LUV — Southwest Airlines Co.

Will it survive?

• Can it pay its interest? 2.6×
  Adequate
  Operating income $428M ÷ interest expense $167M

  Comfortable in a normal year, but below the margin of safety Graham looked for. Worth checking how stable the coverage has been across a full cycle.

• How heavy is the debt? 12.1×
  High
  Total debt $5.2B ÷ operating income $428M

  Years of operating profit it would take to repay all debt. A first read, not a credit rating: it's gross debt (not netted against cash) over EBIT (not EBITDA), and a cyclical year distorts it.

• How long is cash tied up? —
  Not enough data

  The filing data didn't include the inputs for this check.

Is it a good business?

• Return on invested capital 3%
  Below average
  NOPAT $335M ÷ invested capital $9.9B (debt + equity − cash)

  The rate the business earns on the money tied up in it — Buffett's north star, because over time a stock tracks the ROIC beneath it. Above ~15% sustained hints at a moat; below ~8% the company may destroy value as it grows. Asset-light businesses (R&D expensed, little capital) read artificially high — pair this with Owner Earnings.

• Owner Earnings (free cash) margin -3%
  Consumes cash
  Owner Earnings ($831M) = operating cash $1.8B − capex $2.7B

  What an owner could take out without starving the business. That's -3% of revenue. Treating stock comp as the real expense it is (less $13M of SBC) leaves ($844M). Honest caveat: capex here blends maintenance and growth, so steady-state Owner Earnings may run higher (see capex vs. depreciation).

• Are earnings backed by cash? 4.18×
  Cash-backed
  Cash from ops $1.8B ÷ net income $441M

  How much of reported profit showed up as operating cash. Above 1× is reassuring; well below suggests earnings lean on accruals. One year is noisy — growth and working-capital swings distort it, and this is operating cash, not free cash. Watch the multi-year trend.

How is the cash used?

• Where do the earnings go? —
  No surplus to allocate

  The business didn't generate positive Owner Earnings this year, so any distributions came from the balance sheet or borrowing — not from operations.

• Investing or harvesting? 1.71×
  Expanding
  Capex $2.7B ÷ depreciation $1.6B

  Descriptive, not a grade. Above ~1× means investing faster than assets wear out (growth — or, sustained for years, today's earnings carrying less depreciation than tomorrow's will). Below means spending less than it's wearing out (efficiency — or a melting asset base). The ratio won't tell you which; the filings will.

Durability & moat — 2016–2025

A moat is a high return that doesn’t fade, reinvested at high returns. Here is what the record says — judgments, not another chart of the numbers.

• Profitable years 9 of 10

  Lost money in 1 year(s) — look at what happened there before trusting the average.

• Return on capital ≥ 15% 0 of 4 yrs

  A moat shows up as a high return on invested capital that holds year after year — not one good vintage.

• Operating margin 17% → 1%

  Margins are slipping — competition or costs are biting in.

• Reinvestment — incremental ROIC returns capital

  The capital base barely grew: this business returns cash through dividends and buybacks rather than reinvesting. Judge it on the cash returned, not on compounding.

• Worst year 2020 · −42.2% op. margin

  Operations went underwater in 2020 — understand why before trusting the good years.

• Share count −1.4%/yr

  The share count is shrinking — buybacks are quietly growing your slice of the business.

• Dividend record rising

  Paid and raised the dividend across the record — the continuity Graham prized.