Financial Ratios of General Dynamics

Introduction

This report intends to carry out an in-depth analysis of General Dynamics to establish whether investors should invest in the company or not. In order to do this, the report analyzes different financial ratios such as liquidity, profitability, debt management, and market value ratios. General Dynamics is one of the leading companies in the defense industry. Specifically, the company has invested heavily in the aviation, shipbuilding, and marine sectors. General Dynamic’s shares are traded in the New York stock exchange. It main competitor is Lockheed Martin which is renowned due to its ability to manufacture high-tech jets in the defense industry.

In order to establish whether investors should invest in stocks and bonds of the company, this report analyzes key financial ratios in the last three years. The liquidity ratios show that the firm has been performing well in the previous three years. However, the current ratios have declined in the last three years. In 2015, the company had a current ratio of 1.17 compared to 1.27 in the previous year (Hasan, OZeki & Kiral, 2016). Although the company is facing liquidity challenges, its financial prospect remains high due to the risk diversification strategy employed that has enabled it to stay competitive in the market.

Financial ratio analysis

Liquidity Ratios

Liquidity ratios Industrial average
Year 2015 2014 2013
Current ratio 1.17 1.27 1.48 1.4
Quick ratio 0.9 1.03 1.25 0.88

Liquidity ratios show the ability of a company to meet its short-term obligations when they fall due. Specifically, Current ratios show the number of times General Dynamic’s current asset can be able to meet the current assets. As a rule, a higher ratio is preferred because it indicates that a company can be able to achieve its short-term obligations when they fall due. The current ratios have declined significantly from 1.48 in 2013 to 1.17 in 2015. This is an indication the company’s liquidity is dropping which can potentially affect the ability to meet short-term obligations when they fall due. In fact, during 2014 and 2015, the current ratios were below the industry average which is a clear indication the company might not be able to meet its short-term maturing obligations.

The quick ratio measures the ability of a company to meet its current liability from the liquid assets of a firm. General Dynamic’s quick ratio depicts a decreasing trend from 1.25 in 2013 to 0.9 in 2015. However, these ratios are above the industrial average of 0.88 which is an indication the company can be able to meet it current liabilities from the liquid assets of the company. When computing this ratio, stocks are eliminated because it is not easy to convert them into cash quickly and they are always recorded at cost rather than fair value. In general, General Dynamic’s quick ratios are stable which means that it will be able to meet its current liabilities effectively.

Asset management ratios

Asset management ratios Industrial average
Year 2015 2014 2013
Inventory turnover 7.69 8.07 8.86 8.21
Total Asset turnover 0.93 0.87 0.90 0.83
Fixed asset turnover 9.6 9.15 9.16 6.45
Day sales outstanding 43.47 50 50.31 45.32

The asset management ratios show the ability of a company to utilize its assets to generate revenues. The inventory turnover ratio has remained stable in the last three years. However, in 2014 and 2015, the inventory turnover was below the industrial average an indication the company is holding more stocks. It also shows that the sales revenues are declining due to low stock turnover.

The total asset turnover ratio has remained above the industrial average in the last three years. This is an indication the company is utilizing its asset effectively to generate revenues. A higher ratio is preferred because it shows that the firm is using its assets efficiently to generate revenues. The ratios have improved from 0.87 in 2014 to 0.93 in 2015, which is above the industrial average.

The fixed asset turnover ratio shows how efficiently a company has used its assets to generate revenues. Specifically, it measures the ability of a company to utilize its fixed assets to generate sales revenues. General Dynamics has a stable fixed asset turnover ratio, which shows it is using its assets efficiently to generate sales revenues. The ratio has increased from 9.16 in 2013 to 9.6 in 2015. It shows the company is improving the efficiency of its assets to generate sales revenues.

Day sales outstanding ratio has improved from 50.31 to 43.47 in 2015. This is an indication the company is collecting its debts on time. This ratio can be referred to as the debtor’s collection period. A short time is preferred because a company will be able to utilize the money collected from the debtors to reinvest. Due to the importance of money in running the business, it is in the best interest of General Dynamics to collect all its outstanding debts as soon as possible. Moreover, due to the time value of money, the faster a company can be able to collect from its debtors, the more it can be able to invest and make more returns. Ideally, General Dynamics will use money collected from the debtors to reinvest. If a company has a high debtor’s collection period, it might be unable to repay its debts on time when they fall due. A high day sale outstanding may prevent a company from meeting its short-term liabilities when they fall due because a long time is taken between sales and receiving the money.

Debt Management ratio

Debt management ratio Industrial average
Year 2015 2014 2013
EBITDA coverage 14.33 12.89 11.99 11.89
Time interest earned 42.86 37.91 36.02 35.56
Total debt to asset ratio 0.09 0.10 0.11 0.16

The EBITDA coverage shows that the company has outperformed the industrial average. The ratio indicates the number of times earnings before interest tax and depreciation can cover the debts of a firm. A higher ratio is preferred because it shows the firm is financial health and it can be able to meet all its debts.

The time interest earned ratio shows General Dynamics has outperformed the industrial average. It is an indication the company can be able to cover all the interest payable from its earnings.

The total debt to asset ratio shows General Dynamics has performed below the industrial average. This ratio indicates the number of times total assets can cover the total debt. A high ratio is preferred because it shows the assets will be able to meet total liabilities in case a company goes into liquidation.

Profitability ratios

Debt management ratio Industrial average
Year 2015 2014 2013
Return on common equity 26.28 19.24 18.21 28.34
Return on total asset 8.81 7.16 6.76 6.67
Basic earning power 0.15 0.63 0.82 0.73
Profit margin on sales 9.42 8.38 6.15 7.43

The return on equity measures the ability of a company to use shareholders capital to generate revenues. General dynamic return on equity ratios has increased from 18.21 in 2013 to 26.28 in 2015. It shows a significant increase, which is a general indication Dynamics is utilizing its shareholder funds effectively to generate revenues. A higher ratio is preferred because it shows the firm is using money contributed by shareholders to generate revenues. However, in the last three years, the company has performed below the industrial average.

The return on total assets shows that General Dynamics has outperformed the industrial average. For instance, in 2015, the return on total assets was 8.81, which was above the industrial average of 6.67. This ratio shows how effective a company is in utilizing its total assets to generate profits. In 2015, General Dynamics had the highest ratio of 8.8, which was an indication it utilized its assets efficiently to generate revenues.

General Dynamic’s profit margin on sales was below the industry average in 2013. However, the company outperformed the industrial average in 2014 and 2015. The increasing trend in profit margin ratio shows the company is improving its business strategies that affect sales (Damjibhai, 2016, p. 32). Therefore, investors should consider General Dynamics as a profitable venture where they can invest because it is expected to generate high revenues in the future. A high-profit margin shows the company is utilizing its assets effectively to generate sales revenues.

Market value ratios

Market value ratios Industrial average
Year 2015 2014 2013
Price/earnings ratio 15.1 16.3 16.3 17
Market/book 4.0 3.92 4.76 4.6
Price/cash flow ratio 17.9 17.34 17.52 12.3

The price/earnings ratio show that the company has performed below the industrial average. For instance, in 2013, General dynamics had a price/earnings ratio of 16.3, which was below the industrial average of 17. General Dynamics has a stable price/earnings ratio that is below the industrial average, which is an indication the company is performing below the industrial expectations. This ratio is used to measure the value of the General dynamic by comparing the book value with market value. Thus, when General Dynamic books value is compared with the market value, it shows a declining trend from 2013 to 2015 (Morningstar, 2016).

The price/cash flow ratio shows that the company has outperformed the industrial average. In 2015, General dynamic reported a price/cash flow ratio of 17.9, which is an indication the company is generating high cash flow. A high cash flow is preferred because it enables a firm to pay high dividends. Inventors want to invest in a company that is generating high cash flow, which results in high dividends (Núñez & Vlachos, 2015). Therefore, investors should invest in General dynamics because it has high future prospects of increasing its dividend payout.

Conclusion

In summary, General dynamics are stable. The company has a stable current ratio, which is an indication it will be able to meet its short-term maturing obligations. The debt ratios show General Dynamics is financially healthy. For instance, EBITDA coverage is above the industrial average. This shows the risk profile of the company is very low. Therefore, investors should invest in the company because it is less risky. Moreover, the profit margin ratio has improved significantly in the last three years. The profit margin on sales increased from 6.12 to 9.42, which is an indication the company, will pay high dividends in the future. Therefore, investors should buy General Dynamics shares and bonds.

References

Damjibhai, S. D. (2016). Performance Measurement Through Ratio Analysis: The Case of Indian Hotel Company Ltd. IUP Journal Of Management Research, 15(1), 30-36.

Hasan, O., Zeki, K., & Kiral, B. G. (2016). Dynamic Analysis of Elastically Supported Cracked Beam Subjected to a Concentrated Moving Load. Latin American Journal Of Solids & Structures, 13(1), 175-200.

Morningstar: General Dynamics Corp financial ratios. (2016). Web.

Núñez, M., & Vlachos, D. G. (2015). Steady-state likelihood ratio sensitivity analysis for stiff kinetic Monte Carlo simulations. Journal Of Chemical Physics, 142(4), 1-7.

Appendixes

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

Financial Ratios of General Dynamics

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