Financial Reporting and Analysis Solution

EXECUTIVE SUMMARY
This financial analysis report investigates two of the biggest competitors within the aerospace
and defense industry, Boeing and Airbus. Our aim is to analyze these companies' financial
situation and how their performance has developed over the last three years (2017-2019) in
order to make an informed decision. With the result of this analysis we will be able to
recommend to our clients/investment committee with the best investment choice. To reach our
target we have analyzed the annual reports for both companies. We used the companies’
reports from year 2016 to year 2019 to carry out vertical, horizontal and comparative analyses
on both companies' income statement, cash flow statement and balance sheet after making the
necessary adjustments to reconcile the divergence in their financial reporting standards.
With this information, we digit out some financial ratios as price to earnings ratio, price to
sales ratio, return on equity, return on asset, days on inventory on hand and days sales
outstanding. The information used for this analysis were mainly taken from the companies’
webpages, their annual reports downloaded from their webpages and other online sources.  
Our analysis of the two companies’ data shows that Boeing has outperformed Airbus in most
areas in recent years. Boeing’s revenue, pre-tax profit, and earnings per share growth rate in
the last five years surpassed Airbus’s growth. However, Airbus grew revenue at a slightly
faster rate in the last two years compared to Boeing’s. In term of reward to shareholders,
Boeing has been considerably more generous to its shareholders in form of dividend payment,
having more than doubled its payout over the last five years in addition to large shares
buybacks.
Considering the figures and the capital market movements, both companies’ look good to
invest in but from our deeper analysis of fact and figures, we recommend Airbus for the risk-
averse investors and Boeing for the more aggressive (risk-seekers) investors.
 BUSINESS DESCRIPTION
Airbus is a French multinational aerospace corporation who
design, manufacture, and deliver industry-leading commercial
aircraft, helicopters, military transport, satellites, and launch
vehicle. It´s headquarter is in Netherland and the company´s
shares are traded at Paris stock exchange under the ticker (AIRp).
Airbus is organized into three different segments Airbus for commercial airplanes, helicopters
and last defense and space. In its commercial airplane segment Airbus manufactures A220,
A320, A330, A350 and A380. From 1970 when Airbus was founded it has received more than
19,000 commercial aircraft for over 400 customers around the world. The Airbus Helicopters
segment specializes in the development, manufacturing, marketing and sale of civil and
military helicopters, as well as on the provision of helicopter related services. Airbus
Helicopters is a global leader in both the civil and military rotorcraft markets. Product range
consist of light single-engine, light twin-engine, medium and medium-heavy rotorcraft.
Airbus Defense and Space segment is the largest enterprise in Europe and one of the world’s
top leading space companies and top 10 global defense enterprises.

Boeing is the world´s largest aerospace company and is a leading

provider of commercial airplanes, defense, space and security
systems. The company supports commercial and government
customers in more than 150 countries. Boeing has more than
160,000 people employed worldwide and was listed on the New
York Stock exchange since 1962 with the ticker (BA).
Boeing is branched into different segments of commercial airplanes, defense, space &
security, global service and Boeings capitals corporation. Boeing as of today manufactures the
737, 747, 786, 777 and 787 for commercial airplanes and business Jet range. Over 10,000
Boeing-built commercial jetliners are in service worldwide which is almost half of the worlds
fleet. Boeings defense, Space & Security (BDS) segment is a global organization that produce
leading solutions for the design, modification, service and support of commercial derivatives,
military rotorcraft, satellites, humans’ space and autonomous systems. Boeings aftermarket
segment supports mixed fleets worldwide and deliver services for commercial, defense and
space costumers regardless of the original manufacturers. Boeing Capital Corporations (BCC)
is Boeings finance solutions for Boeings customers and is a segment who work closely with
commercial airplanes and defense, space & security segments to ensure that costumers have
the financial help they need to buy and take delivery of Boeings products.
INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
The sector consists of two major markets: Aerospace and Defense. Aerospace focuses
primarily on commercial aircraft manufacture, delivery, and operation, while Defense
specializes in the nation's need for military arms and equipment equipped to operate on
ground, sea, and air. In general, the industry is engaged in aircraft manufacture (mostly for
business use) and spaceships, typically satellites, both for military and commercial use.
The industry is heavily concentrated and dominated by the limited number of large companies
capable of influencing the price level. As the primary components are flight aircraft, the
aerospace and defense industry's product line are broad and needs up to millions of individual
parts. Competitive Intelligence is a vital method used by many businesses in the aerospace
and development industry in finding optimal growth markets and providing a strategic edge.
Competitive intelligence helps enterprises in the Education and Development field to cultivate
an innovative culture that encourages workers to make improvements that move the business
forward.
Boeing, Airbus, United Technologies, which merged with Raytheon Technologies
Corporation to form Raytheon Technologies Corporation, Lockheed Martin, and Northrop
Grumman, are the major players in this industry. Globally, Boeing and Airbus combined a 91
percent share of commercial aircraft.
In 1916, Boeing was the only aircraft supplier until Airbus was founded in 1970 and launched
its first commercial aircraft in 1974. Notably, over the past five years, Airbus was able to
wrest away market share from Boeing and had a fifty-six percent bigger order book than
Boeing's at the end of 2019.

SWOT Analysis
There are some areas of strength, weaknesses, opportunities, and threats (SWOT) for the two
giant companies in the aerospace and defense industry as highlighted in the table below.
Company Strength Weakness Opportunity Treat
Pair fatal crashes that Lucrative duopoly in New
led to the grounding of airplane sales. commercial
Track record of
737 MAX resulting in Getting the 737 aerospace
successful
loss of confidence in MAX airborne again competition
Boeing production ramp-
the firm. Testing would be a big step coming from
up
setbacks with planned in recovery China
777X jet
More mature Routinely struggles in Lucrative duopoly in New
product line, meeting production airplane sales with commercial
which does not commitments as opportunities to aerospace
Airbus have the same evidenced in metrics gain market share competition
risks as the 737 like profit margin and in expanding coming from
MAX and the free cash flow (FCF) markets China
777X jet generation
FINANCIAL ANALYSIS
To achieve the purpose of this task, we adjusted both companies' financial statements to make
them more comparable since their reporting standards differ. Boeing report under US GAAP
standards while Airbus report under IFRS. We made most of the adjustments on Airbus
financial statements to converge to US GAAP standards.
We made adjustment for Goodwill on the statement of financial position of the two
companies and impairments on goodwill were reversed on their annual reports to show the
true position of their financial statements. We also reversed the inventory write-down by
Airbus since it is allowed under IFRS but not under US GAAP. We also adjusted for assets
held for sale. Adjustments to R&D were done since under US GAAP development cost was
expensed while it was capitalized under IFRS, adjustments where done for Airbus. We did
adjustments for investments properties on Airbus financial reports and for Lease on Boeings
financial reports.
We had dilemma with the different ways the two companies presented their balance sheets
and income statements, so we focused on the top items and summarized it to make it more
comparable. The table used for the analysis is showed in the appendix.

Common size: Income Statement analysis

The common-size analysis for Airbus shows a slightly decreasing for Cost of sale. Their cost
of sales decreased from 85,27% in 2017 to 85,09% in 2019. It has been the opposite for
Boeing, their cost of sales has increased from 81,5% in 2017 to 93,74% in 2019. According to
Boeing’s annual report the primarily reason for the increasing of cost of sales are due to the
737 MAX grounding which cumulated in lots of contingency liabilities and high write-off.
This has affected Boeing a lot. Boeings gross margin decreased from 18,50% in 2017 to
6,26% in 2019. Meanwhile Airbus’s Gross margin has increased from 11,64% in 2017 to
14,91% in 2019. Even if Boeing had a lower gross margin on 2019 compared to Airbus
(Boeing 6,26% vs Airbus 14,91%) are Boeings 3-years average for gross margin 1,28%
higher than Airbuses 3-years average gross margin.
Selling, General and administrative expenses have increased from 4,13% in 2017 to 8,69% in
2019 for Airbus which affected the net earnings for 2019. The mainly reason for the
increasing on Airbus’s SG&A expenses according to their annual report were mainly due to
the final agreement the company reached with the French Parquet National Financier
(“PNF”), the UK Serious Fraud Office (“SFO”), and the US Department of Justice (“DoJ”) .
The agreement was done to resolve the authorities’ investigations about allegations of bribery
and corruption. The agreement with US Department of State (“DoS”) and the DoJ was to
resolve their investigations into inaccurate and misleading filings made with the DoS pursuant
to the US International Traffic in Arms Regulations (ITAR). Airbus has agreed to pay
penalties for about €3,5bn. Boeing is having an increasing trend. Their SG&A increased from
4,36% on 2017 to 5,11% on 2019.
Research and development activities on the A320 and A350 programmes are the mainly
reasons for the fluctuation for R&D expenses for Airbus, the R&D expenses increased from
4,76% on 2017 to 5,05% on 2018 and then decreased from 5,05% on 2018 to 4,76% on 2019.
Meanwhile Boeing had a slight decrease from 3,38% in 2017 to 3,23% on 2018 due to higher
investment in production development. They experienced an increase again from 3.23% on
2018 to 4,20% in 2019 against revenue. The increasing was due to lower sales.
Boeings net earnings increased from 10,21% in 2017 to 14,35% in 2018. This increase was
mainly due to higher deliveries of MAX737. Then in 2019 their net earnings dropped
drastically from 14,35% in 2018 to (1,93%) in 2019. The major reason as we earlier
mentioned was as the result of grounding of two MAX737. For Airbus, the net earnings
increased a little bit from 2017 to 2018, the increasing was 0,33%. In 2019 their net earnings
dropped from 3,88% in 2018 to (2,05%). On average, Boeing is having a higher 3-years then
Airbus. (Boeing 3-years averaged 7,54% vs Airbus 3-years averaged 1,79%). Despite the fact
taht Boeing had some issues with the MAX737 during 2019 they still have a higher average
net earnings compared to Airbus.

Common size: Balance sheet analysis

Boeings’ current assets has gone from 79,77% in 2017 to 81,42% in 2019, it had slight
increase in currents assets from year to year. Airbus had increase in current assets from
55,72% in 2017 to 57,84% in 2018 and then an increase from 57,84% in 2018 to 56,04% in
2019.
In the common-size balance sheet analysis Boeing is having current assets as ratio of the total
assets on 3-years averaged of 80,46% compared to Airbus which had a 3-years averaged of
56,53%. On non-current assets to total assets Boeing is having a 3-years average of 19,54%
and Airbus is having a 3-years average of 43,47%. For Airbus, the current assets almost equal
to the non-current assets while Boeing is having higher current assets than non-current assets.
Both companies faced a decrease in non-current assets to total assets from year to year.
Boeing averaged 73,96% as the ratio of current liabilities to total liabilities and equity on a 3-
years average while Airbus had a 3-years average of 58,74%.
Based on this information we can deduce that Airbus is having negative working capital in the
three years that we have analyzed. To have a negative working capital is not a good sign since
this is used to analyze the companies’ ability to meet liabilities as they fall due and investors
can be worried about this situation.
For Boeing and Airbus, the 3-years average of total liabilities to total liabilities and equity
were over 100%. Boeing was having a 3-years average of 107,8% while Airbus had having a
3-years average of 102,86%. This indicates that both companies were having negative total
equity. Boeing had a 3-years average of (7,8%) in total equity and Airbus had a 3-years
average of (2,86%) of total equity. This is an indicate that the company borrowed money to
cover their loss, or they have paid larger dividends than they should.
Boeing equity capital was negative because they repurchased common shares yearly and they
are also having a negative accumulated OCI loss which resulted in negative equity, for Airbus
the reason was due to negative retained earnings as a result of the adjustment we carried out
for goodwill to show the true position of the company’s the financial statement analysis.

Comparative income statement analysis

Boeings revenue decreased with 26,75% in 2019 compared to 2018. They have lower revenue
due to lower sales as a result of the suspension of deliveries of the 737MAX, which caused a
decreasing in cost of sales as well. Cost of sales decreased with 3,97 % for 2019 from 2018
but from 2017 to 2018 the cost of sales increased. Their cost of sales depends much on how
much revenue they realized. Gross margin fell with 24% for year 2019. For Airbus, it was the
opposite. Revenue increased first by 7,94% for year 2018 and then with 10,63% for year
2019.
In 2019 they had higher revenue due to higher deliveries (863 aircrafts) compared to 2018
(800 aircraft). According to Airbus’ annual report the increase in cost of sales were the effect
of the increasing in revenue. Airbus 3-years average gross margin was 25,2% while Boeings
3-years average gross margin was (5,77%).
Airbus had decreased SG&A costs for 2017 and 2018 but in 2019 they got more than doubled,
mainly due to the final agreement that the company have reached with the French Parquet
National Financier (“PNF”), the UK Serious Fraud Office (“SFO”), and the US Department of
Justice (“DoJ”) according to the information provided in the company’s annual report.
Both Boeing and Airbus had increasing EBIT on 2017 and 2018 and decreasing EBIT for
2019. This was due to different reasons, for Boeing it was the grounding of two 737MAX and
for Airbus it was the high SG&A expense.
Boeings net earnings increased by 59,66% for year 2017 and by 40,55% for year 2018 but
decreased (113,42%) year 2019. Airbus net earnings increased with 150,05% year 2017 and
with 9,48% year 2018 but decreased (152,86%) year 2019.
 Return On Equity
2.00 VALUATION
1.00 Return on Asset, Return on Equity, Days on
0.00
2017 2018 2019 Inventory on hand and Days Sales Outstanding
-1.00
-2.00 2019 Return
ROA On Assets
ROE DOH DSO
-3.00 Boeing
0.12 (0,01) 0,12 354 68
-4.00 Airbus
0.10 (0,01) 0,3 194 30
0.08
2018 ROA ROE DOH DSO
Boeing Airbus
0.06
Boeing 0,1 (1,95) 277 48
0.04
Airbus
0.02 0,03
 
(3,3)
 
206
 
33
 

2017
0.00 ROA ROE DOH DSO
2017 2018 2019
Boeing
-0.02 0,09 (1,88) 146 29
Airbus 0,02 1,7 209 33
Boeing Airbus
Boeing and Airbus performances are
in line as shown by Return On Assets in 2019, which means that both companies are equally
efficient on management their assets to generate profit. Both in 2018 and 2017 Boeing had a
higher return on assets which indicates that Boeing is more effective of returning profits from
total assets.
The Return On Equity is slightly higher for Airbus in 2019 than Boeing. Both Airbus and
Boeing had negative return on equity in 2018 which means that the quantity of net income is
lower than the quantity of equity compared between the two companies. Airbus had a higher
return on equity in 2017 than Boeing.
Days on inventory on hand which measures how many days it takes the company to turn its
inventory into cash. Boeing is having a big increase in days over the time period measured,
from 146 to 354 meanwhile Airbus is marginally decreasing its days on inventory in hand
over the same time period which indicates that Airbus is more efficient of managing its
inventory and one reason for the high number of days of inventory for Boeings last year could
be that 737 MAX was difficult to sell which results in a higher day on inventory on hand for
Boeing.
Days sales outstanding which is the last ratio highlighted in the graph which measures how
many days it takes for a company to collect payment after the initial sales has been made.
Airbus is the more efficient one of the two companies of collecting cash from costumers with
around 30 days which indicates that Airbus is effective in credit and collective. Although this
could also indicate that the company is having a too strict that could lead to sales being lost to
competitor’s due to the stringent credit and collect method. Boeing is in opposite of Airbus
increasing its days sales outstanding which means that Boeing is not as efficient of collecting
cash from customers. With more than a 100% increase from 2017 to 2019 indicates that
Boeing are having some difficulties, according to Boeing annual report, being a repercussion
of the 737 MAX incidents.
Earnings Per Share (EPS)

Earnings Per Share EPS 2019 2018 2017

25.00 Boeing (2,6) 18,94 12,96
20.00
15.00
Airbus (1,91) 3,59 3,23
10.00
5.00 Earnings per share were recalculated after the
0.00 adjustment were made between Boeing and
2017
-5.00 2018 2019
Airbus to make them more comparable due to
Boeing Airbus the different accounting standards that they
use.

Price-Earnings Ratio

Closing stock price 2019 2018 2017

Price Earnings Ratio Boeing 324 307 281
50.00 Airbus 126 80 78
0.00
-50.00
1 2 To calculate a company’s P/E number, which
3

-100.00 is a multiple that describes how many years

-150.00 you are predicted to earn back your
Boeing Airbus investment, you divide the market price of the
share with the company´s earnings per share.
In the table below the closing prices Boeing and Airbus are presented to show the P/E ratio
calculation.
Boeing and Airbus P/E ratios = Price / EPS
P/E Ratio 2019 2018 2017
Boeing (124,6) 16,2 21,6
Airbus (65,9) 22,28 24,14
As of 2019 both Boeing and Airbus has a negative profit which resulted in negative earnings
per share and so forth in a negative P/E ratio. The fact that Boeing had a negative P/E ratio
due to the 737 MAX incident. Looking at both 2017 and 2018 the P/E ratio was positive
which indicates that Boeing is not year after year making negative profits. Airbus negative
P/E ratio is much due to the high sales, administrate and general cost that they incurred under
2019.

P/S
Price to sale is a ratio that compares the stock price relative to its revenue and it shows how
much investors are willing to pay per euro/dollar of sales per stock.
P/S Ratio 2019 2018 2017
Boeing 2,51 1,93 1,43
Airbus 1,19 1,16 0,99
Both Boeing and Airbus are increasing in price to sales ratio. A higher ratio indicates that the
market is higher valued so in this case the market is valuing Boeing higher than Airbus
throughout the period under consideration.
HISTORICAL PERFORMANCE OF THE COMPANIES MARKET PRICES
Boeing Airbus

INVESTMENT RISKS
Firm risk: Boeing had a lot of problem under 2018 which led to the 737Max was grounded
worldwide and many airlines decided to cancel orders from the company. After the problems
involving crashes the company faced a new problem in the corona virus as of 2020 which led
to an even larger impact on its financials. Although Boeing is looking brighter into the future
and preparing a for new flights with its new 737 MAX 10 and its financializing of its
Embracer partnership. Both for Airbus and Boeing the environmental aspect is to take in as a
consideration when looking at the company’s future. In the automobile industry, electric cars
are developing in a rapid pace and is changing how we looked at environmental aspect of
travel.
Market risk: As of February, due to the corona pandemic, the aircraft industry is seeing its
greatest uncertainties as the industry has ever seen. All over the world the airline industry is
grounded as a result to the pandemic which have led to collapse to the share prices of aircraft
manufactures. Both Boeing and Airbus have major of their businesses allocated towards
commercial airlines. As of today, the airline industry is still in an uncertainty and will
probably persist for a long period of time.
The global environmental changes that our world is facing is a big factor of consideration
when looking ahead for aircraft manufacturing’s. The world is getting more and more
conscious of the effect that travel have on the earth health. The new generation who is
growing up is more likely to avoid travel more than we have done in the past.
CONCLUSIONS AND FINDINGS
Our review of aerospace and defense has shown that Boeing and Airbus enjoy the chunk of
the market share which gave them a leverage over other players in the industry. There is fierce
competition between these firms as noticed in their strategies to outperformed each other. In
term of market share, Airbus, through its A320 family of aircrafts has been able to take
market share away from Boeing over last five years, coupled with the pair fatal crashes that
led to the grounding of Boeing’s 737 MAX.
The analysis of the two companies’ data shows that Boeing has outperformed Airbus in most
areas in recent years. Boeing’s revenue, pre-tax profit, and earnings per share growth rate in
the last five years surpassed Airbus’s growth. However, Airbus grew revenue at a slightly
faster rate in the last two years compared to Boeing’s. In term of reward to shareholders,
Boeing has been considerably more generous to its shareholders in form of dividend payment,
having more than doubled its payout over the last five years in addition to large shares
buybacks. Market placed higher value on Boeing than Airbus as evidenced in their market
price per share, although Airbus has relatively performed better in term of shareholders return
per share in relation to the market price.
Considering the figures and the capital market movements, both companies’ look good to
invest in but from our deeper analysis of fact and figures, we recommend Airbus for the risk-
averse investors. Airbus over the next three to five years seems poised to outperform Boeing
based on the expected expansion of free cash flow as it ramps up deliveries, which should
help it to narrow a valuation gap that currently has Airbus shares trading at less than half
Boeing's multiple to earnings and about 40% below Boeing's multiple to sales. Boeing's
prospects have also been more negatively affected due to management's credibility,
particularly regarding the catastrophe surrounding return-to-service (RTS) for the 737 MAX
which was intended to compete with the Airbus A320 NEO in the narrow-body market.
We recommend Boeing for the more aggressive (risk-seekers) investors. Getting the 737
MAX airborne again would be a big step in Boeing's recovery as the company has more than
400 737 MAX planes on its lots waiting to be delivered, but investors need to be mindful that
this is a multistep process. We propose that the aggressive investors should exercise caution
by deferring investment decision until Boeing gets the 737 MAX back into service and risk
dissipates. With the 737 MAX back in the air in a timely fashion, based on current prices,
Boeing's history of better execution makes it look like a better value.