Determining Profitability of Investments in the Boeing Company
As for prospective stockholders, the outlook is slightly less than average with respect to overall turnover, but dividends are relatively large compared to the industry average. While this isn’t by itself enough to warrant immediate investment in Boeing stock, this information, combined with recent news and Boeing’s future plans, indicates that stable, longer term investments should be safe and profitable for stockholders. Yes, it is advised that one become an owner by purchasing stock.
Over this past fiscal year, the company delivered 285 airplanes, and captured 277 gross orders from airlines. It also set two notable milestones, delivering its 1500th 737NG and 500th 777 airplanes to customers. Its most recent investment has been in the creation of the new 787 (formerly the 7E7), which has acquired 186 total orders and commitments, 126 of them in 2004.
Other recent business news and ventures from Boeing include its Capital Corporation, which provides financing solutions to Boeing customers. Over the last year, that division has increased lease rates, seen a 100% increase in income before taxes, and sold its Commercial Financing Services (CFS) arm for $2 billion. Another venture of the company is Connexion by Boeing SM, which provides in-flight broadband Internet and intranet service to commercial flight passengers. This service obtained 90 new orders in 2004 from 3 airlines, and has expanded its market to include the commercial maritime flight market.
To get a better understanding of the success or failure of the Boeing Company, one can analyze various liquidity, solvency, and profitability ratios. The first two types of ratios can be useful for individuals deciding whether to loan money to the company. Liquidity is the ability of a company to pay off its short-term obligations, usually due within a year. Solvency measures the long-term abilities of the company to pay of its loans, as well as the interest as it’s incurred. The third type of ratio, profitability, may be useful for prospective owners wishing to purchase common stock. Profitability is the ability of a company to overcome its expenses by increasing revenue.
For the prospective short-term creditor, various liquidity ratios can be examined and compared to competitors’ values, to get a feel for Boeing’s ability to pay back maturing loans and be ready for sudden cash needs. The most basic liquidity comparison is a calculation of Boeing’s working capital, which is simply the difference between the company’s current assets and current liabilities. Current assets include cash and other assets which can most quickly be turned into cash, called liquid assets. Current liabilities are those which are expected to be paid back within the year or operating cycle of the company. Boeing’s working capital for 2004 was $-5.7 billion, indicating that short-term creditors are less likely to be paid, although working capital isn’t necessarily a dependable indicator of liquidity.
Another liquidity ratio, the current ratio, is calculated by dividing Boeing’s current assets by its liabilities. For 2004, Boeing’s current ratio was 0.72, indicating that for every dollar of short-term liabilities owed by Boeing, it has 72 cents of liquid assets available.
The current cash debt coverage ratio indicates Boeing’s ability to generate cash to satisfy its short-term obligations. This ratio is determined by dividing the amount of cash provided by business operations by the average current liabilities over the past two years. For Boeing, this value was found to be 0.18. Values below 0.40 are generally considered to be causes for further investigation into liquidity, and such will be necessary for this company.
Turnover ratios can aid in understanding the time required for such things as inventory to be sold, or receivables to be earned. The inventory turnover ratio, and the closely related calculation of days in inventory, indicate the speed with which a company sells its goods to 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. In 2004, the inventory turnover ratio was 9.32, and the average age of each inventory was about 39 days. This can be compared with another eminent airplane manufacturer, Northrop Grumman, which deals more in sales to the military and government. That company’s inventory turned over nearly 23 times in 2004, with an average of 16 days in inventory.
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. For 2004, receivables were collected about 7.7 times, implying that the average collection period for receivables was nearly 48 days. This was slightly better than competitor Northrop Grumman’s values of 7.2 receivable turnovers, with an average collection period of 50 days.
For the most part, these liquidity ratios seem to indicate that it may not be a good idea to loan money to the Boeing Company for the short-term future. Current liabilities are relatively much greater than current assets, and the inventory turnover ratio indicates that Boeing is taking much longer to sell its products than, for example, competitor Northrop Grumman.
The prospective long-term creditor can utilize various solvency ratios to determine the long-term survivability of Boeing. One source of information used to establish long-term debt-paying ability is the debt to total assets ratio, which measures the percentage of assets financed by creditors, rather than stockholders, and is calculated by dividing the total liabilities of the company by its total assets. Larger values indicate a riskier company from the perspective of a creditor, as the chances of being paid back decrease. For Boeing, its 2004 debt to total assets ratio was 0.79, implying that 79 cents of every dollar invested in assets by Boeing was provided by the company’s creditors. This high ratio should unsettling for prospective creditors, especially when compared with that of Northrop Grumman, which had a debt to total assets ratio of 0.49 in 2004. It may still be possible for the company to support these high ratios for extended periods.
Another useful solvency ratio is the cash debt coverage ratio, which indicates Boeing’s ability to generate the cash necessary to meet its long-term needs. This is calculated by dividing the cash providing by the company’s business operations by its average total liabilities over the past year. Values below 0.20 generally indicate the need for further investigation into the company’s solvency. In 2004, Boeing’s ratio was 0.07. This may be standard for the industry, as Northrop Grumman’s was 0.12.
The times interest earned ratio indicates Boeing’s ability to make interest payments when they are due. It is found by dividing income before income tax and interest expenses (a value which better indicates the amount available to pay interest expense) by the interest expense. For Boeing, this ratio was calculated to be 3.94, which is slightly lower than Northrop Grumman’s 4.7.
A final calculation useful for determining solvency is the free cash flow calculation, which provides insight into Boeing’s cash-generating ability, describing the cash remaining from business operations after adjustments for capital expenditures and dividends have been made. In 2004, Boeing’s free cash flow was $1.83 billion, compared to $2.93 billion for Northrop Grumman. Combining the low numbers for Boeing’s time interest earned ratio and free cash flow, with its relatively large debt to total assets ratio, and relatively low cash debt coverage ratio, one should be left with the impression that the Boeing company may not be a good choice for long-term creditors.
There are also several ratios which help determine the profitability of Boeing for stockholders. The earnings per share ratio measures the net amount of income earned on each share of common stock issued to the stockholder. It is calculated by dividing the net income less preferred stock dividends by the average number of common shares outstanding over the past year. The value for Boeing was about 2.3, which is much higher than the industry average of 0.9, but is not the highest in the industry.
Another useful profitability ratio is the price-earnings ratio, which measures the ratio of the current market price of each share of common stock to the earnings per share ratio mentioned above. This is calculated by dividing the stock price per share by the earnings per share ratio. In 2004, this value for Boeing was 25.8, higher than others in the industry. This indicates that investors think current earning levels with persist or increase for Boeing, compared to other companies in the industry, implying that long-term investments in stock may be better.
The gross profit rate expresses as a percentage the excess of net sales divided by the cost of goods sold to customers. It is found by dividing the gross profit by the net sales. For Boeing, it was found to be 15% in 2004, which is only slightly less than the industry average of 16.7%. A related calculation is the profit margin ratio, which measures as a percentage how much of net income results from each dollar of sales. Unlike the gross profit rate, which measures the margin by which the selling price of goods exceeds the cost of goods sold, the profit margin ratio measures how much of the selling price covers all expenses incurred by Boeing. The profit margin ratio is calculated by dividing the net income by the net sales in 2004. For Boeing, this was found to be 3.57%, which is slightly lower than industry average of 4.84%.
The return on assets ratio is an overall measure of profitability, calculated by dividing the company’s net income by its average total assets for the past year. It indicates how much each dollar of investment as assets generates net income. For Boeing, this value was 3.5%, also slightly less than the industry average of 4.97%. Another useful profitability ratio is the asset turnover ratio, which indicates the efficiency of a company’s asset use, and is calculated by dividing net sales by average total assets. This was 98% for Boeing in 2005, which is also average for the industry.
Two more closely related ratios are the payout ratio, and the return on common stockholder’s equity ratio, both useful for measuring corporate performance. The payout ratio measures the percentage of earnings distributed as dividends to stockholders. It is calculated by dividing amount of cash dividends declared on common stock by the company’s net income. For Boeing in 2004, this was 34.6%, higher than the industry average of 30.4%. The return on common stockholder’s equity ratio measures profitability from a stockholder’s viewpoint. It shows the translation from common stock investment into net income earned, and is calculated by dividing the net income less preferred stock dividends by the average common stockholders’ equity. For Boeing, this was found to be 37% in 2004.
While only the payout ratio is larger than average, the other profitability ratios are not much lower than the average for the industry, indicating that long-term investment would be a safe risk to take, and a possibly profitable one, considering Boeing’s future plans, including the release of the 787 and their Connectix by Boeing internet broadband service.
