Boeing fortune 500 rank 2019

Boeing Company

Financial Statement Analysis: The Boeing Company

Introduction

The Boeing Company is an American company founded in July 15, 1916 by William Boeing and has its headquarters in Chicago, Illinois (Wilma, 2020). The company is rated as being among the best performing financially with the latest Fortune Magazine “Fortune 500” list rating of 2019 putting the company in the 40th position after realizing sales volume of US$ 76.6 billion. In the year 2020, Boeing Company was ranked position 121 on the “Fortune Global 500” list (Weiss & Amir, 2019)

Financial statement analysis is the process where accounting information given in financial statements and reports are critically examined in detail. The process revolves around evaluating relationship between component parts of financial statements in order to obtain a better understanding of a firm’s performance (White, Sondhi & Fried, 1998). The measurement and interpretation of business performance is done through the use of ratios. A comprehensive analysis of the financial statement of Boeing Company is vital to many stakeholders in the business world. One way of doing this is through the analysis of the financial ratios related to the company. The financial rations plays vital roles which include: revealing the ability of Boeing Company to meet its short term obligations as and when they fall due, assessing the performance of the company within the period with which the financial statements covers, enabling both cross-sectional and time series analysis of the company, establishing a prediction of the future performance of the company as well as establishing the efficiency of the company with respect to the utilization of its available assets to generate revenues (Groppelli & Ehsan, 2000; Ingram, 2019).

This financial ratio analysis of The Boeing Company focus on analysing various ratios including the debt ratio, gross profit margin, free cash flow ratio, times interest earned ratio, accounts receivable turnover ratio, inventory turnover ratio and the DuPont analysis of the ROE. An evaluation of the ratios will be represented to establish the overall performance of the company in as far as profitability, efficiency, liquidity and solvency are concerned.

Financial Ratio Analysis for the Boeing Company

(Figures are in Millions of USD except the resultant ratios and percentages)

i. Debt Ratio

Debt ratio= Total debt (current plus long term liabilities)

Total assets

For 2019 = 142,242/133,625= 1.06

For 2018 = 117,020/117,359= 1.00

ii. Gross Profit Margin

Gross profit margin = Gross profit x 100

Sales

For 2019 = (12,725/84,818)*100% = 15.0%

For 2018 = (19,637/101,127)*100% = 19.4%

iii. Free Cash Flow

Free cash flow = Net operating cash flow – Investment in capital expenditures

Or

Net income – Net investment in operating capital

For 2019 = (4,407)

For 2018 = 13,531

iv. Times Interest Earned

Times interest earned ratio = Profit before interest and tax

Interest charges

For 2019 = (1,975)/722 = (2.74)

For 2018 = 11,987/474 = 25.29

v. Accounts Receivable Turnover

Accounts receivable turnover = Annual credit sales

Average debtor

For 2019 = 84,818/12,309 = 6.89

For 2018 = 101,127/13,904 = 7.27

vi. Inventory Turnover

Inventory turnover = cost of sales

Average stock

For 2019 = 72,093/76,622 = 0.94

For 2018 = 81,490/62,567 = 1.30

DuPont Analysis of ROE for the Boeing Company

(Figures are in Millions of USD except the resultant ratios and percentages)

i. Return on Sales

Return on sales = Net profit x 100

Total sales

For 2019 = (-636/84,818)*100% = (0.7%)

For 2018 = (10,460/101127)*100% = 10.3%

ii. Asset Turnover

Asset turnover = Annual sales

Total assets

For 2019 = 84,818/133,625 = 0.63

For 2018 = 101,127/117,359 = 0.86

iii. Return on Assets

Return on assets = Net profit x 100

Total assets

For 2019 = (-636/133,625)*100% = (0.5%)

For 2018 = (10,460/117,359)*100% = 8.9%

iv. Financial Leverage

Financial leverage = Average assets

Average equity

For 2019 = 133,625/ (8,617) = (15.5)

For 2018 = 117,359/339 = 346.2

v. Return on Equity

Using the DuPont Analysis, ROE will be obtained as follows:

Return on Equity = Net profit margin (Return on sales) * Asset turnover * Financial leverage

For 2019 = (0.007) * 0.63 * (15.5) = 0.07

For 2018 = 0.103 * 0.86 * 346.2 = 30.67

Evaluation of the Ratio Trends for the Boeing Company

The financial performance of The Boeing Company can be ascertained by analysing each of the ratios obtained from the company’s financial statements. Its performance can, however, be best ascertained by looking at the ratio trends of the company of a period of time for example five years. This will show the performance of the company over time and will help in predicting the likely performance in the future. For Boeing Company, the years 2018 and 2019 have been considered to obtain ratio trends.

Debt ratio shows the extent to which a company finances its total assets using borrowed funds, commonly known as debt. It can be ascertained by looking at how much a company has used in terms of both its long term and short term liabilities to finance its assets. The lower the ratio the better for a company. In 2018 the debt ratio for Boeing Company was 1.00 while it was 1.06 in 2019. Looking at the ratios, it can generally be deduced that the company has a slightly high debt ratio which is more risky and expose the company to insolvency. From the year 2018 to 2019, there is an increase in the debt ratio from 1.00 to 1.06 which shows an increasing trend, a situation which is likely to lead to a heavy debt repayment burden for the Boeing Company.

On the other hand, we have the gross profit margin which can simply be explained as the measure of a company’s profitability. The ratio measures the efficiency of a company to produce each unit of a product by controlling the cost of sales. Gross profit margin is focus on the direct expenses unlike net profit margin which covers both the direct and indirect expenses of firm. The ratio should be high which implies that a company has efficiently covered its direct costs and has excess funds to cover its indirect costs. A higher gross profit margin is a reflection of a company’s strong liquidity position and the likely co-existence to the unforeseeable future. It is a general consideration that a gross profit margin of 5 % is low, 10% is average and 20% is good. The Boeing Company, therefore, had an average gross profit margin of 15% in 2019 and a slightly good gross profit margin in 2018. It is worth to note that the decreasing trend of the gross profit margin of the company from 19.4% in 2018 to 15% in 2019 shows a reduction in the profitability of the company which is not good for the company.

Free cash flow stands for the cash that a company generates after accounting for cash outflows that has been used to support or cater for operations as well as maintain its capital assets. It measures profitability excluding the noon-cash expenses in the statement of comprehensive income and take into consideration spending on assets as well as the changes in working capital (Groppelli & Ehsan, 2000). Though using free cash flow to measure the financial performance of a company can be seen to be lumpy and difficult to calculate, it can be preferred by investors since it gives an insight on the availability of cash that can be used by a company to repay creditors or rather meet out repayment of dividends and interest to investors. From the ratio analysis of Boeing Company, it is clear that the company’s ability to meet its dues of dividends and interest to investors in 2019 is very low as a result of its negative free cash flow. The trend again from the year 2018 to the year 2019 risks the solvency of the company. There is a huge drop of the free cash flow from a positive value of USD 13,531,000,000 to a negative value of USD 4,407,000,000. This shows underperformance by the company and can keep off investors from investing more in the company.

Times interest earned ratio is another ratio considered in the case of the Boeing Company which represents the number of times the company can pay its interest from its earnings. The more the number times the better and the higher the ability of the company to meet its debt obligations based on its current income (Jan et al, 2008). In the period 2018, Boeing showed a strong ability to meet its debt obligations due to its approximately 25 times payment of its interest charges over the period. However, the period 2019 showed a significant drop in the company’s ability to meet its debt obligations. As a matter of fact, this period shows that the company is unable to meet its interest charges since its interest times earned ratio is at negative. An investor relying on this ratio over the periods 0f 2018 and 2019 to invest in Boeing Company would not dare risk his/her finances due to the significant decrease in the ratio.

Furthermore, accounts receivable turnover for Boeing Company shows a slight drop from, 6.89 in the year 2018 to 7.27 in 2019, in the number of times debtors of the company bought on credit after paying their dues. It is worth to note that it is not only a decrease in the ratio over the period but also the ratios are slightly low an implication that the debt level might be high in the company. It is a risk to the company due to the likely high levels of bad debts, a situation which jeopardize the profitability of the company in the long run.

Inventory turnover presents an indication of the number of times the stock was turned into sales in a year in a company. The higher the stock turnover ratio, the better the firm and the higher the sales. However, a low inventory turnover ratio portray high levels of stock or inventories are slow moving. This leads to a reduction in the company’s profitability. In the year 2018, Boeing Company turned its inventory 1.3 times to sales while in 2019 its operations resulted in 0.94 times conversion of stock to sales. Apart from the ratios being low, the company is experiencing a decreasing trend from the year 2018 to the year 2019 a situation which is not good to the profitability and generally the financial position of the company.

Finally is the return on equity a ratio which shows the value shareholders get from the company upon investing one shilling of equity capital. The analysis of Boeing return on equity using the DuPont Analysis Model presents a more realistic and comprehensive view of the company’s ROE rather than its simplistic view of dividing only two aspects: net profit and equity. DuPont Analysis decomposes the formula of obtaining ROE into the various drivers of ROE, a situation which gives investors a chance to focus on the key metrics of Boeing’s financial performance individually, hence easy identification of the company’s strengths and weaknesses (Hargrave, 2020). DuPont Analysis takes into consideration the net profit margin of a company, its asset turnover and the financial leverage to obtain the return on equity. The higher the return on equity, the better for a company. This is because it is an evidence that the company is performing well and, therefore, can pay its investors higher for the amount they invest in the company. The Boeing Company in the year 2018 is doing fairly good in its return on equity where an investor’s one shilling worth of equity is valued at approximately 30. This dropped significantly to 0.07 in 2019 an indication that an investor’s one shilling worth of equity loses value in 2019 and in fact results in very low earning. This is not god for the company since no investor would be comfortable putting his/her finances in the company.

Recommendations to Boeing Company on the Financial Ratios

The above financial data and in particular the ratios portrays a serious concern on the financial position of the Boeing Company and the need to take drastic measures to safeguard the financial performance of the company and the interests of its stakeholders. To reduce the debt ratio, Boeing Company ought to check on its operational efficiencies. This will allow the company profit more on the owner funds and minimize the overdependence on debts to finance the company’s assets. The same situation applies for the gross profit margin, the free cash flow, times interest earned, inventory turnover, accounts receivable turnover and the ROE of the company. The significant poor performance of the ratios is a show of inefficiency in operations which tend to reduce the profits of the company. The ability of the company also to control its costs is deteriorating making its free cash flows fall drastically. The company should also check on its expenses and reduce or eliminate the unnecessary to further cut its operational costs. Moreover, the company should focus on reducing the level of credit sales as a measure to make a turnaround on its accounts receivable turnover.

Conclusion

Financial ratios plays a crucial role in bring to light the financial performance of every company. The ratios for the backbone to the decisions made by various stakeholders in an attempt to safeguard their interests in a company. The Boeing Company is not an exception. All stakeholders are dependent on the company’s financial ratios to make decisions, for example, investors would like to understand the company’s return on equity and debt ratio in order to ascertain the viability of making an investment in the company (Zane, Kane, & Marcus, 2004). On the other hand, employees are keen on the gross profit margin and net profit margin to ascertain on the profitability and liquidity of the company they are working for. The stability of such ratios guarantees them of the security of their jobs. However, the trend analysis of Boeing Company over the periods of 2018 and 2019 shows a worrying trend (based on the above data and ratios) and calls for drastic measures to safeguard the solvency of the company and more importantly the interests of the many stakeholders the company is serving.

References

Groppelli, A.A. and Ehsan, N. (2000). Finance, 4th ed. Barron’s Educational Series, Inc. ISBN 0-7641-1275-9.

Hargrave, M. (September 10, 2020). Financial Ratios: DuPont Analysis- Corporate Finance and Accounting. Retrieved from: https://www.investopedia.com/terms/d/dupontanalysis.asp#formula-and-calculation-of-dupont-analysis

Ingram, D. (February 12, 2019). Financial Ratios: The Advantages of Financial Ratios. Retrieved from: https://smallbusiness.chron.com/advantages-financial-ratios-3973.html

Jan, W.R., Haka, S.F., Bettner, M.S. and Carcello, J.V. (2008). Financial & Managerial Accounting. Mc-Graw-Hill Irwin. SIBN 978-0-07-299650-0.

Weiss, S.I. and Amir, A.R. (July 18, 2019). Boeing Company- Description, History & Aircraft. Encyclopaedia Britannica.

White, G.I., Sondhi, A. and Fried, D. (1998). The Analysis and Use of Financial Statements. John Wiley & Sons, Inc. ISBN 0-471-11186-4.

Wilma, D. (January 24, 2020). “On this day: Boeing moves corporate headquarters to Chicago in 2001”- Histroylink.org.

Zane, B., Kane, A., and Marcus, A.J. (2004). Essentials of Investments, 5th ed. McGraw-Hill Irwin. ISN 0-070251077-3.

https://www.investing.cpm/equities/boeing-co-ratios