Last Updated 07 Jul 2020

The financial statement of BAE system & analysis of company’s financial perform-ance

Category Company
Essay type Analysis
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Table of contents

Introduction

BAE Systems is a global defence and security company with approximately 100,000 employees worldwide. The Company delivers a full range of products and services for air, land and naval forces, as well as advanced electronics, security, information technology solutions and customer support services. In 2009 BAE Systems reported sales of ?22.4 billion (US$ 36.2 billion). BAE Systems plc. (BAE) is one of the leading global defence, aerospace and security companies, providing advanced electronic, security, information technology solutions. The company is engaged in designing, manufacturing, and supporting military aircrafts, space systems, surface ships, submarines, avionics, radars, C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) systems, electronic systems, and guided weapon systems. BAE’s other operations include complex software development, advanced manufacture, and providing specialized training services. Its distribution network covers about 130 countries.(www.baesystem.com)

2nd largest global defence company based on 2009 revenues*

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Approximately 100,000 employees worldwide
Global capability
Customers in more than 100 countries
2009 sales exceeded ?22.4 billion

* (: Defense News Annual Ranking, published June 2010)

Key Facts

LAND

BAE Systems is a global leader in the design, development, production and support of armoured combat vehicles, major and minor calibre naval guns and missile launchers, canisters, artillery systems and intelligent munitions.

AIR

BAE Systems delivers advanced military air capability through major aircraft programmes in the UK, US and to many overseas customers.

SEA

BAE Systems has a breadth of capabilities and is delivering high performance through a range of warships, submarines, auxiliary vessel programmes and naval armaments

HOMELAND SECURITY

BAE Systems is well positioned to play a key role in this developing market, where protecting people, assets and infrastructure, and maintaining national security and economic stability are paramount

TECHNOLOGY & INNOVATION

BAE Systems has a proud heritage of ground breaking inventions including Concorde, Radio communication, and the Harrier Jump Jet. In the changing world of defence and homeland security, technology and innovation are still at the heart of our business.

INFORMATION TECHNOLOGY

BAE Systems Information Technology, based in McLean, Virginia, is one of the ten largest IT providers to the US government. Our aim is to be a recognized provider of managed IT Operations.

(www.baesystem.com)

Balanced Scorecard

The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and non profit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more ‘balanced’ view of organizational performance.

The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The “new” balanced scorecard transforms an organization’s strategic plan from an attractive but passive document into the “marching orders” for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.

This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective. The balanced scorecard is a management system (not only a measurement system).(www.balancescorecard.org)

Kaplan and Norton describe the innovation of the balanced scorecard as follows

“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.”

The Balance Score Card Frame Work

Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January-February 1996): 76. http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx

The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the “unbalanced” situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.

For example:

Growth stage – goal is growth, such as revenue growth rate
Sustain stage – goal is profitability, such ROE, ROCE, and EVA
Harvest stage – goal is cash flow and reduction in capital requirements

The following table outlines some examples of financial metrics:

ObjectiveSpecific Measure
GrowthRevenue growth
ProfitabilityReturn on equity
Cost leadershipUnit cost

Financial Performance Of BAE System

BAE Systems plc. (BAE) is one of the leading global defence, aerospace and security companies, providing advanced electronic, security, information technology solutions. The company is engaged in designing, manufacturing, and supporting military aircrafts, space systems, surface ships, submarines, avionics, radars, C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) systems, electronic systems, and guided weapon systems. BAE’s other operations include complex software development, advanced manufacture, and providing specialized training services. Its distribution network covers about 130 countries.(www.baesystem.com)

BAE Systems Plc.Key Recent Development

Jul 26, 2010 BAE Systems, Aquamarine Power Collaborate On Wave Energy
Mar 24, 2010 BAE Systems Plans To Develop Hydrogen Fuel Cell Bus For Sun Line Transit Mar 16, 2010 BAE Systems Delivers First Hybrid Propulsion Systems To Alexander Dennis Under Green Bus Fund Initiative Sep 28, 2009 Oshkosh Bags New Deal From BAE
Aug 19, 2009 BAE Systems To Provide Propulsion Systems To King County Metro Transit For 500 Hybrid Electric Buses.
This comprehensive SWOT profile of BAE Systems plc. provides you an in-depth strategic analysis of the company’s businesses and operations. The profile has been compiled by Global Data to bring to you a clear and an unbiased view of the company’s key strengths and weaknesses and the potential opportunities and threats. The profile helps you formulate strategies that augment your business by enabling you to understand your partners, customers and competitors better.
The profile contains critical company information including

Business description – A detailed description of the company’s operations and business divisions.
Corporate strategy – Analyst’s summarization of the company’s business strategy.
SWOT Analysis – A detailed analysis of the company’s strengths, weakness, opportunities and threats.
Company history – Progression of key events associated with the company.
Major products and services – A list of major products, services and brands of the company.
Key competitors – A list of key competitors to the company.
Key employees – A list of the key executives of the company.
Executive biographies – A brief summary of the executives’ employment history.
Key operational heads – A list of personnel heading key departments/functions.
Important locations and subsidiaries – A list and contact details of key locations and subsidiaries of the company.
Detailed financial ratios for the past five years – The latest financial ratios derived from the annual financial statements published by the company with 5 years history.
Interim ratios for the last five interim periods – The latest financial ratios derived from the quarterly/semi-annual financial statements published by the company for 5 interims history.

Key benefits of buying this profile include,

You get detailed information about the company and its operations to identify potential customers and suppliers.

The profile analyses the company’s business structure, operations, major products and services, prospects, locations and subsidiaries, key executives and their biographies and key competitors.

Understand and respond to your competitors’ business structure and strategies, and capitalize on their weaknesses. Stay up to date on the major developments affecting the company.
The company’s core strengths and weaknesses and areas of development or decline are analysed and presented in the profile objectively. Recent developments in the company covered in the profile help you track important events.

Equip yourself with information that enables you to sharpen your strategies and transform your operations profitably.

Opportunities that the company can explore and exploit are sized up and its growth potential assessed in the profile. Competitive and/or technological threats are highlighted.

Scout for potential investments and acquisition targets, with detailed insight into the companies’ strategic, financial and operational performance.

Financial ratio presented for major public companies in the profile include the revenue trends, profitability, growth, margins and returns, liquidity and leverage, financial position and efficiency ratios.
Gain key insights into the company for academic or business research.
Key elements such as SWOT analysis, corporate strategy and financial ratios and charts are incorporated in the profile to assist your academic or business research needs.(www.baesystem.com)

Why I Chose The Balance Scorecard To Calculate My Analysis

In most cases big companies need different tools to evaluate overall performance. For instance, Company X may have supply department which needs logistic solutions, customer support service that need to solve customer’s problems, sales department, HR department and so on. As said above, different business areas have different KPIs. But all your departments should woks as one single whole. Thus, if sales department has imperfections, supply department cannot work 100% of its capacity. If HR department spend money inefficiently and cannot find new employees on time, you will suffer losses which will affect the entire company.

Under such conditions, every department or business type should use Balanced Scorecard in its own way in terms of KPIs. Sales department must calculate number of new customers, while contact centre is taking care of first resolution rate (number of calls which solve customer’s problem from the first time).

Balanced Scorecard will make you and your employees feel confident as you will be always informed on strengths and weakness of your company. At the same time, Balanced Scorecard will contribute to positive organization climate and help you establish a fair and comprehensive compensation system.

Establish certain evaluation periods (for instance once or twice a month) and call overall meeting of the company with representatives of different department. Using Balanced Scorecard you will be able to summarize company performance and make smart decisions as to future development strategy. Of course, you know what to tell a head of logistic department if he always has several unused vehicles in his fleet. And you do know if customers are complaining that call center operators are sometimes incompetent to solve their problems.

Balanced Scorecard is your reliable advisor in the changeable world of business. This is a MUST have tool for top managers, head of departments and companies, development managers, quality control specialists etc.

1. Profitability – its ability to earn income and sustain growth in both short-term and long-term. A company’s degree of profitability is usually based on the income statement , which reports on the company’s results of operations;

2. Solvency – its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity – its ability to maintain positive cash flow, while satisfying immediate obligations;

Both 2 and 3 are based on the company’s balance sheet, which indicates the financial condition of a business as of a given point in time.

4. Stability– the firm’s ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company’s stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators.

Financial analysts often compare financial ratio (of solvency, profitability, growth, etc.):

Past Performance – Across historical time periods for the same firm (the last 5 years for example),
Future Performance – Using historical figures and certain mathematical and statistical techniques, including present and future values, this extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects.
Comparative Performance – Comparison between similar firms.

These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement by another, for example:

Net income / equity = return on equity (ROE)

Net income / total assets = return on assets (ROA)

Stock price / earnings per share = P/E ratio

Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:

They say little about the firm’s prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms.
One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm’s performance.
Seasonal factors may prevent year-end values from being representative. A ratio’s values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.
Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values.
They fail to account for exogenous factors like investor behaviour that are not based upon economic fundamentals of the firm or the general economy (fundamental analysis) [1].
Financial analysts can also use percentage analysis which involves reducing a series of figures as a percentage of some base amounts [2]. For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over a given time period expressed as a percentage is known as horizontal analysis [3]. Vertical or common-size analysis reduces all items on a statement to a “common size” as a percentage of some base value which assists in comparability with other companies of different sizes [4].

Another method is comparative analysis. This provides a better way to determine trends. Comparative analysis presents the same information for two or more time periods and is presented side-by-side to allow for easy analysis.[5]

The Report

This report is divided 2 chapters

Chapter: 1

Analysis of ratio calculation

Profitable ratio:

1. ROCE:- operating profits / capital employed x 100

2009= 982/4727 x 100

0.208 x 100

20.80%

2008=1718/7289 x 100

0.236 x 100

23.60%

Companies can use these figure as a benchmark to see if they are making a good profit. BAE System would conclude that it’s ROCE (%) shows success relative to other firms both 2009 and 2008. However, the fall in the ration between 2009 and 2008 is a sign of a 2.80 % declined.

2. GROSS MARGIN:- gross profit/ sales x 100

2009= 779/ 20374 x 100

0.0382 x 100

3.82 %

2008= 1700/16671 x 100

0.1020 x 100

10.20 %

This ratio must be treated with caution, as gross profit in the profit and loss account in sales minus costs. Since all of the overhead are ignored in this calculation, it is not as important a measure of success as net profit. However, the fall in the ration between 2009 and 2008 is a sign of a 6.38% declined.

3. NET PROFIT:- net profit / sales x 100

2009 = 982 / 20374 x 100

0.0482 x 100

4.82%

2008 = 1718 / 16671 x 100

0.103 x 100

10.30%

The fall in the ration between 2009 and 2008 is a sign of a big declined. 2009 was 4.82 % and 2008 was 10.30 % so different between this two year are 5.48%.

4. ASSETS TRUNOVER:- sales / capital employed

2009 = 20374 / 4727

4.31

2008 = 16671 / 7289

2.29

Expressing the assets turnover ratio as so many times is traditional but the measure would be more meaningful if we called it pounds rather so many times. This ration is going up between 2009 and 2008 is a sign of a slight up. Means it’s up just only 2.02.

LIQUIDITY RATIO:

1. CURRENT RATIO :- current assets / current liabilities

2009 = 8788 / 11993

0.73

2008 = 8069 / 10790

0.75

It should be noted that a maximum as well as minimum ratio is recommended. Too many current assets will limit a firm’s ability to purchase the fixed assets that are needed to produce the goods that provide the company’s profits. Consequently, a high current ratio may be an advantage in the short run but will inhibit the long term profitability of the company. Calculation of these ratio gives the result is 2009 and 2008 respectively 0.73 and 0.75 just slight declined.

2. QUICK RATIO(ACID TEST):- Quick assets /

Current liabilities

2009 = 7901 / 11993

0.66

2008 = 7143 / 10790

0.66

The current ratio assumes that stocks and debtors are liquid assets. Firms cannot be certain that their stock will sell quickly, so that Acid test ratio is used as an alternative to the current ratio. The calculation of the Acid test ratio ignores stock in its calculation, considering only cash, bank balance and debtors as a liquid asset. Calculation of these ratio gives the result is 2009 and 2008 no change in this ratio.

3. RECEIVABLE DAYS: – receivable / sales x 365

2009 = 3764 / 20374 x 365

0.185 x 365

68 days

2008 = 3831 / 16671 x 365

0.23 x 365

84 days

This is a ratio measuring the average time a company’s customers take to pay for purchases, equal to accounts receivable divided by annual sales times 365. In this calculation we can see that this ratio is falling down by 16 bays it’s good signed for company.

4. PAYABLE DAYS: – payable / purchase x 365

2009 = 10218 / 20060 x 365

0.57 x 365

186 days

2008 = 9165 / 15386 x 365

0.60 x 365

219 days

This is a ratio measuring how long a company is taking to pay its trade creditors. It is calculated as: 365 * Accounts Payables divided by Cost of Goods Sold. In this calculation we can see that this ratio is falling down by 33 bays it’s good signed for company.

5. INVENTORY DAYS: – inventory / cost of sales x 365

2009 = 887 / 20060 x 365

0.044 x 365

16 days

2008 = 926 / 15386 x 365

0.060 x 365

22 days

This is a ratio measuring the number of days inventory is held. As a general rule, the longer inventory is held, the greater is its risk of not being sold at full value. It is calculated as: 365 * Inventory divided by Cost of Goods Sold . In this calculation we can see that this ratio is falling down by 6 bays it’s good signed for company.

Ratio to measure risk:

1. FINANCIAL GEARING: – debt / equity

2009 = 20680 / 4655

4.44

2008 = 18386 / 7234

2.54

Shareholders ought to have the upper hand because if they don’t that could cause them problems as follows:

Shares earn dividends but in poor years dividends may be zero: that is, businesses don’t always need to pay any!
Long term liabilities are usually in the form of loans and they have to be paid interest; even in bad years the interest has to be paid
Equity shareholders have the voting rights at general meetings and can made significant decisions
Long term liability holders don’t have any voting rights at general meetings but they have the power to override the wishes of the shareholders if there are severe problems over their interest or capital repayments

So, shareholders like to see the gearing ratio, the relationship between long term liabilities and capital employed, being in their favour! A shareholder of company will be unhappy with this result .because the ration is going high 1.90.

2. DIVIDEND COVER: – PAT / total dividend

2009 = – 45 / 573.6

0.008

2008 = 1768 / 518

3.41

The dividend cover ratio tells us how easily a business can pay its dividend from profits. A high dividend cover means that the company can easily afford to pay the dividend and a low value means that the business might have difficulty paying a dividend. We can see in this calculation it’s fall in very biggest so it’s not a good news for shareholder.

3. INTEREDT COVER: – PBIT / interest

2009 = 282 / 22

12.82

2008 = 2371/ 23

103.09

The interest cover ratio tells us the safety margin that the business has in terms of being able to meet its interest obligations. That is, a high interest cover ratio means that the business is easily able to meet its interest obligations from profits. Similarly, a low value for the interest cover ratio means that the business is potentially in danger of not being able to meet its interest obligations. Calculation of these ratio gives the result is 2009 and 2008 it’s big fall in this ratio.

4. OPERATING GEARING: – fixed costs / variable costs

2009 = 203 / 282

0.72

2008 = 18 / 2371

0.008

Operational gearing is the effect of fixed cost on the relationship between sales and operating profits. If a company has no operational gearing, then operating profit would rise at the same rate as sales growth (assuming nothing else changed).

Operational gearing is simple and important – and often neglected.

High fixed costs increase operational gearing. Calculation of these ratio gives the result is 2009 and 2008 it’s big rise in this ratio.

Conclusion

There is a lot to be said for valuing a company, it is no easy task. I hope that we have helped shed some light on this topic, and that you will use this information to make educated investment decisions. If you have any other questions about fundamental analysis please do not hesitate to

Contact us.

Ratios must not be ignored. They are still an excellent guide to performance.

Conclusion should be based on the specific circumstance. In some cases, profitability ratios may be most important measure, but in emergencies, liquidity ration may be more significant.

The problems and limitation involved in ration analysis should be borne in mind.

References

Introduction is available: http://www.baesystems.com/AboutUs/FactSheet/index.htm
Balance score card is available: http://www.balancedscorecard.org/BSCResources/AbouttheBalance dSc orecard/tabid/55/Default.aspx
Key facts: Defense News Annual Ranking, published June 2010
Bob Ryan (2008), financial Accounting for business, 2nd education .uk: cengage learning college.p. 25-35.
John Wolunski and Gwen Coates (2005) A2 Business studies.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting (12th Ed.). Hoboken, NJ: John Wiley & Sons, p. 1320 ISBN 0-471-74955-9.
Kieso, et al., 2007, p. 1320
Kieso, et al., 2007, p. 1320
Kieso, et al., 2007, p. 1319
Roy Dodge (1997) Foundation of business accounting.
NA(2009) Ratio Analysis available.www.bized.co.uk.
NA(2009) Ratio Analysis calculation available:www.skymark.com
NA(2009) Ratio Analysis conclusion available:www.measurebusiness.com
www.marketresearch.com NA(2010) about bae system available :http:en.wikipedia.org.

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