Paper about The Boeing Company (BA)

Running Head: BOEING COMPANY-Part3

BOEING COMPANY CROSS SECTIONAL ANALYSIS 3721

Boeing Company

SIC & Industrial Name – 3721, Boeing Company

The Boeing Company represents one of the largest aerospace companies in the world with an in-depth specialty in jetliners, defense, security, and other space systems, as well as providing after sales support services. Currently, the company has government-based customers from over 150 countries across the world, thus showing the strategic position of the company as a global competitor within the aircraft manufacturing and services industry. However, to have a well-informed overview of the performance of the company from a multifaceted angle, there needs to be an analysis of the company's financial performance, which reflects several elements within the organization such as efficiency and profitability potential. This report aims at providing a thorough analysis of the company’s profitability, efficiency, liquidity and solvency by analyzing the various financial ratios of the company obtained from credible sources such as investors.com and ready ratios so as to gain an overview of the effectiveness of the company’s processes. These ratios will further be compared through a cross-sectional analysis with other related companies operating within the same industry so as to gain a wider view of the company’s performance.

This paper is going to focus on the analysis of the company's performance based on the four aspects, which include profitability, efficiency, liquidity, and solvency using the historical financial performance ratios obtained from the company’s financial statements.

Company's profitability

The company's profitability can be analyzed using various financial metrics that normally create a vivid picture of the company's ability to generate profit, the general revenue and the operating costs, among other liabilities incurred within the course of the production. Some of the profitability ratios involve the Return on assets and the Return on Equity.

Gross Profit Margin

The gross profit margin is mainly used as an indicator of whether the sales made are sufficient enough to cover up for the production costs of those particular goods. The average gross profit margin is usually regarded as being 10% or above as the rule of thumb when analyzing the profit margin, whereas a 20% gross profit margin is considered a good gross profit margin. According to the analysis of The Boeing Company’s gross profit margin, the company’s profitability can be regarded as being low mainly because the company has a gross margin of -9.78, which is below the industry average of 22.71% (About Financial Ratios, 2021). It is worth noting that a 5% margin is usually considered as being generally low. Subsequently, a cross-sectional analysis of the company against its closest competitor, United Technologies Corporation, is an indicator of the weak capacity of the company to turn its assets into profits since the competing company has a gross margin of 28.4%, which is normally regarded as a good profit margin. The effects of a low gross profit margin are overseen in the results of other ratio analysis such as the Return on assets and return on equity.

Return on Assets

Return on Assets (ROA) is usually used as an indicator of how profitable a company is based on the total assets owned by the company and used in the production process. According to the Return on assets of The Boeing Company, the company is not profitable since its ROA was -7.80%, which is lower than the industry competitors such as the United Technologies Corporation, which has a ROA of 4%. It is worth noting that a low ROA is usually an indicator of the low capacity of the company to effectively make use of its assets in attaining more profits (Ready Ratios, 2020). Subsequently, a higher ROA is always better since it is directly related to the profit margins that indicates the effective use of assets to attain more profit for the business.

Return on Equity

Unlike the ROA, which mainly uses the company assets as the basis for the calculation of the company's profitability, the Return on Equity (ROE) measures the financial performance of the company by dividing the net income with the total equity owned by the shareholders. Generally, an ROE of 15-20% is usually considered as being good ROE mainly because it is an indicator of the potential of the company to provide some of the level profit for every share bought by stakeholders. The Boeing Company’s ROE is negative thus indicating that there is low profitability for the stakeholders of the Boeing company stocks according to the valuation. When compared to other companies like the United Technologies Corporation, the company's profitability can be considered as being very low since the competing company has an ROE of 13.1%, which despite being below the industry average of 26.6%, is better that the Boeing company’s ROE ratio which indicates zero profits attained by the company during that particular financial period of reporting (ReadyRatios, n.d).

Efficiency

Inventory turnover ratio

The inventory turnover ratio, on the other hand, represents one of the most prevalent efficiency ratio, which specifically indicates the efficiency in the management of the inventory by comparing the COGS with the average inventory over the reporting period. For most industries, the inventory turnover ratio mainly ranges between 5 and 10, which means that the business should sell, and subsequently restock the inventory after every 1 to 2 months (Henry, 2020). The Trailing Twelve Months (TTM) Inventory Turnover for the company is 0.81 against the industry's 6.94 average. Subsequently, the competitors' Inventory Turnover ratios could be used to reflect the low nature of the company's capacity to sell its inventory. An example is when compared to Raytheon Technologies Corp inventory turnover ratio of 5.17, Boeing company’s inventory turnover ratio (ITR) could be determined as being very low. This notion means that there should be changes to the company’s sales and market strategies and initiatives so as to support an increase in the rate at which the assets are sold to the target market.

Asset turnover ratio

The Asset Turnover ratio (ATR) presents the ratio of the total sales against the average total assets of the company. Although low asset turnover suggests that there are problems with the surplus production capacity, bad approaches towards tax collection and poor management of the inventory, the Boeing company’s ATR presents one of the most prevalent factors that suggest existence of some level of efficiency within the company. It is worth noting that while Boeing Co.’s asset turnover ratio is 0.41, the asset turnover ratio for RTX technologies is 0.38. According to the rule of thumb when using the asset turnover ratio is that the higher the ratio, the more efficient the business is in managing its inventory. However, utility industries normally have a ratio of between 0.25 and 0.5 as compared to retail sector, which normally have an asset turnover ratio of more than 2.5 (Gocardless, n.d). Thus, the company management for Boeing Co. could be described as being efficient enough in using the company's assets to realize more revenues through increased sales.

Receivables turnover ratio

Apart from the asset turnover ratio, the Receivables turnover ratio forms another ratio that provides an insight into a business’s efficiency in managing the credit services it offers to customers by using the rate at which the company collects the credit as the measurement criteria. The main reason behind the use of the ratio is mainly because collecting credit from customers within a relatively short period of time provides the business with ample time to take care of its various obligations. According to Boeing Co.’s financial ratio results, the company could be considered to have weak policies meant to control the process of retrieving credit from its customers based on its receivable turnover ratio that is 5.23 as opposed to the industry average of 6.93. It is worth noting that low receivables turnover ratios normally depict bad credit policies as well as the fact that there is need for a review of the policies so as to ensure that the receivables are collected on time (Murphy, 2020). However, it is worth noting that the credit policies could be used by competitors as a competitive niche within the market hence attracting more customers despite a reduction in efficiency in regards to credit collection.

Liquidity

Current ratio

The current ratio acts as a liquidity ratio indicating the company’s ability to pay for the short-term obligations that don’t are needed within a year. The rule of thumb when using the liquidity ratios involves the fact that a current ratio of below 1 indicates the inability for the business to optimize its assets to provide profits, enough to cover for the short term expenses (Freshbooks, n.d). Thus, the company could be determined as having a high potential for liquidity based on its current ratio of 1.39 that is above the industry average of 1.38, meaning that the company can easily convert its assets into cash so as to take care of its short term obligations (About Financial Ratios, n.d). Subsequently, the liquidity measure could be used to analyze the probability of the company going bankrupt by being used as an indicator whereby a low current ratio indicates the inability of a company to meet its short term liabilities.

Solvency

Times interest earned

When investors or creditors are analyzing the potential for the solvency of a business, one of the most crucial tools that they usually analyze involves the times interest earned (TIE), whereby a tie ratio of more than 2.5 is usually considered an acceptable risk whereas a TIE of less than 2.5 indicates a high probability for bankruptcy and financial instability of the company (Horton, 2019). However, a TIE ratio, which is far above the industry ratios, could be an indication of the lack of proper utilization of the earnings since it indicates an insufficient capacity for the company to reinvest the earned cash in new projects. The times interest earned by the Boeing company is negative, thus indicating that the company is highly susceptible to solvency.

Debt ratio

In addition to the TIE, the debt ratio also forms one of the most applied Solvency ratio, which analyzes the ability of the company to repay its debts using the total assets. A lower ratio as compare to the industry averages is usually considered better than a higher ratio, mainly because a company with lower ratios implies that the company is more stable due. In the preceding year, the Boeing company had a debt ratio of 1.06, which is far above the industry average during the reporting year of 0.67. This notion implies that the company is most likely to go bankrupt in the long term due to high debt levels as well as the lack of the company’s assets to cover the company’s current liabilities.

Conclusion

Based on the company’s financial analysis using the financial ratios, the company currently exhibits low levels of profitability indicated by low gross profit margin as well as the low ratios in regards to the ROA and ROE. Subsequently, the company exhibits poor performance in regards to efficiency as compared to the industrial peers whereby the company has weak policies regulating the efficient use of the company’s resources as well as application of best practices in inventory management. Thus, the company needs to review its policies so as to ensure that they align with the organization's growth and profitability needs, for example, by reducing the amount of days to attain the receivables and providing a platform for optimal performance of assets within the organization. However, the company has a high level of liquidity based on current ratio analysis of the company, which has a slightly higher current ratio than the industry average.

Thus, from an investor's point of view, the company is currently not stable enough in regards to efficiency and profitability for investment. Apart from the negative income levels attained by the shareholders, there is also the aspect of debt ratio, which indicates that the company has very high chances for undergoing solvency. This notion is mainly supported by the fact that at the moment, the company has very high debt levels that cannot be sustained by assets owned by the company.

References

FreshBooks. (n.d.). What is a good liquidity ratio? https://www.freshbooks.com/hub/accounting/good-liquidity-ratio

Gocardless. (n.d.). How to calculate total asset turnover ratio. https://gocardless.com/en-us/guides/posts/how-calculate-total-asset-turnover-ratio/

Henry, R. (2020). The ideal inventory turnover ratio for your business goals. Skubana - Ecommerce Operations Platform for Brands and Sellers. https://www.skubana.com/blog/good-inventory-turnover-ratio

Horton, M. (2019). What does a high-times interest earned ratio signify for a company's future? Investopedia. https://www.investopedia.com/ask/answers/030615/what-does-high-times-interest-earned-ratio-signify-regard-companys-future.asp

About Financial Ratios (2021). Boeing (BA) financial ratios. Investing.com. https://www.investing.com/equities/boeing-co-ratios

About Financial Ratios. (n.d.). United technologies (RTX) financial ratios. Investing.com. https://www.investing.com/equities/united-tech-ratios

Murphy, C. B. (2020). Why the receivables turnover ratio matters. Investopedia. https://www.investopedia.com/terms/r/receivableturnoverratio.asp

ReadyRatios. (n.d.). Boeing Company (The) (BA): Annual reports and key ratios comparison. Financial Analysis Software | Financial Analysis | Financial Statements | Current Ratio | Financial Ratio | ReadyRatios.com. https://www.readyratios.com/sec/BA_boeing-co?