Boeing Case Study

Boeing

Boeing (stock symbol BA) is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems (Morningstar 2013). I will be looking at whether or not this companies stock should be a bought or sold, with analysis of the Liquidity, Profitability, and Solvency of the company over a three year period 2009-2011. The company's principle clients are the U.S. government and commercial airlines. Unlike Lockheed, one of its largest and closest competitors, Boeing is not as dependent on government spending. With the 1997 merger of Boeing and McDonnell Douglas, the company further enhanced its presence in the commercial aviation arena. Today, Boeing has nearly 12,000 commercial jetliners in service worldwide, which is roughly 75 percent of the world fleet. The company has more than 170,000 employees worldwide and reported revenues of nearly $69 billion in 2011 (Boeing Website 2013).

Financially, the company is divided into two main segments:

* Commercial Jetliners

* Defense, space and security systems

LIQUIDITY

Demand in the airline industry is driven by the government's military spending and the overall global economic climate, which affects airline traffic and demand for new commercial aircrafts. Despite uncertainties, Boeing finished 2011 with record revenues of $68.7 billion and net earnings equaled an all-time high at more than $4 billion.

Boeing's profitability depends on technical expertise and the ability to accurately price long-term contracts. Revenues are generally higher in the second half of the year after the new federal budget is approved. Cash flow and overall liquidity has not been an issue as contracts are paid based on percentage completion and cost-plus. In addition, manufacturers are paid as work is completed and final products are delivered on an agreed-upon schedule. Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. In this section, the discussion will focus on all relations with relation to Boeing's stock liquidity (Walther 2012).

The working capital ratio measures the difference between the total current assets and current liabilities. My analysis of Boeing's working capital ratio has shown a steady increase from $2.4 million in 2009 to $8.5 million in 2011. This is a positive indicator that the company has the ability to pay it liabilities. Boeing has a massive $374 billion backlog, amounting to five times 2011 sales. Such strong revenue visibility should allow the firm to adjust production rates and ride out economic downturns (Boeing website 2012).

The current ratio takes Boeing's current assets and divides it by their current liabilities. Boeing has seen an increase in their current ratio over the last three years. In 2009, Boeing's current ratio was 1.07. Essentially meaning that for every dollar of short-term liabilities that was owed by the company, it had $1.07 of liquid assets available. In 2010, Boeing's current ratio was 1.15 or $1.15 of liquid assets available. In 2011, Boeing's current ratio was 1.20, or $1.20 of liquid assets available. Boeing was slightly better than their competitor Lockheed Martin, who had a 2011 current ratio of 1.16, or $1.16 of liquid assets available. While Boeing is showing a positive trend with this ratio, it is still below the 1.3 industry ratio. Boeing must continue to improve this ratio in order to reduce their short and long-term credit risk rating. A reduction in their credit risk is a good indicator to creditors that they will most likely be paid back by Boeing.

The inventory turnover ratio measures the cost of goods sold divided by average inventory. This ratio and the days in inventory ratio, is a good aid in helping analyst and investors understand the time required for Boeing's inventory to be sold, or for their receivables to be earned. This ratio highlights how fast Boeing may or may not be selling goods to their customers. The ratio indicates the numbers of times within a year that Boeing's inventory was completely sold, and is calculated by dividing the cost of goods sold to the customer by the average ending value of the inventory over the past year (Walther 2012). Boeing's inventory turnover ratio decreased in the past 3 years. In 2009, the inventory ratio was 3.47 and the average age of each inventory was about 105 days. In 2010, the inventory ratio was 2.51 and an average age of each inventory was about 145 days. In 2011, the inventory ratio was 1.97 and an average age of each inventory was about 184 days. In 2011, Lockheed Martin's inventory ratio was 17.67 and an average age of each inventory was about 21 days. Boeing figures are much lower than the industry standards, which also declined from 7.40 to 5.91 for the same years (Boeing website 2012). This implies that the company may have had poor sales, which contributed to the excess inventory that is being accounted for with the increase in the days in inventory figures.

The receivables turnover ratio, and its closely related calculation of average collection period, can be used to evaluate the liquidity of Boeing's receivables. The ratio measures the average number of times receivables have been collected within the year, and is calculated by dividing net credit sales (which are net sales less net cash sales) by the average gross accounts receivable over the past year (Principles of Accounting II 2012). Boeing Co.'s receivables turnover improved from 2009 to 2011. In 2009, receivables were collected about 13.4 times per year with an average collection period for receivables being around 27 days. In 2010, receivables were collected about 11.9 times per year with an average collection period for receivables being around 31 days. In 2011, receivables were collected about 12.9 times per year with an average collection period for receivables being around 28 days. In 2011, Boeing's competitor Lockheed Martin's receivables were collected about 7.9 times per year with the average collection period for receivables being around 46 days. Boeing's receivables turnover ratio numbers are good indicators that the company has had better performance in collecting on debts that are owed to them. Conclusively, the liquidity ratios indicate that Boeing is mainly trending in the right direction and that it would be a good idea to loan money to them in the short-term.

PROFITABILITY

Boeing's earnings per share have been consistent over the three-year period. The earnings per share are relatively neutral and holding steady. This indicates that Boeing