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Finance

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Introduction

The term finance is a key aspect for business entities in order to complete different kinds of activities. In order to analyse need of finance, there are different types of methods and techniques. Companies produce various number of financial statements to assess their financial needs (McLean and Zhao, 2014). This study provides financial analysis of corporation BAE Systems (UK's Aerospace company) along with comparison of performance with competitor named Airbus SE. Both companies are operating in same industry, BAE is UK's company while Airbus SE is European international aerospace and defence corporation.  

Study also contains practical sum of valuation of respective company and some numerical task related to capital structure. Moreover, study provides explanation about key limitation of usage of ratio analysis.

Task 1

Financial Analysis:

Financial analysis mainly relates to effective application of financial and numerical information for assessing corporation's performance in all aspects and provide meaningful recommendations in relation to ways by which company can improvise existing performance. Ratio analysis is one of the most useful tool for financial analysis which is purely formula based (De Mooij, 2012.). This help to make comparison of financial and operating performance of company with industry standards and competitors. Following is ratio analysis of Company BAE Systems along with its competitor Airbus SE, as follows:

Profitability Criteria: 

Ratio analysis exhibits corporation's performance in terms of capacity and efficiency of company to generate profits. It mainly includes net profit ratio and gross profit ratio, which are analysed below in respect of respective company and its competitor:

Net Profit Ratio:

This ratio represents how much profit after providing all expenditures company has been earned as a specific percentage of total revenue. Net profit margin or ratio  demonstrates how much or what extent company's revenue has been converted into net income.  

Year 2018

BAE Systems

Airbus SE

Net Profit Margin(%)

5.94%

4.79%

Above presented table shows that company BAE's net-profit margin is 5.94% in year 2018, while Airbus has reported 4.79% of net-profit margin. Which indicates that BAE is more efficient to generate net-income as in comparison with its competitor Airbus (Airbus Annual Report, 2018).

Gross Profit ratio:

This ratio demonstrates how effective corporation is in generation of gross income/profit only though its main operations without considering indirect incomes and expenses. This exhibits company's operational effectiveness. Here below table shows GP ratios of BAE and Airbus:

Year-2018

BAE Systems

Airbus SE

Gross Profit Ratio (%)

65.16%

13.79%

BAE System has reported gross profit of 65.16% in year 2018 while Airbus SE's gross profitability ratio is 13.79% in year 2018. It indicates that BAE is much more efficient to attain gross profits and operating more effectively as in comparison with Airbus which is core competitor of company (BAE Systems Annual Report, 2018).

Liquidity: 

Ratio analysis also aid in assessment of liquidity position of corporation either in short-term or long term. For short-term liquidity position current asset ratio and quick ratio are used while for analysing long-term liquidity position debt to equity ratio is used generally (Ayub, 2013). In this context following are the key ratios for evaluation of liquidity position as follows:

Current Ratio:

 It is key ratio which assist in evaluation of relationship between company's current liabilities and current assets. Industry's average current ratio are generally recognised as 2:1. It is a short-term liquidity ratio which shows how efficiently company can pay its current debts by using current assets.

Year-2018

BAE Systems

Airbus SE

Current Ratio

1.0289

0.96

Above table shows that current ratio of both corporations are below the industry average. BAE's current ratio is 1.03 approx while Airbus' current ratio is 0.96 approx. Which indicates that BAE's short-term liquidity position is more favourable as in comparison with its competitive corporation Airbus. Although company has to focus in this area as it is below the industry average which may lead to negative working capital and increase the chances of liquidation. Company can improve this ratio by restructuring of short-term debts and timely collection of trade-payables.

Debt to Equity Ratio

It also is a leveraging ratio which computes weighted of company's entire debts and obligations against aggregate amount balance of shareholder equity funds. It points out towards corporation's financial viability and long-term liquidity position. Industry's average ratio is about 1 to 1.5. Following table exhibits both corporations' debt-equity ratio, as follows:

Year-2018

BAE Systems

Airbus SE

Debt-equity Ratio

3.4620

10.85

In year 2018, BAE Systems' debt-equity ratio is 3.4620 while Airbus SE's debt-equity ratio is 10.58. A lower ratio indicates that company is financially stable it means that BAE is more financially stable as compare to Airbus SE. A higher debt-equity ratio than industry average and competitors shows that BAE is less risky as it relies less on debt funding.

Investor Ratios:

Investor ratios act as tool to assess how much returns investors or shareholders are receiving from a business. These ratios are crucial to assess whether company is appropriate for investors and holder of company's securities (Knorr Cetina and Preda, 2012). In this regard following is an analysis of investor ratios of respective corporations, as follows:

Return on Equity:

It is also recognised as profitability ratio which shows corporation's profitability in context of equity employed. ROE ratio act as crucial measure which explains  how well corporation utilising investments made by investors to provide earnings growth. Following table contains ROE of BAE and Airbus, as follows:

Year-2018

BAE Systems

Airbus SE

Current Ratio

18.03%

31.41%

ROE of company Airbus SE is 31.41% in year 2018 while BAE's ROE is just 18.03%. Comparative analysis shows that from investor's and shareholder's perspective Airbus is more efficient to provide earnings on investments or funding made by them in company. While BAE should improve this ratio to attract more investors and build trust in existing investors or shareholders.

References

  • De Mooij, R .A., 2012. Tax biases to debt finance: Assessing the problem, finding solutions. Fiscal studies. 33(4).  pp.489-512.
  • McLean, R. D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external finance. The Journal of Finance. 69(3).  pp.1377-1409.
  • Ayub, M., 2013. Understanding islamic finance. Gramedia Pustaka Utama.
  • Knorr Cetina, K. and Preda, A., 2012. The Oxford handbook of the sociology of finance. Oxford University Press.
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