As we analyze the probability of Southwest, we took more considerations on the ROA instead of ROE. Since Delta has the negative balance for equity, it is not consistent to compare ROE among these four companies. The ROA ratio for Southwest is quite lower than the other three peer companies. Thus, we disaggregated the ROA ratio to two parts: Profit Margin and Asset Turnover. When we further comparing these two ratios, we found that the Asset Turnover rates of Southwest are in the middle range among all these four companies. However, the Profit Margin Ratios are low compared to its peers. The Comparative Income statement of Southwest shows that it has high sales revenue but it also has relative low net income among the peer groups. It is because Southwest has high expenditures on SG&A, depreciation, depletion and amortization, which are dragging down the net income of Southwest.
Furthermore, we analyze the operating income profitability by comparing the RNOA( return on net operating asset), NOPM( net operating profit margin) and NOAT( net operating asset turnover) among these four companies. Southwest has an extremely low RNOA rate compared to its peers. As shown in the exhibit 3a, southwest has a much higher P/E ratio among the peer group. Also as shown in exhibit 3b, Southwest has the highest Net PPE compared to its peers. Southwest’s high PPE increase the Net operating Asset as well as decrease its RNOA ratio. We disaggregated the RNOA to NOPM and NOAT. As we previous mentioned, the profit margin ratio of Southwest is much lower than its peers because it has high sales revenue but low net operating profit. The huge expenditure on depreciating and amortization is the key factor of high operating expense, which also leads to a low net operating profit.
Compared to its peer companies, Southwest falls in the high risk but also high potential area of the