Global issues
Being the largest supplier of aircrafts and airbuses for Boeing Ic., investors of Spirit Aerosystem Holdings were largely concerned that in light of increasing demand for higher production units, the company might end up with oversupply of aircrafts. However, the management of Spirit Aerosystem Holdings has confirmed that the company is well positioned to adjust the planned changes in output and will not set up a new factory to fuel the production growth.
Ratio Analysis
In this section, we will analyze the past two year financial trend for Spirit Aerosystem Holdings using the tool of financial ratios. With the objective to achieve a comprehensive analysis of the financial situation of the company, we will discuss multiple financial ratios relating to liquidity, profitability, solvency and efficiency. Additionally, each ratio section will be followed with a discussion relating to the factors that led to change in the financial ratios over the period of past one year.
-Liquidity Ratios
These ratios assist in evaluating the working capital position of the company and its ability to meet short-term obligations. Highlighted and discussed below are the liquidity ratios of the company:
a) Current Ratio: Current Assets/ Current Liabilities
2014: 3052/1259= 2.42
2015: 3299/1459= 2.26
b) Quick Ratio: (Current Assets- Inventory)/Current Liabilities
2014: (3052-1753)/1259= 1.03
2015: (3299-1774)/1459= 1.04
Beginning our analysis with the current ratio, we found that over the year time, the multiple decreased from 2.42 to 2.26 with the higher proportionate increase in the current liabilities by 15.88% relative to the current assets, which increased by 8.09%. However, it was the quick ratio, which happens to be a stringent measure of the liquidity position, that revealed the real scenario. Following our calculation we found that over the year time, the quick ratio multiple increased from 1.03 to 1.04, thus confirming a sustainable liquidity position of the company
-Profitability Ratios
One of the most important ratio sections, which indicates how efficiently and profitably the company is utilizing its available resources. All the stakeholders of the company, especially the shareholders, are very much concerned over the trend relating to the profitability ratios. Highlighted and discussed below are the profitability ratios of the company:
a)Operating Margin: Operating profit/ Revenue
2014: 354/6799= 5.20%
2015: 863/6644= 12.98%
b) Net Margin: Net profit/ Revenue
2014: 358/6799= 5.26%
2015: 788/6644= 11.86%
c) Return on Equity: Net Income/ Total Equity
2014: 358/1622= 22.07%
2015: 788/2120= 37.16%
Referring to the above figures, we can see that over the period of one year, the profitability of the company has increased in a sustainable manner. Beginning with the operating margin, even though the revenue figures of the company decreased by 2.28%, however, on account of 66.07% fall in the operating expenses, the operating margin surged from 5.20% to 12.98%. Important to note,the reduction in the operating expenses this year was attributed to absence of loss on divestiture this year.
Next, as for net profit margin, the impact of reduced operating expenses was inevitable on the net margin of the company, which surged from 5.26% to 11.86%.
Finally, we tested the profitability position with the perspective of the shareholder using return on equity(ROE) multiple and yet again found the optimism prevailing with multiple increasing from 22.07% to 37.16% on account of higher net profit this year.
Overall, the profitability ratios confirm the bullish profitability trend, which the company attained on the basis of the reduced proportion of operating expenses, though the fall in the revenue figures is a worrisome position.
-Solvency Ratios
Also known as the leverage ratios, these ratios allow us to analyze the capital structure of the firm and whether it is capable enough to bear the risk embedded in the capital structure. Highlighted and discussed below is the solvency ratios of Spirit Aerosystems:
a)Debt-Equity Ratio: Total Debt/ Total Equity
2014: (1144+9)/1622= 0.72
2015: (1098+36)/2120= 0.53
b)Interest Coverage Ratio: Operating Income/ Interest Expense
2014: 354/88= 4.02
2015: 863/52= 16.59
Referring to the above figures, we can see that over the year, the debt-equity ratio of the company has declined from 0.72 to 0.53, thus confirming the firm’s reduced reliance on debt funds. On the other hand, with the interest coverage ratio increasing from 4.02 to 16.59, the trend confirms the strong solvency position of the company to withstand the debt related payments.
-Efficiency Ratios
For a capital intensive industry, it is always important to access the trend in efficiency ratios as these ratios indicate how efficiently the firm is utilizing its asset base. Highlighted and discussed below are the efficiency ratios of the company:
a)Asset Turnover: Revenue/ Total Assets
2014: 6799/5163= 1.31
2015: 6644/5778= 1.15
The above figures indicate that over the year, the asset turnover ratio has declined from 1.31 to 1.15 on account of the decrease in the revenue figures. This indicates that Spirit Aerospace was not efficient enough to utilize its asset base and generate higher revenue on per unit of the asset available.
References
Cameron, D. (2016, February 3). Spirit AeroSystems Set to Adjust to Jet Makers’ Output Changes. Retrieved June 21, 2016, from Wall Street Journal: http://www.wsj.com/articles/spirit-aerosystems-set-to-adjust-to-jet-makers-output-changes-1454525305
Spirit Aerospace System. (2015). Annual Report 2015. Spirit Aerospace System.
