Financial Statement Analysis - BAE Systems and Lockhead Martin - Research Paper Example

Ratio Analysis Executive Summary This report looks at an analysis of the financial ments for two companies in the Military defense i.e. BAE systems and Lockhead Martin. Ratio analysis is undertaken in order to interpret the financial information from the creditors and investors view. A systematic approach is brought through the calculated ratios where liquidity, solvency and profitability index are summarized and recommendation made on the best performing company. At the end of the report the learner achieves his intended purposes of the project. Part one: Calculation of Ratios: The purpose of this research is that at the end of the report the learner will be able to Develop online business research skills., Develop timely work patterns; adherence to assigned work schedule., Gain familiarity with real annual reports for companies in a chosen industry., Identify financial information needed to compute selected ratios from real annual reports , Calculate liquidity, solvency and profitability ratios for companies in a chosen industry., Interpret or otherwise explain the meaning of the selected ratios, Assess and describe the relative merits of each company for investors and creditors respectively., Develop interpersonal, collaborative, research skills and report writing skills. RATIO ANALYSIS For LOCKHEAD MARTIN Current Ratio = Total Current Assets/ Total Current Liabilities 1.16 1.21 1.16 1.19 Acid Test = Total quick assets/ Total current liabilities 0.96 1.06 0.97 1.00 (Total quick asset = total current assets minus inventory) 11613.00 12880.00 11728.00 12466.00 Total ASSET Turnover (TAT)= total assets/ inventory 15.28 20.23 16.05 16.11 Equity ratio = total owners equity/ total assets 0.03 0.08 0.09 0.10 Debt ratio/Debt to asset Ratio= total liabilities/ total assets 0.97 0.92 0.91 0.90 Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth 36.87 11.30 9.86 8.67 Gross Profit Margins (GPM) = (Net gross Profit / Net Sales) x 100 7.97 8.29 9.45 11.06 Net Profit Margin (NPM)= (Net profit/net sales)*100 5.71 6.30 6.78 7.78 Return on Assets (ROA) = (Net Profit / Total Assets) x 100 7.00 7.95 8.32 8.77 Return on Equity= (Net Profit / Net Worth or Owners Equity) x 100 265.23 97.79 90.42 84.86 RATIO ANALYSIS For BAE systems Current Ratio = Total Current Assets/ Total Current Liabilities 0.62 0.59 0.65 Acid Test = Total quick assets/ Total current liabilities 0.55 0.53 0.60 (Total quick asset = total current assets minus inventory) 5665.00 5945.00 6972.00 Total ASSET Turnover (TAT)= total assets/ inventory 32.26 33.23 37.31 Equity ratio = total owners’ equity/ total assets 0.18 0.23 0.22 Debt ratio/Debt to asset Ratio= total liabilities/ total assets 0.82 0.77 0.78 Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth 4.45 3.43 3.51 Gross Profit Margins (GPM) = (Net gross Profit / Net Sales) x 100 67.58 61.10 64.78 Net Profit Margin (NPM)= (Net profit/net sales)*100 6.98 5.01 -0.33 Return on Assets (ROA) = (Net Profit / Total Assets) x 100 5.37 4.54 -0.28 Return on Equity= (Net Profit / Net Worth or Owners Equity) x 100 29.25 20.10 -1.26 Summary of ratios Lockhead Martin Liquidity Ratios 2011 2010 2009 2008 Current Ratio 1.16 1.21 1.16 1.19 Acid Test 0.96 1.06 0.97 1.00 Asset Turnover 15.28 20.23 16.05 16.11 Solvency Ratios 2011 2010 2009 2008 Debt Ratio 0.97 0.92 0.91 0.90 Equity Ratio 0.03 0.08 0.09 0.10 Debt to Equity 36.87 11.30 9.86 8.67 Profitability Ratios 2011 2010 2009 2008 ROA 7.00 7.95 8.32 8.77 Profit Margin 5.71 6.30 6.78 7.78 Gross Margin 7.97 8.29 9.45 11.06 ROE 265.23 97.79 90.42 84.86 Analysis and Interpretation of ratios The liquidity ratio for Lockhead Martin has declined from 2008 to 2009 then improves in 2010 but then again it declines. The solvency ratio shows an improvement for the four years for the debt ratio and debt to equity; however the equity ratio has declined for the four years. The profitability ratio has declined from 2008 to 2011 but the ROE has tremendous improved over the four the years. Liquidity ratio for Lockhead Martin is relatively good for the four years. The ratio is recommendable when it is at least above one. The significance behind this ratio is that the creditors can place reliance on the company to be paid regularly. The Company has a liquidity of above one (+1) hence it can easily get liquid cash to settle its debts. Cash is not tied up in fixed assets that require further process for disposal. An improvement in the debt to equity or the solvency ratio shows that the company is going into debts. The four years have an increase in the debt ratio and debt to equity ratio and a decrease in the equity ratio. The Company is relying on debts to fund its activities. Nonetheless the ratio should be less than one ( Read More