Ration Analysis Assignment.docx

7/25/2019 Ration Analysis Assignment.docx

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EXECUTIVE SUMMARY

This report is prepared on the basis of analyzing two case study companies with comparisons

on its annual reports financial performance which contains in task 1 and in the task 2 of the

report contains the project appraisal techniques of a given scenario. In the task 1 scenario the

basic concepts been covered by the given questions such as discussing the main financial

statements of the selected annual reports !omparing the formats of income statement and

balance sheet for a company and a sole trader "nalyzing the financial performance and

financial position of both companies by using appropriate ratios and select the best company

accordingly "ssessing how above two companies# financial information helps various stake

holders to make decisions Identifying sources of finance that are available to selected

organizations which is mainly $oeing company !omparing and contrasting the sources offinance %based on cost of the source and other factors& that are available to the above selected

organization in order to select the best possible sources of finance and finally e'planation on

how above financing options are appeared on the selected financial statements.

The task (2 or the second part of this report contains the project appraisal techniques for a

selected three projects as %)roject 1* )urchase a van + hire it for a cab service )roject 2*

$uild a small shopping comple' + rent it out for businessmen )roject ,* )urchase shares

from a leading company&. "ccordingly e'plaining the significance of financial planning and

capital budgeting decisions as well as evaluating investments prepare budgeted cash flows of

the investments and select the best option by applying both discounted and non-discounted

investment appraisal techniques been done.

inally the report will provide technical details of the financial ratio analysis and project

appraisal techniques with cost benefit analysis.

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Task 01

/hen considering the $oeing company and "irbus company as the case study companies0

Boeing Company

$oeing is a famous " aerospace company as well as the leading manufacturer of

commercial jetliners and defense space and security systems. $oeing products include

commercial and military aircraft satellites weapons electronic and defence systems

launch systems advanced information and communication systems and performance-based

logistics and training. /ith corporate offices in !hicago $oeing employs more than

134((( people across the nited tates and in more than 35 countries.

The Visionof the company 67)rovide e'cellent emergency response and fire prevention to

protect people programs facilities and our community from the adverse effects of fire

release of hazardous material and industrial injuries. 8eploy these services in a responsive

and cost-effective manner9.

Airbus Company

The "irbus :roup is a ;uropean multinational aerospaceand defence corporation registered

in the anuary 2(1B

;"8 was reorganized as "irbus :roup combining the divisions for development and

marketing of civil and military aircraft as well as communications systems missiles space

rockets helicopters satellites and related systems.

Cision statement of the company 67Dur VisionInnovation at "irbus :roup The world will

change considerably in the coming decades9.

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http://en.wikipedia.org/wiki/Aerospacehttp://en.wikipedia.org/wiki/Aerospacehttp://en.wikipedia.org/wiki/Airbushttp://en.wikipedia.org/wiki/Airbushttp://en.wikipedia.org/wiki/Airbus_Defence_and_Spacehttp://en.wikipedia.org/wiki/A%C3%A9rospatiale-Matrahttp://en.wikipedia.org/wiki/A%C3%A9rospatiale-Matrahttp://en.wikipedia.org/wiki/DaimlerChrysler_Aerospacehttp://en.wikipedia.org/wiki/DaimlerChrysler_Aerospacehttp://en.wikipedia.org/wiki/Airbushttp://en.wikipedia.org/wiki/Airbus_Defence_and_Spacehttp://en.wikipedia.org/wiki/A%C3%A9rospatiale-Matrahttp://en.wikipedia.org/wiki/DaimlerChrysler_Aerospacehttp://en.wikipedia.org/wiki/DaimlerChrysler_Aerospacehttp://en.wikipedia.org/wiki/Aerospace


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Question 01

Income statement and the balance sheet of the two companies can be taken as the main

financial statements which contribute to calculate the net loss or profit of the company as

well as the balance sheet represents the financial position of the company in a particular

accounting period.

"ccording to $oeing !ompany income statement the net profit in billions was E2F4G in 2(12

and for "irbus !ompany it is E 11FG when compared to $oeing the profit proportions are E

1GF( lesser. /hen considering the balance sheet values EF2121 in "irbus !ompany and in

$oeing it is E444F3 which again is a rise than the rivalry company.

!omparison of the key disclosure regimes in comparison to financial ratios of 2((4-2(12

Boeing Company

Finania!

In"o#mation

$00% $00& $010 $011 $01$

Tota! Re'enues (0)&0& (%)$%1 (*)+0( (%),+- %1)(&%

.et ea#nings $)(,$ 1)+1$ +)+0, *)01% +)&00

Ea#nings pe#

s/a#e

+(- 1%, **( -++ -11

pe#ating

ma#gins

(-2 +12 ,,2 %-2 ,,2

pe#ating as/

"!o3

4*015 -)(0+ $)&-$ *)0$+ ,)-0%

Cont#atua!

6ak!og

+$+)%(0 $&()-00 +0+)&-- ++&)(-, +,$)+--

Tota! 6ak!og7 +-1)&$( +1-)--% +$0)%$( +--)*+$ +&0)$$%

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Table 1* $oeing company financial ratios

Ai#6us Company

Finania!In"o#mation

$00% $00& $010 $011 $01$

Tota! Re'enues *+)$(- *$)%$$ *-),-$ *&)1$% -()*%0

.et ea#nings 1-&, 4,-$5 -,$ 10+, 1$$&

Ea#nings pe#

s/a#e

1&- 40&*5 0(% 1$, 1-0

8#oss ma#gin ,)+-% *)*+& ()$$* ()%*+ ,)&+-

Table 2* "irbus company financial ratios

Question 0$

or a sole trader and for a company the type of e'penses varies so for companies the different

types of e'penses leads to make the financial statements more comple' and for sole traders it

seems to be simpler. There are four types of financial statements as statement of financial

position %balance sheet& the statement of comprehensive income %income sheet& the

statement of changes in equity %equity statement& and the statement of cash flow.

The comparative analysis of $oeing versus "irbus can be considered as major marketingcompetitors that cannot be easily traced or identified. "ccording to the financial reviews it

has been appeared that "irbus had gained the success. /hen comparing the last 5 years

almost more than 2((( aircraft deliveries had been taken place by two major manufacturers

of the air craft industry as "irbus and $oeing.

The balance sheet reports on assets and liabilities whereas the income statement reports onincome e'penses and profits cash flow statement reports on operational investment and

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financial cash flow activities and an equity statement reports on equity changes. $alance

sheets are typically divided into two sections -- one for assets the other for liabilities and net

worth where as the Income statements are used to show the transformation of revenue into

net profit or loss.

Question 0+

The balance sheets of the company $oeing and "irbus and with other disclosures normally

provide relevant information useful not only in helping investors but also to forecast future

cash flows liquidity and long term solvency. nlike the income statement which reports

changing statement reporting events occurred during a period of time the balance sheet

shows an organized array of assets liabilities shareholders equity in a point of time.

Analysis of annual reports of Boeing and Airbus companies for 2011/2012

nancial years

" ratio is a statistical means of which relationship between two or various figures can be

compared or measured.

Analysis of Profitability Ratios

:ross )rofit @argin

This represents the proportion of each dollar of revenue that both $oeing and "irbus

companies is retained as gross profit. or the $oeing !ompany in the year 2(12 it is 15.FGH

whereas for "irbus !ompany it is 1BH which implies that the $oeing profit proportions are

1.FGH higher than the "irbus profit proportions even though they are competing companies

with each other. This can be due to lack of brand recognition or brand name more customer

goodwill towards the $oeing !ompany as it has a history more than the "irbus as well as

this can be due to facilities and service quality deviations.

Dperating )rofit @argin

@easures company operating results. This indicates that the percent of profit on each dollar

of sales earned by both companies. In year 2(12 $oeing earned G.G2H and the "irbus

company earned ,.4H which is again a deduction on company sales which shows that

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$oeing has high profit margin means more profitable company that has better control over its

costs.

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Analysis of Liquidity Ratios

!urrent atio

!urrent ratio measures ability to pay short-term obligations. If this ratio is considerably high

it implies that the firm is liquid and has the ability to pay its current obligations on time and

when they become due. /hen !onsidering $oeing this means when compared to standard

ratio 2*1 this ratio is lower as it is 1.2G. This shows low short term liquidity efficiency. or

"irbus it is (.F, which is lower than even $oeing so for both companies the ability of

repaying their short term obligations like bank overdrafts debts are lower and has to be

improved.

/orking !apital "nalysis

/orking capital measure firms efficiency and short term financial health. If any company has

a positive working capital it means that firm is able to pay off its short term liabilities. or

$oeing it is 12,2GE and for "irbus it is -,,1FE which shows that "irbus is having an

efficient and stable financial position.

Analysis of Activity ratios

Inventory turnover ratio

In this analysis basically inventory turnover debtor#s turnover and creditors turnover needs to

be analysed.or $oeing Inventory Turnover 8ays are 13F days where as for "irbus company

it is 1G5 days. This indicates how much inventory is available in terms of the number of days#

sales. o from sales point of view $oeing has a higher performance than the "irbus in year

2(12.

8ebtor#s turnover ratio

or $oeing debtors 8ays are 25 and for "irbus BB days.This indicates number of times that

accounts receivable amount is collected throughout the year. " high accounts receivable

turnover ratioindicates a tight credit policy of $oeing !ompany than the "irbus !ompany.

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!reditor#s turnover ratio

In this analysis basically the settlement time of the creditor#s can be seen. or $oeing

creditors days are 11 days appro'imately. or "irbus !ompany creditors days are GB.5 or G5

days. In here the money payback of $oeing in terms of days is quick whereas "irbus the

activity ratios are not early as $oeing !ompany.

Analysis of financial leverage ratios

8ebt to ;quity atio

In $oeing !ompany it is 1B and in "irbus !ompany it is G.4, which means that @easures

the portion of assets contributed by creditors. " company financing a large portion of assets

with debt has a high degree offinancial leverage. The higher the leverage0 the higher the risk

that a company may be unable to meet itscurrent obligations.

Interest !overage

In $oeing !ompany 1,.3, and for "irbus 11 appro'imately which implies that the

responsibility o f the company in paying the interest component is much more higher than

"irbus who is the rivalry company in operating in the long run.

igure 1* inancial results

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Question 0*

inancial statements represent a formal record of the financial activities of an entity. The

balance sheets of the company $oeing and "irbus and with other disclosures normally

provide relevant information useful not only in helping investors but also to forecast future

cash flows liquidity and long term solvency. nlike the income statement which reports

changing statement reporting events occurred during a period of time the balance sheet

shows an organized array of assets liabilities shareholders equity in a point of time.

Boeing Company

S/a#e/o!9e#s: ; ocusing on producing the airplanes the market demands and

pricing products to provide a fair return for company shareholders while continuing

to find new ways to improve efficiency and quality. In 2((4 there is a net E4535

million decrease in hareholders# equity primarily due to declines in pension plan

assets as a result of declines in financial markets. $etween 2((4 to 2(12 more than

E,F million was distributed in 51 countries. hareholders are of 2 types as a

registered shareholder or as a beneficial owner of stock that is held in Jstreet name.J

Custome#s :;!ompany has a worldwide customer network with 35 percent of total

backlog represented by international customers.G(H of the $oeing !ommercial

"irplanesK backlog are for jetliners ordered by non .. customers including many

from emerging markets. This includes $oeing 8efense pace + ecurityKs total

revenue.

Emp!oyees: ; $oeing employees volunteer around the world to support

many charitable endeavors.

Supp!ie#s an9 pa#tne# ompanies: ; The $oeing supplier network includes

appro'imately 24((( suppliers and partners. $oeing has si' esearch +

8evelopment !enters 13 !onsortia and 22 joint research centers. $oeing has

relationships with more than 5( international universities and Technology L

Technical ervices !enters worldwide.

t/e#s: USA 8o'e#nment) Regu!ato#y 6o9ies) Me9ia

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http://www.boeing.com/assets/pdf/companyoffices/aboutus/community/2012_report/2012_Corporate_Citizenship_Report.pdfhttp://www.boeing.com/assets/pdf/companyoffices/aboutus/community/2012_report/2012_Corporate_Citizenship_Report.pdf


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Ai#6us Company

Custome#s:;There are ,2B firm orders from 2( customers for the passenger version

the "irbus ",4(-4(( of which 1,2 have been delivered to 11 of those customers as of

@ay 2(1B due to the company annual report.

Supp!ie#s an9 ournalists @edia.

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Question 0-

or $oeing the source of finance is used aircraft finance market Messer %Messer source of

delivery financing are !ash ;'port !redit $ank 8ebt Messer elf-und !apital @arkets&

and ;'port !redit.

This can be briefly e'plained as below.

igure 2* ources of finance

inancing sources for $oeing deliveries in 2(1B shows the decreasing reliance of rapid

e'pansion of the capital markets and other funding sources of lessor funding. $oeing

customers to continue to be in the industry rates are than the rivalry company of "irbus as the

financial ratios and other nonfinancial factors are showing a 5(*5( or more than that of less

ratio effect which implies that in the long run the survival rate of the $oeing company is

much more higher than the "irbus company.Messor leverage should be balanced across all of

the finance markets as well as reversing thee 3 years decline of self funding from parent

company provided leverage.

=owever the main financial ratios and the components which affects the market are as above

meentioned and basically the cashcapital markets has a lesser impact when companerd to

other factors such as lessor self fundbank debte'port creditmanufacturer impact as well as

lessor funding.

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Question 0(

sed "ircraft inance @arket

This depends on secondary markets. =igher oil prices interest rate deviations over the pastdecade that reduced opportunities for used aircraft market as well as to disruptions.

The secondary market is strengthening due to pricing adjustments to these new fundamentals.

The recovery is evidenced by new and returning market participants with aircraft asset

e'pertise that is better rewarded by the more nuanced used aircraft market.

Messor source of delivery financing such as cash e'port credit bank debt lessor self

fund capital markets.

!apital @arkets

This is e'plained using the $oeing company annual report as 7The !apital @arkets* The

growth from ,H of new delivery financing in 2((F to our projection of over 2(H in 2(1B

tells a story of rapid e'pansion. /ith the !ape Town Treaty facilitates e'panded investor

interest in airlines outside of the .. to broad funding of leasing companies the public

markets are delivering on their promise. !omplementing public market liquidity we e'pect to

see meaningful growth in private placements to provide debt and equity for airlines and

lessons where transaction size or other considerations limit public market access.9 %"nnual

report of $oeing 2(12&

!ommercial $ank 8ebt

;'port !redit

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Question 0,

According to the 2012 annual report consolidated balance sheet of Boeing Company

Total current assets balance is E5G,(F as at 8ecember 2(12 Total assets E444F3 Total

shareholders# equity is E5F3G total current liabilities EBBF42. Total liabilities and

shareholders# equity E444F3 when compared to 2(11 figures of EGFF43.These are the key

disclosure regimes of 2(12 and the reasons for such aspects due to past years behavioral

patterns and reasons. o the past years inefficiencies and weaknesses are continuing

throughout the year 2(12 as well and the company should focus on a $) which will

reengineer the design of the cost cycle of the company.

According to the 2012 annual report consolidated balance sheet of Airbus Company

The total cost balance is E13434 as at 8ecember 2(12 amortisation is E - ,BB3


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2012 Aircraft Deliveries of Airbu

China

Southern

E as y J et S au di A ra i an

Air!ines

" au #t ha ns a A er o$ ot % S A A ir &a ys

A'ian(a Airasia )ndianAir!ines

Singa*ore

Air!ines

ChinaEastern Air+ran(e

23,

13,

14,9,

7,

5,

5,

6,

5,

4,4,

5,

2012 Aircraft Deliveries of Boeing

-ynnair

A.ari(an Air!ines

/ECAS

e!ta

JA"

Continenta!

"ion Air

/"

South est

C Air&ays

A!! i**on Air&ays

ainan Air!ines15 | P a g e


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igure ,* !omparison of "irbus Cs $oeing !ompany

Task 0$

Question 01:

=e has to choose between three possible projects where the cost of capital and estimated

useful life associated with all three investments are 12H and 3 years respectively. The scrap

value of )roject (1 should be considered as B(H of the initial investment. The three

investments are as follows

)roject 1* )urchase a van + hire it for a cab service.

)roject 2* $uild a small shopping comple' + rent it out for businessmen

)roject ,* )urchase shares from a leading company %shares could be sold at the end of B th

year&

$ase on above scenario

)roject 1* )urchase a van + hire it for a cab service

!ost of capital -12H

seful l life - 3 years

crap value B(H of the initial investment

)roject 2* $uild a small shopping comple' + rent it out for businessmen



)roject ,* )urchase shares from a leading company



%hares could be sold at the end of Bthyear&

In order to appraise this project by project appraisal method the e'act 3 years values should

be thereby considering those discounted cash flows the


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less than zero the project has to be rejected and if it equals to zero it depends on the

organization.

$ased on the calculated


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Question 0$

In here basicallymeasuring whether the benefits of a project e'ceed the investment cost or in

brief cost benefit analysis has to be done. There are two types of techniques as

discounted and non-discounted cash flow techniques.

Non-discounted Techniques

Payback Period

Accounting Rate of Return (ARR)

iscounted !ash "lo# Techniques

Net Present Value (NPV)

nternal Rate of Return (RR)

Paya( Period

A#ter (onsidering the (u.u!ati'e (ash $o&s and net (ash $o& #a(tors the

*roe(t &hi(h gi'es the ui(est *aya( shou!d e se!e(ted: Su(h

ad'antages o# this te(hniue are it is (on'enient to (a!(u!ate as &e!! as to

understand &ith ui(est *aya( *roe(ts se!e(ted !ess un(ertain

*roe(ts are eing se!e(ted: Su(h dra&a(s are eyond the *aya(

*eriod (ash $o&s are not serious!y !ooed at !ess un(ertainty is !ie!y to

se!e(t !ess return *roe(ts: So are &e se!e(ting the nest earning or !essest *aying *roe(ts are no& uestiona!e:

Accounting Rate of Return (ARR)

;he na.e itse!# suggests that it is an a((ounting ase .ethod .eaning

*ro


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A--= A'erage annua! P); >100

)nitia! )n'est.ent

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hen (o.*aring the three *roe(ts the highest A-- *roe(t &i!! e

se!e(ted ased on its a**ro*riate 'a!ues: ;he ad'antages o# this .ethod

are &ith *ro


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+igure 4 P? ?s )--

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CC"%S) B -ECEA;)S

)n order to i.*ro'e the su**!ier and (usto.er re!ationshi*s the (o.*anies

(an i.*!e.ent e!o& re(o..endations:

The @anagement Team*-In order to get the optimum efficiency those companies should

focus on the management which should be carefully selected and appropriately trained in

order to achieve the organizational goals.

Technical !apability* - "s the two companies are engaged in technological advancement

products which is mainly aircraft industry the technology up taking is a must when it is

about the development of the products. In order to protect the competitive advancement

these two companies should continuously engage in research and development.

!ommitment to integrity*-Integrity in the broadest sense must pervade our actions in all

relationships including those with our customers suppliers and each other. This is a

commitment to uncompromising values and conduct. It includes compliance with all lawsand regulations.

inancial trengths*-"s the aircraft industry id a high risk business it is a must to have a

high financial strength. In order to engage with investments and new technological

advancements this base is a must. This objective also requires contingency planning

and control to ensure the company is not overe'tended should severe economic

downturns occur in the period of operations and planning.

/orkforce training and development %employee Training& this should be done to ensure

that the service quality being served to the customers are for the dame way in order to

survive in the long run.

!ommunication*-even though this aspect is seen as comparably normal it is essential to

make sure that the communication levels are there properly and the communication

should be consistent with the hierarchical levels of the company.

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2trengthsP2trongglobalnetwork

P$roadproductline P+8development

/eaknessesP"hierarchicalmanagementstyle

P;mployeerelataedissues

P8ependson12government

DpportunitiesP


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econdly the competitive advantage policy can be used by the company where normally it

comes from the hired employees. The company strives for continuous quality improvement

and invests in the workforce through its benefits programs and by encouraging a balanced

workLlife culture.

Dne of the most important key points about the pricing strategy is linked to the duopoly

commercial airplane structure. The duopoly increasingly means a likelihood of imperfect

competition where the two firm $oeing and "irbus can affect the prices of their products.

"ctually the two firms are far from being to set their own prices. The buyers who have the

choice only between these two manufacturers have a considerable bargaining power.

In these two companies the communication policy is another key aspect to be pay attention

for. In here the two companies are highly depends on the e-commerce or e-communication

where they pay lack of attention to the usage of paper based communication signs and mass

media which are more reliable.igns are the company#s logo that can use as an advertising

technique. o company prints its logo on all of its aircraft and when these aircraft are

stationary in an airport or elsewhere these planes will be advertising for the company.

This type of advertisement like the above is however limited as it doesn#t convey a message

it simply reminds people of the company and its logo. The company also uses signs on all of

its premises worldwide and the company name is now a prominent feature of the western

edge of !hicago cityKs skyline its backlit $oeing logo on top is visible for miles at night.

These two companies should be highly concentrated on the technological advancement where

the technology plays a vital role in doing so. @ost probably they should pay attention on the

uture "ircraft Technology ;nhancements%"T;& programs 8efense "dvanced esearch

)rojects "ir orce esearch Maboratory etc.

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A**endi(es

Finania! Ratio Ca!u!ations: Boeing Company

Ratio $00% $00& $010 $011 $01$

8#oss ia6i!ities

S/a#e/o!9e#s

Euity

55(G,L-12FB

-B2.5

5F424L2124

24

35G(,L2G33

2B

G3,G4L,515

22

42F2FL543G

1B

Inte#est Co'e#age


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Finania! Ratio Ca!u!ations: Ai#6us Company

Ratio $00% $00& $010 $011 $01$

8#oss


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