Should Investors Worry about Boeing’s Leverage Levels?


May. 28 2018, Updated 6:32 a.m. ET

A capital-intensive business

Boeing (BA) operates in a highly capital-intensive industry. The planemaker has to invest on a regular basis in research and development in new aircraft manufacturing, innovation, and technology upgrades. Companies operating in this space keep their rivals at bay only through a solid investment in innovation and research.

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Boeing’s debt levels

Huge capital investment can’t just be funded through equity stock, but also through debt. Companies such as Boeing normally incur huge debt costs in the form of interest. At the end of the first quarter, the world’s largest aerospace company had a total debt of ~$12.4 billion. Boeing’s balance sheet is at its highest in recent quarters. In fact, the company’s total debt levels have steadily gone up after the third quarter. However, Boeing had cash and short-term investments of $9.8 billion, which means that the company had a net debt of $2.5 billion as of March 31.

Various cost-cutting measures taken in the recent past have helped Boeing to improve its operating margins across its operating segments. Based on 2017 EBITDA (earnings before interest, tax, depreciation, and amortization) of $12.1 billion, BA’s net leverage, or net-debt-to-EBITDA ratio, has improved slightly to touch 0.18x from 0.19x in Q4 2017.

Peer group’s debt levels

In the aerospace and defense (ITA) sector, Boeing’s closest peers are Lockheed Martin (LMT), Embraer (ERJ), Northrop Grumman (NOC), United Technologies (UTX), and General Dynamics (GD). At the end of Q1 2018, BA’s defense peer Lockheed Martin (LMT) had a net debt-to-EBITDA ratio of 1.75x. Northrop Grumman has a net debt-to-EBITDA ratio of -0.83x, indicating an excess of cash over total debt. United Technologies’ (UTX) metric stands at 1.79x, whereas General Dynamics (GD) has a net-debt-to-EBITDA ratio of 0.46x.

The above comparison shows that in spite of the magnitude of Boeing’s operations, its net-debt-to-EBITDA multiple is the lowest in its peer group. Thus, the company is in a far better position compared to peers on the leverage front.

In the next part, we’ll look at Boeing’s guidance for 2018.


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