For more than 60% (assume 65%) dollar-based revenue, half are naturally hedged, $18.5billion are instrument hedged and the rest ($1.5billion) is unhedged. The unhedged part will subject to exchange rate risk when translated at period end rate. Thus exchange gain/ loss will be accounted in “currency translation adjustment for foreign operations” in the comprehensive income. This effect is small for natural hedge since the exchange gain/loss will offset for cost and revenue, asset and liability.
- Ratio analysis
Ratio analysis will be carried out in the following two directions: time series analyses (compare 2009 with 2010) and cross sectional analyses (compared with its main competitor Boeing). Four aspects will be considered.
- Financial performance
Return on capital employed
Compared with year 2010, EADS generated a negative profit per € of asset in 2009. This loss relates to the increased cost of sales. €2.1 billion onerous contract charges incurred on the A400M and A380 programs in 2009(financial statement 2010:38). Thus 2010’s ratio seems better. However, Boeing seems operate in a more efficient way, generating more profit with less net asset each year. Maybe Boeing’s production line is more mature and equipped with skilled labor hence more profitable.
Gross profit margin
As expense tends to stay fix in the short term, it is better to analyze gross profit margin.
Clearly, Boeing is more effective in generating gross profit from cost of sales. There is €1,785m improvement in gross profit for EADS, leading to a higher profit margin in 2010. Removing the €2.1 billion contract charge effect, unfavorable foreign exchange rate also weigh on its profit margin.
Segment report analysis
Return on asset is calculated for the five products. From the business segment information, it can be found that Airbus Commercial always occupies nearly 50% of the total revenue. This product also weighs significantly in Boeing’s performance. In EADS, its consolidated revenue increase from €26.4b in 2009 to €27.7b in 2010 by 5%. According to registration document (2010:80), this was due to i) higher quantity of deliveries (from 498 recognized in revenue to 508), a more favorable mixed of product (mainly increase in A380 large aircraft) ii) advance in price (value). However, in terms of EBIT, it decreased from €386m to €291m by 25%. This strange result is caused by the unfavorable hedged rate in 2010, which gave €0.6 billion loss in this segment. ROA nearly stays the same for this segment.
Airbus Military seems a terrible product with a little share, generating €1,752m loss in 2009 and returned to €21m profit in 2010. The huge loss ss caused by €1.8 billion A400M program contract charge. As a result, its 2009 ROA is relatively low. The depressed product has a totally different situation in Boeing, perform relatively well and generating about $1,300m income every year stably.
For the other three product, Eurocopter, Astrium, Cassidian, their EBIT changed by -30.4%, 8.4%, and 1.8% separately. Revenues increased by 5.7%, 4.3%, 10.6%. The large decrease in EBIT in Eurocopter was caused by higher research & development cost and thus its ROA is decreased in 2010. The better performance in Astrium is due to growth in defense and military service. For Cassidian, it provides the highest ROA every year and the company has planned a revenue growth for this segment.
- Liquidity
Current ratio analysis
Current ratio measures to what extent current liabilities are covered by current assets. EADS’s ratio is always lower than Boeing thus less liquid. This may because Boeing does not like to pay by credit. The decreasing current ratio for EADS can be attributed to €1.5 million increase in current liability. It can be learned from note 28 that it is because the company received more advance payment from customers.
Acid test ratio
Since inventory is not so liquid thus it is excluded when calculating this ratio. Generally, this ratio should be at least one. But in aerospace industry, it will be lower owing to the giant value of stock. EADS has a higher acid ratio in 2010 compared with Boeing and the reason maybe that EADS does not store that much closing inventory and materials or it usually delivers it aircraft after completion. Besides, this ratio for EADS stays almost the same. For year 2010, it has fewer inventories but lower acid ratio. This is also caused by the increase in current liability arising from advanced payment.
- Solvency
Working capital cycle analysis
EADS has to wait for 167 days to collect money after paying its credit to suppliers. It takes a long time to turn over its working capital but it is common in this industry since aircraft need long period for full completion of work. The 8 days decline is caused by drop in inventory days. The company incurred more sales in 2010 but fewer ending inventories. It can be found in Note 18 in financial statements (2010:18) that finished goods and work in progress are written down to net realizable value because estimated cost for contract exceed total revenue. The impairment makes it quicker to turn over. When compared with Boeing, Boeing is more liquid in receivable and payable. This may because Boeing executes an adequate credit control. All in all, their cash conversion cycle is at the same level.
Long-term solvency is analyzed in investor returns since it relates to risk.
- Investor returns
Return
EADS pays a stable dividend though a low payout ratio. Boeing is in a reverse situation, with high payout ratio but more risky. This is driven by EADS’s low profit. Since the €752 loss in 2009, it may not be sensible to compare negative ratios with positive ones in EADS. The low profit leads to a low EPS, ROE and high PE ratio with reference to Boeing. Hence the return is low and payback period is long.
From Osiris, the estimated 2014 EPS 2.98 and PE 6.96 can be found, so the estimated share price is 20.74. It is close to present share price 20, thus not much return.
Risk and long-term solvency
Boeing is higher gearing than EADS so it has more profit for distribution when earn same profit. The 2010 gearing for EADS increases just because the fair value loss from hedge makes equity drops by €2 billion. EADS is not a profitable company since it just covers the interest expense 3 times and negative in 2009. Its solvency maybe a concerning problem.
- Conclusion
From the above ratio analysis, it can be known that EADS has made a big progress from 2009 to 2010. However, there exists an evident gap between EADS and Boeing. It generates too little profit every year, sometimes loss. Furthermore, it maybe a risky share since it has a solvency problem and its capital is not so well structured since large amount of interest need to be paid.
For long-term investment, foreign exchange rate needs to be taken into consideration. It will affect financial result to a large extent even the dollar revenues stay the same. Considering the worldwide recession, euro is predicted to depreciate, which is good news to EADS. However, the company may choose to stop hedging, also due to hedge rate deterioration. It is hardly to say without hedge, the profit will be more or less. But one thing for certain is that, its transaction will be more risky due to the fluctuation in rates and long periods for production. Besides, the estimated share price in 2014 is nearly the same as now. All in all, the company is not recommended to invest.
Reference list
2010. Boeing financial statements 2010[online] Available from: [Accessed 8/12/2012]
2010. EADS financial statements 2010[online]. Available from: [Accessed 7/12/2012]
2011. EADS looks to increase natural hedging[online]. Available from: [Accessed 15/8/2012]
2010. EADS registration document 2010[online]. Available from: [Accessed 7/12/2012]
2009. IAS 39 Financial instruments recognition and measurement[online] Available from: [Accessed 8/12/2012]