Financial Ratio Analysis for BAE Systems Plc Case Study

Financial Ratio Analysis for BAE Systems Plc - Case Study Example After the September 11 tragedy which shocked the global business environment becomes a grim reminder for nations to improve their defense systems. BAE Systems Plc (BAE) traces its origin to the 7.7 billion merger of Marconi Electronic Systems which is the defense electronics and naval shipbuilding subsidiary of the General Electric Company Plc and British Aerospace which specializes in the manufacture of aircraft, ammunition, and naval systems. Out of these prestigious business organizations, its establishment in 1999 equipped with a unique competitive advantage which enables it to position itself as the third largest global defence company and sixth largest US defense company employing 97, 500 highly skilled people. Financial ratio analysis is a very essential tool in assessing the financial health of a business entity. It enables a financial analyst to spot trends in a business and to compare it with the performance of similar business enterprises within the same industry. This tool is currently utilized by business managers, investors, creditors, suppliers, and other decision makers in order to determine the financial performance and well being of a business organisation. ... These are profitability ratios, financial leverage ratios, liquidity/solvency ratios, and efficiency ratios. In order to get a deeper insight of BAE's financial performance, its computed financial ratios will be benchmarked with its competitor's Cobham Plc. The rationale of choosing these two business organizations is simple. It should be noted that both of them are regarded as important players in the global pharmaceutical industry. Being in the same line of business and the same industry, it is right to assume that BAE and Cobham Plc both face the same challenges and opportunities in the sector under consideration. This assumption justifies the comparability of their financial performance during the fiscal years. 2.1. Profitability Ratios Profitability ratios measure the ability of the company to generate income from its investments less the costs incurred (Fraser & Ormiston 2004). The ratios computed for this category are return on capital employed, sales profit margin, and return on equity. Return on capital employed is a variant of return on investment which measures how well the company is utilizing its capital. The computed sales profit margin, which is the ratio of operating income to sales measures as a percentage of sales, show the excess revenue from sales over cost of normal operation excluding financing. On the other hand, return on equity measures how much wealth is created for the company's stockholders for every shares that they have on hand (Fraser and Ormiston 2006). Logically, higher performance ratios indicate a healthier financial condition. Table 1. Profitability Ratios Comparison Table 1 shows the comparative profitability