Comparative analysis of Airbus and Boeing 2012

Return on Capital Employed (ROCE) allows a firm to identify the percentage of profit derived from the capital that was used to run the business. Therefore, ROCE can be used to assess the profitability of the business in a given year. Studies of the Airbus Group’s annual report and financial statements therein, have revealed that the company has investments in associates, mainly in Dassault Aviation (46.32% in December 2012).

Associates are companies in which a firm has less than 50% shares in and are therefore not under the control of that firm. Nonetheless, that firm which in this case is Airbus receives income from its Associates. However, this income from associates need to be deduced from Airbus’ operating profit as it is not generated using the Airbus Group’s capital employed. Subsequently, investments in associates are deducted from capital employed.

2. Profitability (Gross Profit Margin) = 100

Year 2012| Year 2011|

= 14%| = 13.9%|

Gross profit margin represents the percentage of each dollar of Airbus’ revenue that is available after accounting for the cost of goods sold. The values for year 2011 as well as 2012 show a consistent GP margin with a slight improvement in 2012 which suggests that profitability has increased by a very small margin. Revenues were higher in 2012 due to increases in sales of commercial aircrafts, particularly the A330 which received 80 gross orders in that year.

Although it is accepted that higher GP margins are favorable for a business, it is important to compare the values with that of other companies within the industry to identify norms. This comparison will be made with the Boeing company in preceding sections of this report.

3. Current Ratio (Liquidity) = 100

Year 2012| Year 2011|

= 0.93 : 1| = 0.91 : 1|

This liquidity ratio demonstrates a company’s ability to pay its short term liabilities. It is commonly accepted that a higher ratio is more favorable while a value less than 1 indicated that the company in question will be unable to pay off short term obligations if they came due. However, given the industry norm of between 1.20 – 1.30, Airbus’ current ratio value is indicative of a low efficiency in the company’s operating cycle.

It could be explained by the increased competition Airbus has been facing in the recent years, especially from its closest rival Boeing. Commercial aircraft orders was the majority contributor to sales of both Airbus and Boeing with Boeing reporting 1,339 gross orders 2012 and Airbus reporting only 833 orders in the same year.

4. Inventory Turnover Ratio (Efficiency) =

Year 2012| Year 2011|

= 2 Times| = 2 Times|

Showing how many times average inventory is sold during a period, the stock turnover ratio is used to assess how effectively inventory is managed. This ratio is highly dependent on the nature of the industry and ratios of a company in the garment industry cannot be compared with one in the car or aerospace industry. This is due to the higher number of times garments are sold in comparison to aircrafts.

Therefore, given the industry in which Airbus operates in, it is within the industry norms as the Aircraft, Aerospace & Defense industry faces low inventory turnover due to the nature of the products which are not fast moving capital goods. Values are have been constant between 2011 and 2012.

5. Debt to Equity Ratio =

Year 2012| Year 2011|

= 0.33| = 0.41|

Debt to equity ratio is used to measure the relationship between the capital contributed by creditors and that which is contributed by shareholders. The ratio values for Airbus have improved from 2011 to 2012 and shows that for every dollar of the company owned by shareholders, the company owes 0.33 dollars to creditors.

A lower debt to equity ratio is mostly favoured by companies as it demonstrates a better ability to generate sufficient cash to satisfy debt obligations. The values for Airbus are within the industry norms which is on average 0.45 (NYSE).

6. Earnings per Share =

Year 2012| Year 2011|

= €1.50 = $2.04| = €1.27 = $1.73|

Earnings per share ratio are commonly used by shareholders and prospective shareholders to assess the profitability of a company as it measures the amount of net income earned per share. Higher EPS values are always more favorable than lower values because this means that the company has more profits to distribute to its shareholders. EPS values improved in 2012 for Airbus, led by a 15% increase in revenue in comparison to 2011.

5.2 Boeing

1. ROCE = 100

Year 2012| Year 2011|

= 38.5%| = 36.6%|

Return on Capital Employed (ROCE) shows the profit made by the company for all investors relative to the book value of their investments. The ROCE values for Boeing are much higher than Airbus which was 15% in 2012 and 12.8% in 2011. For decades, Airbus and Boeing have remained the two largest and most competitive companies in the global Aircraft, Aerospace & Defense industry, particularly in the commercial airline sector.

In 2012, information released by both companies revealed that Boeing overtook its rival Airbus with 601 commercial aircrafts delivered in 2012 as opposed to Airbus’ 588 aircrafts. Boeing’s delivery of 601 aircrafts in 2012 was the highest recorded in a single year since 1999.

2. Profitability (Gross Profit Margin) = 100

Year 2012| Year 2011|

= 16%| = 19%|

The gross profit margin for Boeing is higher than Airbus (14%) for both 2011 and 2012. Although these values are still below 20%, it is within the industry norms of between 17-18% (csimarket.com). Cost of sales for the Aircraft, Aerospace & Defense industry is higher than most other capital goods industries due to the high cost of raw materials and manufacturing costs.

3. Current Ratio (Liquidity) = 100

Year 2012| Year 2011|

= 1.27 : 1| = 1.21 : 1|

Given the industry norm of between 1.20 – 1.30 for current ratio values and in comparison with Airbus, Boeing has improved liquidity in the year 2012. This then means that the company is in a better position to pay its debts. However, given the long inventory turnover and high waiting time on receivables, liquidity for the Aircraft, Aerospace & Defense industry is still lower than most other industries. Inventories increased from 32,240 in 2011 to 37,751 in 2012 for Boeing, due to increased orders and contributed positively to current assets.

4. Stock Turnover Ratio (Efficiency) =

Year 2012| Year 2011|

= 2 Times| = 2 Times |

The stock turnover ratio for Boeing is consistent with Airbus and the industry norms. Inventory is sold and replaced 2 times a year which is reasonable for the Aircraft, Aerospace & Defense industry.

5. Debt to Equity Ratio =

Year 2012| Year 2011|

= 1.77| = 3.52|

Although debt to equity ratio was a high value of 3.52 in 2011, Boeing has been able to reduce it to 1.77 in 2012, due to a reduction in long term debt compared to the previous year. Consolidated totals of unsecured debt securities reduced from $2186 (million) in 2011 to $ 1224 (million) in 2012 which decreases gearing and lowers risk for the business.

6. Earnings per Share =

Year 2012| Year 2011|

= $5.16| = $5.39|

EPS values decreased from 5.39 in 2012 to 5.16 in 2011 due to increased tax and pension expenses in 2011. The pension contributions include compulsory amounts for the Employee Retirement Income Security Act as well as discretionary contributions to improve the plans’ funded status. (Airbus AR 2012, p 14).

However, the EPS values for Boeing have been well above the industry norm and were 153% above the EPS for Airbus in 2012. Investor confidence in Boeing is thus strengthened by the higher EPS values as opposed to its competitors. Aggressive selling of commercial aircrafts, in particular the 777 Model as well as the delivery of a record 46 Dreamliners to eight customers helped increase earnings.