This report carries out a detailed ratio analysis of BAE systems over a three year period including profitability ratios, Liquidity ratios, Efficiency ratios and gearing analysis. It also evaluates the share performance of BAE systems using investor ratios and also current share price of the company.
BAE Systems: Ratio Analysis (Profitability, Liquidity, Efficiency and Gearing Analysis). Share Performance (EPS, Dividend Yield and Current share price).
Introduction
BAE (British Aerospace Engineering) systems are a worldwide defence, security and aerospace company. The company provides products and services for land, air, naval, advanced electronics and Information technology. It has customers in more than 100 countries. Approximately 107,000 employees work for BAE worldwide. In 2009 BAE reported sales of £22.4 billion and was the second largest defence company in 2009 in terms of revenue after Lockheed Martin. The main customers include Air forces of UK, Germany, Italy, Spain and Saudia and also the Royal Naval forces of UK, Saudia, Australia and the UK and US army as well. BAE has long term contracts with its clients ranging from 3 to 25 years. BAE is divided in to four operational groups operating in different countries. The operating groups are Electronics, Intelligence and support which develop systems for military and commercial application. Land and Armaments provides support for combat vehicles and other military systems. Programmes and support consists of naval and air activities. The international group consists of business in Sweden, Saudi Arabia and Australia. (www.baesystems.com, 2010). The company has a joint venture with Mahindra and Mahindra especially focused on land systems and it also has a strategic alliance with Cobham plc. (Yahoo finance, 2010).
Ratio Analysis
Profitability ratios
BAE systems revenue increased by 22% (£20,374m) in 2009 as compared to 2008(£16,671m) and 2008 sales were 16% higher than in 2007 excluding the income held in equity investments. The largest contributor to the increase in sales in 2009 was the programs and support segment with a growth 36% from 2008 followed by the international segment with 28%. In 2008 the biggest contributor to sales growth was land and armaments division with a remarkable growth of 81% from 2007(£3538m), the growth was due to the fact that sales of 2008 was including the sales from Mine Resistant Ambush Programme and it also included the sales from former Armor holdings which was acquired in 2007 (BAE annual report 2008).
Operating profit margin is profit as percentage of sales (Glen Arnold, 2010) operating profit/ revenue in 2009 was 4.82% a massive dip as compared to 10.3% in 2008 and an increase of 25% from 2007. The decrease in operating margin 2009 was majorly due to increase in impairment of goodwill and intangible asset which amounted to £973m in 2009 an increase of 449% from 2008 £177m. The impairment charge is due to non-award of a follow on contract for production of vehicles under the FMTV programme and the subsequent impact on the growth prospects of the business. The impairment charge reflects a weaker outlook for the business as spending from customer discretionary budgets has reduced in both domestic and export markets (BAE annual report, 2009).
GP margin was 1.54% in 2009 there was a significant decrease in GP margin from 7.8% in 2008 due to 30.38% in operating cost mainly due to cost of inventories, regulatory penalties and depreciation and impairments.
Return on capital employed measured as how effectively the financial resources invested in the business have been used Operating profit/capital employed (Wendy McKenzie, 2010) was 7.32% in 2009 as compared to 11.54% in 2008 and 10.99% in 2007. There was a decrease in ROCE in 2009 because the operating profit decline due to 30.38% increase in operating cost mainly due to £278m regulatory penalties by the US department of justice and UK's serious fraud office and also due to increase in inventories cost and staff costs. As far as 2008 is concerned ROCE increased by 5% due to increase in operating profit.
Total asset turnover (total turnover/total assets) of BAE was 0.8times in 2009, 0.65 in the preceding year and 2.01 in 2007. It shows that £0.8 revenue was earned using £1 of total assets in 2009 and £0.65 revenue was earned using £1 of assets in 2008 and 2007 it was £2.01 revenue to asset of £1. The major decline in total asset turnover was due to the increase in other investment of £211m which is government bonds held in a Reservoir trust in respect of groups pension schemes.
Liquidity Ratios
Current ratio shows a company capacity to pay its current obligations (Investopedia, 2010). The current ratio of the BAE in 2009 is nearly equal to the current ratios of the proceeding two years 0.73 in 2009, 0.75 in 2008 and 0.74 in 2007. The current ratio strengthen a little bit in 2008 it was due to 13.81% increase in current assets mainly attributable to 30.62% increase in receivables (amount due from customers from contract work, trade receivables and other receivables) because contract work was completed in this time span and the amount fell due, and also increase in other financial assets consisting of cash flow hedges and other interest rate contracts. The reason for decline in current ratio for 2009 was due to 1.75% decrease in receivables and 4.21% decrease in inventory( WIP, raw material and finished goods) was due to £35m write down of inventory to its net realisable value, it was also due to the increase of 11.15% in current liabilities.
Quick ratio shows a company at any time can pay off all its current liabilities using cash and cash equivalents excluding inventory (Richard E. Brown, 2010). The quick ratio of BAE is the same in 2009 (0.66) and 2008(0.66) but there was a decline of 1.49% in 2008(0.66) as compared to 2007(0.67). The decrease in quick ratio was due to increase in trade and other payables of 11.19% and also the increase in other financial liabilities.
Cash and cash equivalents were as follows, In 2009 it was £3678m, In 2008 £2605m and 2007 £3046m. The decrease in cash in 2008 was due to purchase of subsidiary undertakings £1078m and purchases of Property, Plant and Equipment of £520m and also repayment of loan of £306m. In 2009 increase in cash was due to inflow from loans issued of £920m.
Efficiency Ratios
Receivables days are calculated as (Rec. /Sales - 365 days) in 2009 were 67 as compared to 84 in 2008 and 75 in 2007. There is an Improvement of 20% in receivables days in 2009 this is due to offering of strict credit terms to its clients as it is visible that although the sales has increased by 22% but the receivables have not increased with yhe same proportion. It is due to efficient credit control. The decline in 2008 is due to the fact that there was 30.62% increase in receivables of the company because of more lenient credit terms offered to its clients because the company wanted to increase its revenue in the period of recession by offering favourable credit terms.
The inventory days are the period in which finished goods are held in stock after manufacturing. There was 30% decrease in inventory days in 2009 as compared to 2008 and increase of 15.22% in 2008 as compared to 2007. The decrease in inventory days shows that BAE is not holding its inventory for a longer period of time and it is attributable to the increase in sales.
The creditor's days are( time taken by the company to pay its creditors) decreasing year by year, there was a decrease of 14.75% in 2009 as compared to 2008 and there was decline of 2.69% in 2008 as compared to 2007. It shows that the company is having difficulty in availing credit from its creditors and it could be due to the company's ability to pay its short term liabilities reflected by company's current and quick ratios.
Gearing analysis
The gearing has significantly increased from 36.6% to 60% in 2009. A minor decline of 2.24% was seen in long term debt to equity in 2008 although there was an increase of 18.9% in loans but it was mitigated by the issue of shares. There was a significant increase of 67% in the long term debt to equity ratio due to increase in loans of 8.9% and also because of the decrease in equity due to accumulated losses and the current year loss. Accumulated loss in 2008 was £68m and in 2009 it was £2141m. In 2009 it was mainly attributable due to ESOP discretionary trust with market value of £13m. The shares in ESOP were recorded at cost and were deducted from retained earnings. In 2008 increase in acc. loss was due to conversion of preference shares into ordinary shares and using the retained earnings for this purpose.
Interest coverage calculated as net of finance income and expense the interest cover has decreased over the period of three years from 20.69 in 2007, 2.63 in 2008 and 1.4 in 2009 this reduction in interest cover is due to increase in long term loans as discussed above.
Share Performance analysis
AS far as the Earnings per share are concerned in 2009 the basic EPS was -1.9 due to the loss made in the year but in the preceding year the basic EPS was 49.6p. This decline in 2009 was also due to the increase in share from 3582m in 2008 to 3585m shares in 2009. In 2008 there was a growth in EPS due to increase in profit from continuing operations' of £1768m in 2008 as compared to £922 in 2007.
Dividend yield indicates the relationship between dividend per share and price per share and is calculated as Dividend per share/Market price per share (Charles H. Gibson, 2009). Dividend yield of the company has increased as it was 4% in 2009, 3% in 2008 and 2.43% in 2007. Although the company has made a loss in 2009 but still due to the increase in dividend per share and the decrease in market price per share led to a better dividend yield in 2009. As indicated by the formulae the increase in dividend per share and the decrease in market price per share led to a better dividend yield. Same is the case in the preceding year of 2008. BAE is a public limited company and it has to maintain or increase its dividend because if the company do not pay any dividend at all than it will send adverse signals to the market and it will further lower the share price.
Price earnings ratio for the year 2009 is not relevant because the company made a loss in 2009. But the P/E ratio has declined to 7.6 in 2008 as compared to 19.2 in 2007 it was due to the decrease in share price of BAE systems
The average share price in 2009 was £3.44 and in 2008 it was £4.33 and in 2007 it was 4.52. There has been decline in the share price every year, one of the reason was economic meltdown that affected every industry and also due to the investigation and the penalties faced by the company, In 2009 there was a decline of 20.55% from 2008 and in 2008 it was 4.20%. (BAE annual report 2009, 2008)
The current market price per share of BAE on 22 December 2010 is 332.8p and the market capitalization of BAE is £11344.8m as at 22 December 2010. (Google finance, 2010)
Overall in 2009 the aerospace and defence industry was impacted by the 2009 world economic recession. In summary the revenue of competitors like Boeing and EADS remained flat as compared to performance in 2008. At the same time operating margins and operating earnings also declined (Deloitte 2009).
Conclusion
BAE systems sales increased 22% from 2008. However £45m loss was reported it was due to a large penalty from UK fraud office and US department of justice and also due to impairment charges due to loss of FMTV contract. In 2008 there was a 17% increase in sales from 2007 it was mainly due to increase full year performance from Armor Holdings acquired in 2007. Although BAE made a loss in 2009 but the increase in dividend per share reflects that the company has sufficient funds to pay its dividend. The gearing of the company has significantly increased.
REFERENCES
Business Essentials for utility Engineers by Richard E. Brown, CRC Press 2010 pg 205
BAE annual report 2008
http://bae-systems-investor-relations.production.investis.com/results-reports-and-presentations/reports/2009.aspx [Accessed 21 December 2010]
BAE annual report, 2009
http://bae-systems-investor-relations.production.investis.com/results-reports-and-presentations/reports/2010.aspx [Accessed 21 December 2010]
FT Guide to Using and Interpreting Company Accounts Fourth edition by Wendy McKenzie, Pearson Education limited 2010 pg 329.
Financial Times Guide to Investing Second Edition by Glen Arnold, Pearson Education 2010, pg 290
Financial Reporting and Analysis 11th Edition, Charles H. Gibson, South Western Cengage Learning, pg 341
Google finance 2010 http://www.google.com/finance?q=LON:BA [Accessed 22 December 2010]
http://www.baesystems.com/AboutUs/FactSheet/index.htm accesed [Accessed 21 December 2010]
http://www.baesystems.com/AboutUs/CompanyStructure/index.htm [Accessed 21 December 2010]
Investopedia, 2010 http://www.investopedia.com/terms/c/currentratio.asp [Accessed 22 December 2010]
Yahoo finance, BAE systems plc company profile 2010 [http://finance.yahoo.com/q/pr?s=BA.L+Profile [Accessed 21 December 2010]
Global Aerospace and Defence industry performance wrap-up 2009
http://www.deloitte.com/assets/Dcom
UnitedStates/Local%20Assets/Documents/us_ad_2009%20Global%20Aerospace%20Defense%20Industry%20Performance%20Wrap-up_051110.pdf [Accessed 05 January 2011]
