Stock Analysis

Southwest Airlines' (NYSE:LUV) Conservative Accounting Might Explain Soft Earnings

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The market was pleased with the recent earnings report from Southwest Airlines Co. (NYSE:LUV), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

Check out our latest analysis for Southwest Airlines

NYSE:LUV Earnings and Revenue History February 13th 2024

The Impact Of Unusual Items On Profit

To properly understand Southwest Airlines' profit results, we need to consider the US$636m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Southwest Airlines took a rather significant hit from unusual items in the year to December 2023. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Southwest Airlines' Profit Performance

As we discussed above, we think the significant unusual expense will make Southwest Airlines' statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that Southwest Airlines' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Southwest Airlines at this point in time. Case in point: We've spotted 2 warning signs for Southwest Airlines you should be mindful of and 1 of them can't be ignored.

This note has only looked at a single factor that sheds light on the nature of Southwest Airlines' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Valuation is complex, but we're helping make it simple.

Find out whether Southwest Airlines is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.