Evaluate Financial Ratios To Differentiate Profitability

Competencyevaluate Financial Ratios To Differentiate Profitability And

Write a 2–3-page memo to your fund administrator that includes the following: Explains the different liquidity, profitability, and solvency ratios that are used to assess the financial health of a corporation. Computes the liquidity, profitability, and solvency ratios using the 2018 Boeing Corporation's financial statements. Computes the liquidity, profitability, and solvency ratios of Airbus, a passenger plane competitor, using the 2018 financial statements. Compares and contrasts the financial ratios of Boeing and Airbus. Analyzes and provides a recommendation, supported by ratio calculations, as to whether you believe Boeing is stable enough compared to the competitor that if defense funding is reduced, the company will continue to prosper. Note - Be sure the documents display proper grammar, spelling, punctuation, and sentence structure.

Paper For Above instruction

In an increasingly competitive and volatile aerospace industry, leveraging financial ratios is essential for evaluating corporate stability and making informed investment decisions. This paper discusses key financial ratios—liquidity, profitability, and solvency—and calculates these for Boeing and Airbus, comparing their financial health as of 2018 to determine the potential for continued success amid possible reductions in defense spending.

Liquidity Ratios measure a company's ability to cover its short-term obligations. The primary ratios include the current ratio and the quick ratio. The current ratio is obtained by dividing current assets by current liabilities, indicating whether a firm has enough resources to meet short-term liabilities. The quick ratio (or acid-test ratio) refines this by excluding inventory from current assets to focus on the most liquid assets.

Profitability Ratios assess a company's ability to generate profit relative to sales, assets, and equity. Important measures include net profit margin, return on assets (ROA), and return on equity (ROE). The net profit margin is calculated by dividing net income by total revenue, reflecting profit efficiency. ROA reveals how effectively assets generate profit, calculated as net income divided by total assets. ROE demonstrates the return shareholders receive and is computed as net income divided by shareholders' equity.

Solvency Ratios evaluate long-term financial stability and the company's capacity to meet long-term obligations. Key ratios include the debt-to-equity ratio and the interest coverage ratio. The debt-to-equity ratio compares total liabilities to shareholders' equity, indicating leverage levels. The interest coverage ratio, derived by dividing earnings before interest and taxes (EBIT) by interest expense, measures how easily a company can pay interest on its debt.

Using Boeing’s 2018 financial statements, the calculated ratios reveal a resilient yet cautious financial profile. Boeing's current ratio was approximately 1.09, indicating a relatively stable short-term liquidity position. Its quick ratio was around 0.65, reflecting reliance on inventory and less liquidity in immediate terms. Profitability metrics showed a net profit margin of about 7%, with ROA approximately 4.5%, and ROE around 20%, indicating effective utilization of equity but moderate profit margins. The debt-to-equity ratio of roughly 1.7 highlighted significant leverage, while an interest coverage ratio near 8 suggested adequate capacity to fulfill interest obligations.

In comparison, Airbus's 2018 financial data presented a current ratio of 1.05 and a quick ratio of approximately 0.7, similar to Boeing, indicating comparable short-term liquidity. Airbus demonstrated a slightly higher net profit margin at 7.5%, with an ROA of about 4.8%, and an ROE close to 25%. Its debt-to-equity ratio was slightly lower at around 1.4, signaling somewhat lower leverage, and its interest coverage ratio was slightly superior, near 9.5, reflecting strong ability to service debt.

Comparing these ratios reveals that both companies maintain sound financial health, though Boeing exhibits higher leverage, increasing its financial risk especially if defense subsidies decline. The similar liquidity ratios suggest both could meet short-term obligations, but Boeing’s reliance on increased debt levels amplifies concern. Conversely, Airbus's marginally better profitability ratios and lower leverage underscore potentially greater resilience should government or defense contract funding decrease. The higher ROE for Airbus also indicates more efficient equity use, which could translate into better long-term stability.

Analyzing these ratios holistically, it appears that Airbus might be better positioned to withstand reductions in defense spending. Boeing’s significant leverage could become a liability if defense contracts diminish, impacting cash flow and solvency. Conversely, Airbus's slightly more conservative financial structure, combined with robust profitability metrics, suggests a greater capacity for sustained operation without heavy reliance on government defense contracts. Nonetheless, Boeing’s strategic diversification into commercial aerospace offers some buffer against defense sector vulnerabilities. The decision to shift investment should consider these factors; however, based on current ratios, Airbus presents a more stable outlook in a hypothetical scenario involving defense funding cuts.

In conclusion, while both Boeing and Airbus exhibit strong financial health as of 2018, the comparative analysis of their ratios indicates Airbus's slightly better position to endure potential declines in defense-related revenue streams. Investors should consider the higher leverage and associated risks with Boeing against Airbus’s relatively conservative profile. Therefore, a cautious repositioning of funds toward Airbus could mitigate risks posed by upcoming political and defense industry uncertainties, ensuring portfolio stability.

References

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