MBA
Financial Analysis for Managers’ Assignment
This assignment will be based on real data which can be taken primarily from the annual financial reports of Boeing and Airbus (European Aeronautic Defence and Space Company) (EADS) for the 3 years ended 2011.
Full copies of their annual financial reports can be accessed through their web pages.
April 26, 2012|Reuters
“China Eastern Airlines is set to place a $6 billion order for up to 20 Boeing 777 jets, while simultaneously emerging at the centre of an aviation row between China and the European Union by stalling a recent Airbus deal, people familiar with the matter said. The order for wide-body 777s follows a fierce but discreet contest between Boeing and Airbus and allows the U.S. planemaker to bounce back after China’s third-largest airline cancelled an order for 24 of its latest flagship 787 Dreamliners last year”.
Required
The Boeing Airbus rivalry, intense at the best of times, has now reached new heights following Boeing’s controversial order from China Eastern Airlines.
You have been brought in, as a Financial Consultant by Reuters, to independently assess the financial status of both organisations in readiness for a major headline article focussing on the rivalry between the two organisations. The article is due to be published mid July and your deadline for submission of the financial report is 1st July 2012.
Your remit is to report on the financial status of both organisations and you should focus on the profitability, efficiency, liquidity, and gearing of both organisations over the 3 year period 2009 -2011.
The report should include a detailed analysis of the financial position using ratio analysis and horizontal common size (2009 as base) and vertical common size analysis (using total assets as a base).
There should be a section of the report which compares the financial position of both organisations.
Your findings should be submitted in a formal report with well founded conclusions and recommendations.
You should state any assumptions made
Note: You are NOT required to comment on the investment performance of the group.
Assessment Criteria (marking scheme is attached for your reference)
SOLUTION
Contents
Executive Summary. 2
Introduction. 3
About Boeing. 3
About Airbus. 3
Airbus vs. Boeing. 3
Analysis and Financial Calculations. 5
Profitability Ratio. 5
Efficiency Ratio. 6
Liquidity Ratio. 7
Gearing Ratio. 8
Horizontal Analysis. 9
Vertical Analysis. 10
Comparative analysis. 11
Conclusion. 12
Recommendations. 13
Recommendations for Boeing. 13
Recommendations for Airbus. 13
References: 14
Appendix. 15
Table I: Financial data for Boeing. 15
Table2: Financial data for Airbus. 16
Table 3: Ratio Calculations for Boeing. 17
Table 4: Ratio Calculations for Airbus. 18
Executive Summary
The Boeing Airbus rivalry has been very old and being the major and only companies the intensity of rivalry has now reached new heights following Boeing’s controversial order from China Eastern Airlines.
In this report the financial status of both organisations is analysed. For the purpose of analysis various financial ratios have been calculated and an detailed examination of the annual reports have been done. The financial ratios calculated for the period 2009-2011 have been calculated and the analysis thus brings in consideration the profitability, efficiency, liquidity, and gearing of both organisations over the 3 year period 2009 -2011.
Further to support theargument horizontal analysis using 2009 as base and vertical analysis using total assets as base has been done in order to support the analysis.
This analysis has been very essential as it is the base for estimating the strengths of the two companies and the further strategies and steps that may be taken in order to get the leverage from the current situation.
You could add the key findings from your analysis here too as well as the key recommendations
Introduction
About Boeing
Boeing is the largest aerospace company of the world which is into the manufacturing of airplanes of some of the most prestigious security systems in the world. The product line of Boeing include military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems. Boeing has its corporate office in the United States of America and customers across 150 nations of the world. The customers of Boeing are the countries that are into alliance with the US government.
About Airbus
Airbus is an aircraft manufacturing subsidiary of European Aeronautic Defence and Space Company. The major product of Airbus are fly-by-wire airliner, the Airbus A320 and the world’s largest airliner, the A380. The business of Airbus include manufacturing of commercial aircraft, civil and military helicopters, commercial space launch vehicles, missiles, military aircraft, satellites, defense systems and defense electronics and rendering of services related to these activities.
Airbus vs. Boeing
Bothe the companies have dominated the aerospace industry leaving little scope for the competitors to enter and sustain in the market that has been very competitive. Both the companies have come up as the leaders in the market after a series of mergers and acquisitions. Aerospace began as the consortium from Europe and The Boeing came as a competitor and a market leader after taking over the McDonnel Douglas in 1997. Further to this Boeing merged with Lockheed Martin and Convair in the United States and British Aerospace, whereas Airbus merged with Dornier and Fokker in Europe. These companies moved out of the market because of the huge competition and the dependency of the profits on sales volume.
In this report the rivalry between these two giant of the aeronautic industry has been studied based on the financial status of both organisations. For the purpose of analysis various financial ratios have been calculated and an detailed examination of the annual reports have been done. The financial ratios calculated for the period 2009-2011 have been calculated and the analysis thus brings in consideration the profitability, efficiency, liquidity, and gearing of both organisations over the 3 year period 2009 -2011.
Analysis and Financial Calculations
In this section of the report the financial ratios are calculated and the complete analysis of the various ratios that have been calculated is done. The financial ratios that have been calculated includeprofitability ratio, efficiency ratio, liquidity ratio and gearing ratio. The discussion on each of the ratio is done and the strengths and future opportunities have also been discussed in this section.
The annual report of both the companies have been obtained from the website and the important notes from the important information like assets of the company and the income statement has been made.
Profitability Ratio
Profitability ratios are one of the most important ratios that are calculated by the analysts as it defines the profitability of the company and thus the baseline for both the managers and the investors (Needles & Powers, 2010). Managers get know how well the assets employed in the business of the company have been utilized and whether there is change required in the operations of the company (Vandyck, 2006). From the investors perspective it is essential to understand whether the investing in the company will result in growth of the shareholders wealth.
The profitability ratios that have been calculated are shown below.
Profitability Ratios for Boeing
| Profitability Ratio |
2011 |
2010 |
2009 |
| Gross Profit /Operational profit |
8.50% |
7.73% |
3.07% |
| Net Profit |
5.85% |
5.14% |
1.92% |
| Return on Shareholder funds |
114.31% |
119.56% |
61.65% |
| Return on Capital Employed |
15.10% |
14.99% |
7.19% |
The profitability ratios of Boeing have highlighted a few points. Firstly it is very important to note that the there has been considerable increase in the Gross Profit of the company. Also the net profit has increased a lot as compared to the net profit in 2009 to 2010 but not that much increase can be seen in 2011 from 2010. Also the return on shareholder’s funds has increased very much. This can be attributed to the treasury stock that has been introduced in the year 2010 and 2011. Lastly the Return on Capital employed has been appreciable.
Profitability Ratios for Airbus
| Profitability Ratio |
2011 |
2010 |
2009 |
| Gross Profit /Operational profit |
3.28% |
2.59% |
-0.89% |
| Net Profit |
2.11% |
1.25% |
-1.76% |
| Return on Shareholder funds |
11.72% |
6.47% |
-7.14% |
| Return on Capital Employed |
3.94% |
3.01% |
-1.00% |
The Gross Profit ratio for Airbus has not been that appreciable as it has just seen a growth of just over 3% in 2011 over 2010 and about 2.5% from 2009 to 2010. Thus it is a matter of concern for the company as it is having much less gross profit. This can be said that the operational efficiency is not there in the company and Boeing has performed well in maintaining the gross profit. However the appreciable point is that there is considerable increase in gross profit over the three years.
You could try and suggest possible reasons for this
Efficiency Ratio
Efficiency Ratio for Boeing
| Efficiency Ratio |
2011 |
2010 |
2009 |
| Sales Revenue : Capital Employed |
1.78 |
1.94 |
2.34 |
| Debtor turnover |
12.26 |
11.48 |
11.99 |
| Creditor turnover |
8.53 |
8.68 |
10.53 |
The efficiency ratio of Boeing has decreased in case of capital employed for generating the sales for the company. Thus the capital employed is not being utilized efficiently. Boeing however has been able to increase the debt turnover and decrease the credit turnover. Thus it can be said that the account receivable is increasing and may be the trade payable is increasing (Troy, 2012). Thus the cash with the company is increasing. This is very good for the company.
Possible reasons?
Efficiency Ratio for Airbus
| Efficiency Ratio | 2011 | 2010 | 2009 |
| Sales Revenue : Capital Employed | 1.20 | 1.16 | 1.13 |
| Debtor turnover | 7.54 | 7.49 | 5.11 |
| Creditor turnover | 5.41 | 5.46 | 4.98 |
The Airbus has been able to improve the efficiency ratio on the whole. As seen the sales to capital employed ratio has improved and thus it can be said that the capital employed has utilized well to generate more sales for the company. Also the debt turnover ratio has increased a lot. Thus the financial position of the company has improved considerably. There I increase in the credit ratio also but this can be attributed to the better policies and better position of the company in the market.
Liquidity Ratio
Liquidity Ratio for Boeing
| Liquidity Ratio |
2011 |
2010 |
2009 |
| Current Ratio |
1.21 |
1.15 |
1.07 |
| Acid Ratio |
0.43 |
0.46 |
0.56 |
The company has improved the current ratio but it is desirable that the current ratio is in the range of 2. In this case it is even less than 1.5. Since the current ratio is increasing it should not be considered bad as the current assets are increasing or the company is able to reduce the current liabilities. The major concern is the Acid Ratio which has been decreasing. This tells that the inventories have been increasing and thus leading to reduced current assets. If this ratio would have been in the range of one that would have depicted much better position.
You need to review this – a bit confused?
Liquidity Ratio for Airbus
| Liquidity Ratio |
2011 |
2010 |
2009 |
| Current Ratio |
0.91 |
0.96 |
1.00 |
| Acid Ratio |
0.43 |
0.48 |
0.49 |
The liquidity ratio of the company shows that the current ratio of the company is decreasing. This is not a positive sign at all and more so because the ratio is even less than one. The company needs to put some consideration to it as if the current liabilities start exceeding the current assets the fixed assets of the company will be affected. This clearly shows that the liquidity is not improving and rather it is reducing. The company has been able to manage the inventories as the acid ratio has not decreased as much as that of Boeing. Given the nature of business they are into the acid ratio is fair and manageable. Thus the consideration should be given to the fact that the acid ratio should not decrease.
Reasons?
Gearing Ratio
Gearing Ratio for Boeing
| Gearing Ratio |
2011 |
2010 |
2009 |
| Loans: Capital Employed |
0.26 |
0.35 |
0.42 |
| Interest Cover |
-0.09 |
-0.10 |
-0.16 |
The loans to the capital employed ratio have decreased for Boeing showing that the company is able to reduce the loans of the company. This is very positive as the company will have to pay less of interest. This can also be seen from the increased net profit as the loans have decreased and thus less interest has been paid by the company. However the interest coverage ratio has decreased. Thus the ratio shows that the gross (net?)profit are more capable of meeting the interest payments. Thus the company is moving in a very positive direction wherein the profits are increasing, loans and interest payments are reducing. Possible reasons?
Gearing Ratio for Airbus
| Gearing Ratio |
2011 |
2010 |
2009 |
| Loans: Capital Employed |
0.09 |
0.07 |
0.08 |
| Interest Cover |
-0.23 |
-0.35 |
N.A. |
The loans for the company are increasing as compared to the capital employed. Thus in the capital employed for the company more loans have the share thus the loans are impacting the company. However the interest payments are reducing a the gross profit has increased at a good rate. Thus this shows mix things and thus the concern will be to reduce the loans as this may be to maintain the current assets or in other words the liabilities are increasing.
Clarify – this is a bit confusing
Horizontal Analysis
Horizontal Analysis for Boeing
| Horizontal Analysis |
2011 |
2010 |
2009 |
| Sales |
100.66% |
94.18% |
100.00% |
| Gross Profit |
278.82% |
237.17% |
100.00% |
| Net Profit |
306.25% |
252.06% |
100.00% |
The horizontal analysis for Boeing shows that the sales have increased over the period of two years as well as the gross profit. But the growth shown in the gross profit and the net profit has been appreciable and thus can be accounted for the increased operational efficiency of the company (Fridson & Alvarez, 2011).
Horizontal Analysis for Airbus
| Horizontal Analysis |
2011 |
2010 |
2009 |
| Sales |
114.73% |
106.84% |
100.00% |
| Gross Profit |
424.47% |
312.37% |
100.00% |
| Net Profit |
137.90% |
76.06% |
100.00% |
The horizontal analysis for the Airbus company shows that the gross profits are increasing at a much higher rate. This is because the gross profit for the year 2009 was negative or the company was incurring loss. Also the growth in sales over the period of two years is much more than that of Boeing. But this is due to lower value of sales and gross profit than the Boeing company.
Vertical Analysis
Vertical Analysis for Boeing
| Vertical Analysis |
2011 |
2010 |
2009 |
| Account Recievable |
7.01% |
8.17% |
9.18% |
| Inventory |
40.31% |
35.47% |
27.29% |
| Current Assets |
62.27% |
59.17% |
56.85% |
| Non Current Assets |
37.73% |
40.83% |
43.15% |
| Total Assets |
100.00% |
100.00% |
100.00% |
The vertical analysis of Boeing shows that the company is having huge inventories. But the better part for the company is that the current assets are increasing both in absolute value as well as the percentage of total assets. Thus this means that the company will be able to meet its short term liabilities and will also be able to pay for the long term liabilities (Helfert, 2001). This can be seen from the gearing ratio.
Vertical Analysis for Airbus
| Vertical Analysis |
2011 |
2010 |
2009 |
| Account Receivable |
7.36% |
7.34% |
10.44% |
| Inventory |
25.50% |
25.08% |
26.87% |
| Current Assets |
48.62% |
50.48% |
52.94% |
| Non Current Assets |
51.38% |
49.52% |
47.06% |
| Total Assets |
100.00% |
200.00% |
300.00% |
The major issue with Airbus is that the current assets are reducing. However the company has been able to maintain the inventory levels. The accounts receivables have been brought down to the considerable levels and thus ha also resulted in the reduced current assets. Thus overall the steps have been taken by the company to reduce the inventory levels and the account receivables. Thus this can be considered as positive for the company. But as seen from the liquidity ratio, current ratio is decreasing this means that although the current assets have been reduced, the liabilities are not reduced and thus are affecting the current ratio.
Comparative analysis
The comparison clearly shows that Boeing has got the financial stability as the net profit and the gross profit have been increasing. Also the company has performed well in reducing the loans and the interest coverage ratio and the current ratio of the company has also improved. Airbus has been lagging behind as the gross profit in percentage terms has shown little growth as compared to that of Boeing. Also the current ratio of the company has been decreasing whereas that of Boeing is increasing. The only thing that can be said that is favorable for Airbus is that the efficiency ratios have shown the improvement is being done by the company as the debt turnover has improved considerably (Milling, 2003). For Boeing these were also more than satisfactory. Thus overall Being appears to be better placed and thus seems to be the choice for the investors and the customers as for investors it means that the company will be able to grow as per the expectation and also for customers it will mean that company will remain in business and meet the business requirements.
Reasons /explanations?
Conclusion
The financial ratios and the analysis discussion done above certainly show that the Boeing has been more stable over the years and has been able to manage the company as well as the financials of the company very well. The company needs a little bit management in managing the funds as the sales to the capital employed. Overall Boeing is more stable of the two companies and thus will be the first choice of the investor and the customers. The best can be seen as the growth made by the company in the gross profit, Return on capital employed, current ratio and the gearing ratio. All these show that the company is growing and has been showing growth over the last three years. For Airbus apart from a few ratios that show that the efforts are being made considerable efforts are still required, in maintaining the funds and to generate the profits. Air bus has been able to increase the efficiency and the gross profit ratio. But there are certain areas that need consideration as the various other ratios that show that a lot is required to be done. Thus it will be the management of funds that will be required for Airbus and will be difficult to compete Boeing in the coming years.
Recommendations
Recommendations for Boeing
Boeing on the whole shows that the company has got strong financials. However there are some points that need to be considered for Boeing. Firstly the sales to capital employed ratio is decreasing. This needs to be checked. The ratio of sales o capital employed should improve depicting that the full utilization capital employed is there. Second is the increasing inventory which is shown by the acid ratio. It is understandable that the nature of business asks for the huge inventories. However still the acid ratio should be maintained and should not reduce. A reduction in the acid ratio will mean that the inventories are increasing or the other components of current ratio are decreasing. Either ways it will be difficult to meet the liabilities in the long run if the current assets excluding inventories keep decreasing. Thus although current ratio is more conservative approach, acid ratio should be given a little consideration and thus necessary steps should be taken. One way is to reduce the liabilities which include both current and non current liabilities. As the reduced current liabilities will show that the current ratio and the acid ratio will improve and the reduced non-current liabilities will improve the sales to capital employed ratio.
Recommendations for Airbus
There is a lot for the Airbus to work upon. They have shown significant rise in the gross profit and need to keep working towards it. At the same time they need to ensure that the liquidity and the gearing ratios are improving. There are mixed results for them as the loans are decreasing as compared to the capital employed and also the interest coverage ratio. However the major issue for the company is to improve the current ratio for the company which is reducing. The company has shown some strength in reducing the inventories and thus maintains the acid ratio comparable to that of Boeing. Butthe asset management has been considerable good a the efficiency for the company has improved considerably and sales to the capital employed has been increased which is good for the company and thus the improving track is kept by Airbus will certainly take Airbus ahead of Boeing which is currently having more stable position.
References:
Leo Troy, (2012), Almanac of Business & Industrial Financial Ratios
Fridson, M.S. & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner’s Guide. (4th ed.). USA: John Wiley & Sons.
Charles K. Vandyck, (2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing
Helfert, E.H. (2001). Financial analysis: tools and techniques : a guide for managers. New York: McGraw-Hill Professional.
, B.E. (2003). The Basics of Finance: Financial Tools for Non-Financial Managers. USA: iUniverse.
Needles, B.E.& Powers, M. (2010). Financial Accounting. (11th ed.). USA: Cengage Learning.
Appendix
Table I: Financial data for Boeing
|
2011 |
2010 |
2009 |
|
| Gross Profit |
$5,844 |
$4,971 |
$2,096 |
| Net Profit |
$4,018 |
$3,307 |
$1,312 |
| Sales |
$68,735 |
$64,306 |
$68,281 |
| Shareholders Fund |
$3,515 |
$2,766 |
$2,128 |
| Capital employed |
$38,712 |
$33,170 |
$29,170 |
| Total Assets |
$79,986 |
$68,565 |
$62,053 |
| Current Liabilities |
$41,274 |
$35,395 |
$32,883 |
| Current Assets |
$49,810 |
$40,572 |
$35,275 |
| Total Liabilities |
$76,378 |
$65,703 |
$59,828 |
| Total Equity |
$3,608 |
$2,862 |
$2,225 |
| Total Liabilities+Equity |
$79,986 |
$68,565 |
$62,053 |
| Inventory |
32,240 |
24,317 |
$16,933 |
| Loans |
10,018 |
11,473 |
$12,217 |
| Interest Paid |
-498 |
-516 |
-339 |
| Account Receivable |
5607.5 |
5603.5 |
5693.5 |
| Account Payable |
8060.5 |
7405.5 |
6483.5 |
Table2: Financial data for Airbus
|
2011 |
2010 |
2009 |
|
| Gross Profit |
€ 1,613.00 |
€ 1,187.00 |
-€ 380.00 |
| Net Profit |
€ 1,037.00 |
€ 572.00 |
-€ 752.00 |
| Sales |
€ 49,128.00 |
€ 45,752.00 |
€ 42,822.00 |
| Shareholders Fund |
€ 8,850.00 |
€ 8,841.00 |
€ 10,535.00 |
| Capital employed |
€ 40,970.00 |
€ 39,417.00 |
€ 37,928.00 |
| Total Assets |
€ 88,476.00 |
€ 83,187.00 |
€ 80,304.00 |
| Current Liabilities |
€ 47,506.00 |
€ 43,770.00 |
€ 42,376.00 |
| Current Assets |
€ 43,021.00 |
€ 41,990.00 |
€ 42,512.00 |
| Total Liabilities |
€ 79,606.00 |
€ 74,251.00 |
€ 69,663.00 |
| Total Equity |
€ 8,870.00 |
€ 8,936.00 |
€ 10,641.00 |
| Total Liabilities+Equity |
€ 88,476.00 |
€ 83,187.00 |
€ 80,304.00 |
| Inventory |
€ 22,563.00 |
€ 20,862.00 |
€ 21,577.00 |
| Loans |
€ 3,628.00 |
€ 2,870.00 |
€ 2,867.00 |
| Interest Paid |
-€ 364.00 |
-€ 415.00 |
-€ 503.00 |
| Account Receivable |
€ 6,515.50 |
€ 6,109.50 |
€ 8,381.50 |
| Account Payable |
€ 9,088.00 |
€ 8,381.50 |
€ 8,594.00 |
Table 3: Ratio Calculations for Boeing
| Gearing Ratio |
2011 |
2010 |
2009 |
| Profitability Ratio | |||
| Gross Profit /Operational profit |
8.50% |
7.73% |
3.07% |
| Net Profit |
5.85% |
5.14% |
1.92% |
| Return on Shareholder funds |
114.31% |
119.56% |
61.65% |
| Return on Capital Employed |
15.10% |
14.99% |
7.19% |
| Liquidity Ratio | |||
| Current Ratio |
1.21 |
1.15 |
1.07 |
| Acid Ratio |
0.43 |
0.46 |
0.56 |
| Efficiency Ratio | |||
| Sales Revenue : Capital Employed |
1.78 |
1.94 |
2.34 |
| Debtor turnover |
12.26 |
11.48 |
11.99 |
| Creditor turnover |
8.53 |
8.68 |
10.53 |
| Gearing Ratio | |||
| Loans: Capital Employed |
0.26 |
0.35 |
0.42 |
| Interest Cover |
-0.09 |
-0.10 |
-0.16 |
| horiontal Analysis |
2011 |
2010 |
2009 |
| Sales |
100.66% |
94.18% |
100.00% |
| Gross Profit |
278.82% |
237.17% |
100.00% |
| Net Profit |
306.25% |
252.06% |
100.00% |
| Vertical Analysis |
2011 |
2010 |
2009 |
| Account Recievable |
7.01% |
8.17% |
9.18% |
| Inventory |
40.31% |
35.47% |
27.29% |
| Current Assets |
62.27% |
59.17% |
56.85% |
| Non Current Assets |
37.73% |
40.83% |
43.15% |
| Total Assetss |
100.00% |
100.00% |
100.00% |
Table 4: Ratio Calculations for Airbus
|
2011.00 |
2010.00 |
2009.00 |
|
| Profitability Ratio | |||
| Gross Profit /Operational profit |
0.03 |
0.03 |
-0.01 |
| Net Profit |
0.02 |
0.01 |
-0.02 |
| Return on Shareholder funds |
0.12 |
0.06 |
-0.07 |
| Return on Capital Employed |
0.04 |
0.03 |
-0.01 |
| Liquidity Ratio | |||
| Current Ratio |
0.91 |
0.96 |
1.00 |
| Acid Ratio |
0.43 |
0.48 |
0.49 |
| Efficiency Ratio | |||
| Sales Revenue : Capital Employed |
1.20 |
1.16 |
1.13 |
| Debtor turnover |
7.54 |
7.49 |
5.11 |
| Creditor turnover |
5.41 |
5.46 |
4.98 |
| Gearing Ratio | |||
| Loans: Capital Employed |
0.09 |
0.07 |
0.08 |
| Interest Cover |
-0.23 |
-0.35 |
N.A. |
| horiontal Analysis |
2011 |
2010 |
2009 |
| Sales |
114.73% |
106.84% |
100.00% |
| Gross Profit |
-424.47% |
-312.37% |
100.00% |
| Net Profit |
-137.90% |
-76.06% |
100.00% |
| Vertical Analysis |
2011 |
2010 |
2009 |
| Account Recievable |
7.36% |
7.34% |
10.44% |
| Inventory |
25.50% |
25.08% |
26.87% |
| Current Assets |
48.62% |
50.48% |
52.94% |
| Non Current Assets |
51.38% |
49.52% |
47.06% |
| Total Assetss |
100.00% |
200.00% |
300.00% |
LE87
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