Financial Analysis of BAE Systems
Introduction
A financial report aims at showing the profitability and cash flow of the company. This information is used by the decisionmaker of the organization to make an appropriate decision regarding the positioning and to distribute resources accordingto (Williams and Dobelman 2017). At a more advanced level, financial reports aim at targeting different aspects of financial statements. The income statement, which is a crucial part in determining the profitability of a company gives an idea about various sources through which a company is making a profit.
Moreover, it uncovers the number of sales made by the organization, and various types of expenses depending upon how expenses are affecting the profitability(Vogel 2016). This project aims at analyzing the financial statement of “BAE Systems”. The company is situated in London with its share open for any investor who wants to buy. BAE System has many subdivision or subsidiaries that have the same kind of work delegated throughout various division. BAE System is a giant producer of various defence and aircraft products such as avionics, missiles and other aerospace and defence related products(Schroeder, Clark and Cathey 2019). BAE Systems create and develop fighter aircraft with the association of several other American and European aerospace companies. The company at present is making a huge amount of profit by providing solutions in the field of defence and aerospace services.
Financial Analysis
The main objective of this project is to produce a financial analysis of BAE Systems Inc., a London based defence and aerospace solution company(Dewachter et al. 2015). This report would also show the market position and demand for the company's products through the applicable valuation method. The financial report focuses on assessing the financial stability of a company of ongoing period and financial productivity for a speculated period(Post and Byron 2015). A financial report provides an assumption regarding the financial stability of a company after considering various aspects of industry knowledge. Financial analysis is a helpful method through which various financial operationsare thoroughly analyzed. Thisanalysis helps to retain the stability of a company for the long haul and thus helps in bridging the gap between implementation and execution(Grennan and Michaely 2018). By proper analysis and calculation of liabilities, assets and other elements of financial valuation, decisionmakers and investors and predict the future phases of the company. BAE Systems produces annual financial reports on its website using which various financial calculations are done for the present to calculate its worthiness in the current market.
Profitability Ratios
There are various methods to conduct the financial analysis of a company. One of the methods is the profitability ratio. These are various sets of calculating methods to assess and evaluate the financial status of a company(Kallala et al. 2015). Through the calculation of profitability ratios, the investors get an idea about whether or not they should gamble their money on buying the company's share to obtain a high return on investment. The belowcalculated ratios are some of the important calculations on which the investor's investing decision depend upon:
Gross Profit Margin:
It gives the analysis of how much profit a company is generating upon the cost incurred in the manufacturing of those products(de Assis et al. 2017). These costs are termed and prime cost which, to put in simple words in the amount of money that a company invests on building a product(Alexander et al. 2017). Gross Profit ratio entails the profit earned on every single unit that is sold. To calculate the gross profit margin, first, the entire profit for the company is calculated and then the amount is subtracted from the cost of goods sold. Then it is divided with the total sales, and a percentage of the obtain result is estimated. Gross profit margin of BAE Systems for the year ended in 2018 is as follows:
Gross Profit Margin(%) 

Sales for the year 
22452.67 
Less: Cost of Goods Sold 
7821.928 
Gross Profit 
14630.74 
Gross Profit Margin(%) 
65.16259 
As it is observes that the Gross Profit Margin for BAE Systems is not competitive and is considered as average in terms of gaining profit. There are many other companies out there who provide the same kind of products to its target market, and thus the competition is huge when it comes to selling their products(Riley et al. 2016). Therefore, the G.P is higher than many of its competition that is providing similar services to a certain industry. BAE Systems will need to work even harder if it wants to increase the gross profit margin shortly.
Net Profit Margin Ratio:
Net gain or profit is obtained by subtracting all kinds of expenditure that are incurred during a certain period form the total or gross profit that a company makes in that stipulated period (Pierson et al. 2015). The amount thus obtained, is then divided from the total sales of the company to obtain the net Profit Margin Proportion.
Net Profit Margin 

Net Profit for the year 
1334.8 
Sales 
22452.67 
Net Profit Margin 
5.944949977 
As observed from the above calculation, That NPM ratio is much lower than the GPM. This is because there are several operating expenses that BAE Systems has to sustain to keep the business running(Maina and Sakwa 2017). The higher the NPM of a company, the better it would have a chance of survival and expanding its potential. Therefore, if a BAE Systems wants to earn more profit, it would have to take measure to cut down the expenses which are required to run the business. The company's profitability would considerably increase as are plans to cut down on expenses.
Solvency or Liquidity Ratio:
Solvency ratio is used to estimate the stability and power of the company for a short period to repay its debt. It is calculated by dividing the current assets and current liabilities of the company(Nesticò and Pipolo 2015). The total amount of current asset is compared with the current liabilities, and a ratio is created. The higher the ratio. The more power a company will have in repaying its debt. Here we would be calculated the liquidity ratio of BAE Systems to assess its solvency in the short run.
Solvency Ratio 

Current Asset 
12784.04 
Current Liabilities 
12422.98 
Solvency Ratio 
1.02906388 
As it is indicated that from the above calculation that the solvency ratio of BAE Systems is more than 1. According to some experts, if the ratio is more than 1, it indicates that the organization is abled enough to fulfill its short term debts or obligation and is working efficiently and productively(Afonso, Baxa and Slavík 2018). On the other hand, if the current ratio was too high, it would have indicated that the company is not utilizing its resourced properly. Therefore the solvency ratio shows that BAE Systems is working efficiently and is capable of meeting its debt. Thus it can be concluded that the solvency rate of BAE Systems is in a good position at the moment.
Acid Test
Acid Test id the advanced level of solvency ratio, which tends to exclude all the inventories from the total current asset to calculate the ratio(Karna, Richter and Riesenkampff 2016). This is because inventory cannot always be immediately sold to cash it out to repay its debt. Here, the Acid test of BAE Systems is conducted to find out its actual liquidity capability.
Current Assets 
12784.04 
Less : Inventory 
1033.135 
Net Current Asset 
11750.91 
Acid Test 

Net Asset 
11750.91 
Divide : Current Liabilities 
12422.98 
Acid Test Value 
0.945901 
An Ideal Acid Value should be equal to or around 1. Therefore Acid Test would keep on reducing if BAE Systems adds on more inventory. Therefore, ifBAE Systems wants to increase its Acid Test Value, it needs to roll in more cash into the business to enable itself to meet its short term obligation more efficiently.
Equity Ratio
Equity proportionhighlight the amount of money that the business is utilizing from a borrowed source to run its business. Equity ratio should always be less as it would indicate a good financial
Stability and little use of borrowed money in the business(Chen, Duan and Zhang 2015). Here, the equity ratio of BAE Systems of BAE Systems will be assessed to indicate its stability without borrowed money.
Equity Ratio (%) 

Long term debt 
4690.487 
Divide : long term debt+ equity 
12189.39 
Equity Ratio (%) 
38.48007 
Therefore from the above calculation, it can be estimated that BAE Systems uses 38% of its capital from borrowed sources and therefore becomes liable to repay the money. It needs to cut down the amount borrowed, as it would create the burden of repayment to the shareholders with interest, which would reduce the profit of the company(Chatterton et al. 2018).
Limitations of the ration Analysis conducted for BAE Systems
Although Ratio analysis is an important method to conduct financial analysis of the company, it is not free of demerits which are as follows:
Company Valuation 
AssetBased Approach – The most commonly used valuation calculation is Asset Based method. In this method, the book value of all the various stock, inventory and debts and liabilities in the balance sheet of a company is compared and adjusted concerning its current value in the market(Wagner et al. 2015). Under this method, all the initial are updated as per the current market position of those liabilities and asset. The assetbased valuation of BAE System is calculated an under:
Assets based Valuations 

2018 
2017 
2016 
2015 

NonCurrent assets 
15170 
14738 
15947 
13751 
Current Assets 
9576 
7715 
7029 
6332 
Total Assets 
24746 
22453 
22976 
20083 
Less: liabilities 

Current Liabilities 
9307 
7106 
7299 
7153 
NonCurrent Liabilities 
9821 
10563 
12213 
9928 
Total Liabilities 
19128 
17669 
19512 
17081 
Net Worth of Company 
5618 
4784 
3464 
3002 
Trend 
17.4% 
38.1% 
15.4% 
Dividend Valuation Method – Dividend Valuation Method helps to calculate the value of all the price of its current open share, and whether or not its worth is equal to all the dividend that needs to be paid shortly to all the shareholder when the price is discounted to the current value. It focuses on the assessment of the true and fair value of stock irrespective of its value in the current market scenario and considers the dividend payment element and expected return on investment. The Dividend Valuation Model of BAE Systems is calculated below.
Dividend Valuation Model 

CAPM = 

Beta: 
0.49 
RiskFree rate 
2.10% 
market Risk Premium ( Return On equity) 
23.98% 
CAPM 
0.128212 
Here the CAPM value came to be 12.82% which is considered to be good concerning the returns on investment. Therefore a shareholder can choose to gamble by buying the shares of BEA Systems, which would yield a high dividend rate.
Price to Earnings Ratio:Price to earnings ratio helps in determining the price of a share based on the profit that a firm is earning per unit of that share. The price to earnings share is also called the earnings multiples or price multiple (Shahbaz et al. 2017). A high P/E ratio suggests that the shares of a firm are highly underrated or the shareholders are expecting a high return on investment. Companies who do not have sufficient earning or are running at a loss do not have this ratio. This ratio of BAE Systems is as follows:
Price to Earnings Ratio 
2018 
2017 
2016 
2015 
Price 
493.7 
554.4 
599 
499.6 
Earnings per Share 
0.31 
0.27 
0.29 
0.29 
Price to Earnings Ratio 
1592.580645 
2053.333333 
2065.517241 
1722.758621 
From the above table, it can be assessed that the earning that the P/E ratio has significantly decreased as compared to the previous years. This indicated that the price of the share of BAE Systems is decreasing over time, and as a result, the value of the share is also decreasing.
Methodology:
The techniques and method used while doing this project are an indication of how well or bad BAE System is operating as far as the financial stability of the company is concerned. The project entails at showcasing the various aspect of financial research and calculation to bring out the worthiness the company. The methods for the financial analysis of BAE Systems Includes calculation of various elements of ratio analysis and determining various aspects of company valuation for the calculation of net worth of the company (Chang et al. 2016). The various determinants used while the calculation of the financial statement can be used to estimate the net worth of the company, which should be more than 10 Billion Dollars, given the financial stability the company has constantly maintained and the total assets and inventory that the company owns. BAE Systems has been one of the dominant suppliers of products relating to defence and aerospace. With the above estimated financial analysis of the company in this project, it can be assumed that the BAE System will operate for a long time with stable profitability.
Capital Structure:
Amount of liabilities for Absolute PLC – Cost of debt implies the amount of interest that a company has to repay on its various borrowed capital such as loans, bonds and mortgages. The cost of debt is a type of expense that is an additional liability that comes when they decide to borrow money for their business(Kostyukova 2017). As interest expenditure is deducted from the book value, it is essential to deduct it after charging the taxes. Cost of debt, together with the equity makes firm's cost of capital.
Cost of debt can imply the overall financial stability and health of the company and can calculate the overall credit score or the strength of the firm to repay its loan. The amount of liability for Absolute PLC is calculated as under:
Cost of Debt 

Interest rate 
8% 
tax rate 
19% 
COST OF DEBT = 
6.48% 
Cost of Debt for Absolute PLC
Cost of Equity:
It represents interest, an investor expects from the investment to be pursued by the company. It is the rate of interest that is paid by a firm to its investors. The cost of equity is an expense of the firm which needs to be paid when the company makes a profit using the shareholder's money or just profit in general. All the shareholders become eligible to get a certain part of the profit of the organization, which is decided by calculating the Equity cost. The Equity Cost for Absolute PLC is calculated as under:
Calculation of Cost of Equity 

Dividend Growth Model 

Proposed DIVIDEND (D1) 
0.315 
Current Price (p0) 
3.2 
Growth (G) 
5% 
KE = 
14.8% 
Cost of Equity
Weighted Average Cost of Capital:
This is the method of calculating the average rate of interest that a firm needs to pay to its shareholder or who have invested in the shares of the company. It is also known as the company's Capital Cost. This essentially represents the minimum return that a company should be earning on its asset to satisfy its shareholder, The WACC of Average Plc is estimated below:
WACC 

Finance 
Amount 
Rate 
percentage 
WACC 
Equity 
300 
14.8% 
24% 
3.6% 
Reserve 
150 
14.8% 
12% 
1.8% 
Bond 
800 
6.48% 
64% 
4.1% 
Total 
1250 
100% 
9.5% 
Difficulties while Calculated the WACC: There are various useful ways of assessing the WACC and planning the rate of profitability accordingly. But there are various limitations to it as well. Some of the limitation that is generally faced while calculating the WACC such as It is very difficult to maintain the same capital structure throughout the year as market inflation keeps on changing. For the calculation of WACC, the rate of the cost of current capital is required, which is very difficult to evaluate. The WACC includes elements such as equity and debt to get calculated(Chan and Chong 2017). The rate of interest in the cost of debt keeps on changing depending on the market situation. Hence it becomes extremely difficult to calculate the WACC. While WACC considers only the essential elements such as debt, equity and preference shares to calculate the average Capital Cost to avoid complex procedure for the calculation, if other elements of capital budgeting such as extendable bonds, warrants etc., it would make the calculation technique much more difficult. And if a calculating method has too much complexity and difficulty along the way, the probability of making a mistake or producing. An errorfree project becomes much more difficult. Limitations are part of every single aspect that exists in the world and WACC is no exception. Nevertheless, it is still one of the best method out there for estimating and calculating theCapital Cost.
Conclusion:
Therefore, the preparation of this project has was immensely helpful in getting sufficient knowledge regarding the financial analysis of BAE Systems. The company’s specialty remains in the production of defence and dominant aerospace products. Through the financial analysis, it is noticeable that the company is financially strong and would continue to dominate the market for a very long period. The ratio analysis has also indicated that the solvency capability of the company is very high, that suggests that BAE System is capable to dissolve also the debts through the liquidation of the current asset.
References
Afonso, A., Baxa, J. and Slavík, M., 2018. Fiscal developments and financial stress: a threshold VAR analysis. Empirical Economics, 54(2), pp.395423.
Alexander, L., Das, S.R., Ives, Z., Jagadish, H.V. and Monteleoni, C., 2017. Research challenges in financial data modeling and analysis. Big data, 5(3), pp.177188.
Chan, S.W. and Chong, M.W., 2017. Sentiment analysis in financial texts. Decision Support Systems, 94, pp.5364.
Chapuis, C., Bedouch, P., Detavernier, M., Durand, M., Francony, G., Lavagne, P., Foroni, L., Albaladejo, P., Allenet, B. and Payen, J.F., 2015. Automated drug dispensing systems in the intensive care unit: a financial analysis. Critical Care, 19(1), p.318.
Chatterton, T., Anable, J., Cairns, S. and Wilson, R.E., 2018. Financial Implications of Car Ownership and Use: a distributional analysis based on observed spatial variance considering income and domestic energy costs. Transport Policy, 65, pp.3039.
Chen, Y., Duan, L. and Zhang, Q., 2015, April. Financial analysis of 4G network deployment. In 2015 IEEE Conference on Computer Communications (INFOCOM) (pp. 16071615). IEEE.
de Assis, C.A., Houtman, C., Phillips, R., Bilek, E.M., Rojas, O.J., Pal, L., Peresin, M.S., Jameel, H. and Gonzalez, R., 2017. Conversion economics of forest biomaterials: Risk and financial analysis of CNC manufacturing. Biofuels, Bioproducts and Biorefining, 11(4), pp.682700.
Dewachter, H., Iania, L., Lyrio, M. and de Sola Perea, M., 2015. A macrofinancial analysis of the euro area sovereign bond market. Journal of Banking & Finance, 50, pp.308325.
Grennan, J. and Michaely, R., 2018. Fintechs and the market for financial analysis. Michael J. Brennan Irish Finance Working Paper Series Research Paper, (1811), pp.1910.
Kallala, R.F., Vanhegan, I.S., Ibrahim, M.S., Sarmah, S. and Haddad, F.S., 2015. Financial analysis of revision knee surgery based on NHS tariffs and hospital costs: does it pay to provide a revision service?. The bone & joint journal, 97(2), pp.197201.
Karna, A., Richter, A. and Riesenkampff, E., 2016. Revisiting the role of the environment in the capabilities–financial performance relationship: A meta‐analysis. Strategic Management Journal, 37(6), pp.11541173.
Kenett, D.Y., Huang, X., Vodenska, I., Havlin, S. and Stanley, H.E., 2015. Partial correlation analysis: Applications for financial markets. Quantitative Finance, 15(4), pp.569578.
Kostyukova, E.I., Yakovenko, V.S., Germanova, V.S., Frolov, A.V.E. and Grishanova, S.V., 2017. Evaluation of the company's financial condition from the position of different groups of stakeholders. Espacios, 38(33).
Maina, F.G. and Sakwa, M.M., 2017. Understanding financial distress among listed firms in Nairobi stock exchange: A quantitative approach using the Zscore multidiscriminant financial analysis model.
Nesticò, A. and Pipolo, O., 2015. A protocol for sustainable building interventions: financial analysis and environmental effects. International Journal of Business Intelligence and Data Mining, 10(3), pp.199212.
Pierson, Kawika, Michael L. Hand, and Fred Thompson. "The government finance database: A common resource for quantitative research in public financial analysis." PloS one 10, no. 6 (2015): e0130119.
Post, C. and Byron, K., 2015. Women on boards and firm financial performance: A metaanalysis. Academy of Management Journal, 58(5), pp.15461571.
Riley, E.B., Fieldston, E.S., Xanthopoulos, M.S., Beck, S.E., Menello, M.K., Matthews, E. and Marcus, C.L., 2016. Financial analysis of an intensive pediatric continuous positive airway pressure program. Sleep, 40(2), p.zsw051.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and analysis: text and cases. John Wiley & Sons.
Shahbaz, M., Van Hoang, T.H., Mahalik, M.K. and Roubaud, D., 2017. Energy consumption, financial development and economic growth in India: New evidence from a nonlinear and asymmetric analysis. Energy Economics, 63, pp.199212.
Vogel, H.L., 2016. Travel industry economics: a guide for financial analysis. Springer.
Wagner, D., Block, J.H., Miller, D., Schwens, C. and Xi, G., 2015. A metaanalysis of the financial performance of family firms: Another attempt. Journal of Family Business Strategy, 6(1), pp.313.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2019. Financial accounting. Wiley.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book Chapters, pp.109169.
hihi
To export a reference to this article please select a referencing stye below.
Assignment Hippo (2022) . Retrive from https://assignmenthippo.com/sampleassignment/financialanalysisofbaesystems
"." Assignment Hippo ,2022, https://assignmenthippo.com/sampleassignment/financialanalysisofbaesystems
Assignment Hippo (2022) . Available from: https://assignmenthippo.com/sampleassignment/financialanalysisofbaesystems
[Accessed 15/08/2022].
Assignment Hippo . ''(Assignment Hippo,2022) https://assignmenthippo.com/sampleassignment/financialanalysisofbaesystems accessed 15/08/2022.
Want to order fresh copy of the Sample Template Answers? online or do you need the old solutions for Sample Template, contact our customer support or talk to us to get the answers of it.
Our motto is deliver assignment on Time. Our Expert writers deliver quality assignments to the students.
Get reliable and unique assignments by using our 100% plagiarismfree.
Get connected 24*7 with our Live Chat support executives to receive instant solutions for your assignment.
Get Help with all the subjects like: Programming, Accounting, Finance, Engineering, Law and Marketing.
Get premium service at a pocketfriendly rate at AssignmentHippo
I was struggling so hard to complete my marketing assignment on brand development when I decided to finally reach to the experts of this portal. They certainly deliver perfect consistency and the desired format. The content prepared by the experts of this platform was simply amazing. I definitely owe my grades to them.
Get instant assignment help