Full Answer Section

Financial Ratios

• Liquidity Ratios: Measure a company’s ability to meet short-term financial obligations.
  • Current Ratio: Current Assets / Current Liabilities. Indicates how readily a company can cover its current liabilities with current assets.
  • Quick Ratio: (Current Assets – Inventory) / Current Liabilities. A more conservative measure of liquidity excluding inventory, which can be difficult to sell quickly.
• Profitability Ratios: Measure a company’s ability to generate profit from its operations.
  • Net Profit Margin: Net Profit / Revenue. Shows the percentage of revenue converted into profit.
  • Return on Equity (ROE): Net Profit / Shareholders’ Equity. Measures the return on investment for shareholders.
• Solvency Ratios: Measure a company’s ability to meet long-term financial obligations.
  • Debt-to-Equity Ratio: Total Liabilities / Shareholders’ Equity. Indicates the proportion of debt used to finance the company.

Financial Ratio Analysis

Data Source: We will assume access to the 2018 financial statements of Boeing and Airbus for ratio calculations. (Since real financial statements cannot be included in this example, calculations cannot be performed.)

Analysis:

1. Liquidity: A higher current ratio and quick ratio indicate better short-term financial health. Compare the ratios for Boeing and Airbus. If Boeing’s ratios are significantly lower, it may suggest difficulty meeting short-term obligations, potentially impacting its ability to weather a decline in defense spending.
2. Profitability: A higher net profit margin and ROE indicate better profitability. Compare these ratios for both companies. A stronger competitor like Airbus with consistently higher profitability might be a better investment prospect, especially if Boeing’s defense contracts decline.
3. Solvency: A lower debt-to-equity ratio indicates a more financially stable company with less reliance on debt. Compare this ratio for Boeing and Airbus. A higher debt burden for Boeing could make it more vulnerable to economic downturns or a reduction in defense spending.

Recommendation

Based on the comparison of financial ratios across liquidity, profitability, and solvency, a recommendation can be made regarding the stability of Boeing compared to Airbus. If Boeing’s ratios consistently fall below those of Airbus, it might suggest a higher risk associated with a potential decline in defense spending. In this scenario, recommending a shift of investment from Boeing to Airbus might be a prudent strategy.

Additional Considerations:

• This analysis focuses on historical data (2018). Consider obtaining more recent financial statements for both companies to account for any changes in their financial health.
• Market trends and future outlooks for the commercial aviation industry can also influence investment decisions. Researching these factors can provide a more comprehensive picture.

Conclusion

Financial ratio analysis is a valuable tool for evaluating a company’s financial health and investment potential. By comparing Boeing and Airbus across key liquidity, profitability, and solvency ratios, a more informed decision can be made regarding the stability of each company in the face of potential changes in defense spending. Further research and consideration of current market trends are recommended before making a final investment decision.