot see the company through beyond a medium scale time. Long term stability is therefore not guaranteed. 4.0 An evaluation of Southwest Airline's stock performance for the period 2009, 2010, & 2011 4.1 Profitability Within the stock market, the profitability of a company is determined by virtue of the capital share price that the company holds. The profitability is also identified by looking at the price per share of the company. Generally, these two are considered because in economics, it has been established that the total capital share price constitutes the overall value of the company. In the case of Southwest Airlines, shareholder’s equity contributed up to 15% of total net income in 2009, 19% in 2010 and 24% in 2011 (Southwest One Report). Given that Southwest Airlines is an incorporated venture that makes most of its profits from the general public, it is expected that the shareholder equity of the company would be higher in terms of total net income of the company (Keeler, 2002). By and large, the company is not doing all things right to ensure maximum profitability as far as its stock performance is concerned. Should the price per share be lucrative, the capital share value would also go up and thus the stock performance of the company. 4.2 Solvency There is every indication that Southwest Airlines is not a company that can depend entirely on its share performance to cater for the solvency of the company; especially as the solvency deals directly with the ability to honor debt obligations. This assertion is so made against the backdrop that share value of the company must be in a position where it could be described as oversubscribed before part of the value from the stock market can be channeled to catering for creditors and other third parties. Unfortunately, Southwest is faced with a situation whereby most of its shareholders hold on so fast to their share of the stock market. Subsequently, the chances that there will oversubscription to cater for third parties and creditors may be minimal (Oum, Zhang and Fu, 2010). To potential business contractors with Southwest Airlines, the clue is that they should not depend on the share performance of the company for the settlement of their debts. 4.3 Liquidity With less than 30% of its annual net income coming from the stock market, the implication for liquidity is that Southwest Airlines is incapable of maintaining a positive fiscal balance and cash flow. This is because patronage of the company’s shares is not booming. In a situation of this nature, greater percentage of end of year income goes back to the few shareholders who invest mainly for profit making. Therefore, the possibility that there would be positive cash flow to cater for subsidiary obligations in the company is gloomy. As a way of raising enough positive cash flow to better its liquidity status, Southwest has an obligation of looking into restructuring its share price index. This would however happen only over a long term time frame. To investors like DenDi Corporation, the implication is that it would be better to engage the company only in short term and medium term commitments because in the long term, the company will be having a new focus and direction that would have to do with share performance recovery (Oum, Zhang and Fu, 2010). 4.4 Stability Even though the share performance of Southwest has been identified through the Southwest One Report (2012) as not being a very potent business option for the company, there still remains high level of optimism that the company has chances of securing stability. This assertion is made against the backdrop that company that continue to identify lapses with their share performance always look at share performance improvement as a long term strategy. If this is so with Southwest Airlines, the implication is that even deep into the future where critics may expect that the stability of the company would dwindle, the company still pull market surprises because its share performance restructuring will be complete by then and the company would be on the path of maximizing share capital revenues to improving the fiscal stand of the company. 5.0 Specific Recommendation Based on the various parts of the operations of Southwest Airlines discussed above, it is recommended to RenDi Corporation that the consideration it is making to enter a five year long term commitment with Southwest Airlines in terms of renewable energy sources should be cut down. It is not prudent to scrub the deal all together. However, it remains unacceptable to still undertake the commitment on a long term basis. For this reason, it is recommended that the commitment be reduced to a maximum of three years and a minimum of one year. At least, the present deal should be entered with an idea of testing the waters to study how profitable the contract would be to RenDi Corporation. Should the medium term or short term proof profitable, the company can then expand its commitment to two more year. This recommendation is given against the general background that Southwest airlines has not made enough plans to undertake internal fund generation venture. It rather depends on the global economic climate and so it cannot be trusted to honoring all its third parties and debts promptly. You are to consider all necessary and relevant financial performance and stock information, trends, and projections in supporting your recommendation. These factors include, but are not necessarily limited to financial statement analysis, REFERENCE LIST Erin, Roberts. Modalities of Aviation Operations. Sunset Press Limited: London. 2010. Print. Keeler, T.E., Airline Regulation and Market Performance, The Bell Journal of Economics and Management Science, 2002, Vol.3, No. 2, pp. 399-424 Mazzeo, M.J., Competition and Service Quality in the U.S. Airline Industry, Review of Industrial Organization, 2003, 22: pp. 275-296 Oum, T.H., Zhang, A. and Fu, X., Air transport liberalization and its impact on airline competition and air passenger traffic, Transportation Journal, 2010, Vol. 49, No. 4, pp. 24-41 Southwest One Report. 2010 Southwest Airline One Report. 2011. Web. July 1, 2012 Southwest One Report. 2012 Southwest Airline One Report. 2011. Web. July 1, 2012 Read More