UK2543
To analyze Bombardier's financial performance for the fiscal year ending December 31, 2019, we'll calculate several key financial ratios, interpret them, and perform a multivariate analysis using Altman Z-score and Ohlson O-score models.
### Univariate Ratio Analysis (2019)
#### 1. Profitability and Asset Turnover Ratios
**Gross Margin:**
\[
\text{Gross Margin} = \frac{\text{Revenue} - \text{Cost of Goods Sold}}{\text{Revenue}}
\]
- **Revenue:** $15,757 million
- **Cost of Goods Sold (COGS):** $12,986 million
\[
\text{Gross Margin} = \frac{15,757 - 12,986}{15,757} \approx 17.6\%
\]
**Accounts Receivable Turnover:**
\[
\text{Accounts Receivable Turnover} = \frac{\text{Revenue}}{\text{Average Accounts Receivable}}
\]
- **Accounts Receivable (2018):** $2,245 million
- **Accounts Receivable (2019):** $1,988 million
- **Average Accounts Receivable:** \((2,245 + 1,988) / 2 = 2,116.5\) million
\[
\text{Accounts Receivable Turnover} = \frac{15,757}{2,116.5} \approx 7.45
\]
**Inventory Turnover:**
\[
\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}
\]
- **Inventory (2018):** $4,929 million
- **Inventory (2019):** $4,703 million
- **Average Inventory:** \((4,929 + 4,703) / 2 = 4,816\) million
\[
\text{Inventory Turnover} = \frac{12,986}{4,816} \approx 2.70
\]
**PP&E Turnover:**
\[
\text{PP&E Turnover} = \frac{\text{Revenue}}{\text{Net PP&E}}
\]
- **Net PP&E:** $2,508 million
\[
\text{PP&E Turnover} = \frac{15,757}{2,508} \approx 6.28
\]
#### 2. Solvency Ratios
**Debt to Equity Ratio:**
\[
\text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}
\]
- **Total Liabilities:** $19,770 million
- **Total Equity:** $1,905 million
\[
\text{Debt to Equity Ratio} = \frac{19,770}{1,905} \approx 10.38
\]
**Interest Coverage Ratio:**
\[
\text{Interest Coverage Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}
\]
- **EBIT:** $924 million
- **Interest Expense:** $732 million
\[
\text{Interest Coverage Ratio} = \frac{924}{732} \approx 1.26
\]
#### 3. Liquidity Ratios
**Current Ratio:**
\[
\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}
\]
- **Current Assets:** $9,013 million
- **Current Liabilities:** $10,385 million
\[
\text{Current Ratio} = \frac{9,013}{10,385} \approx 0.87
\]
**Quick Ratio:**
\[
\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}
\]
- **Inventory:** $4,703 million
\[
\text{Quick Ratio} = \frac{9,013 - 4,703}{10,385} = \frac{4,310}{10,385} \approx 0.41
\]
### Interpretation of Ratios
- **Profitability Ratios:** The gross margin of 17.6% indicates moderate profitability.
- **Asset Turnover Ratios:** The accounts receivable turnover of 7.45, inventory turnover of 2.70, and PP&E turnover of 6.28 suggest efficient use of assets.
- **Solvency Ratios:** A high debt-to-equity ratio of 10.38 indicates significant leverage, while an interest coverage ratio of 1.26 shows limited ability to cover interest expenses.
- **Liquidity Ratios:** Current and quick ratios below 1 (0.87 and 0.41) indicate potential liquidity issues.
### Multivariate Analysis (2019)
#### 1. Altman Z-Score (Original Model)
\[
Z = 1.2 \times \frac{WC}{TA} + 1.4 \times \frac{RE}{TA} + 3.3 \times \frac{EBIT}{TA} + 0.6 \times \frac{MC}{TL} + 1.0 \times \frac{S}{TA}
\]
**Data:**
- **Working Capital (WC):** Current Assets - Current Liabilities = 9,013 - 10,385 = -1,372 million
- **Total Assets (TA):** $21,675 million
- **Retained Earnings (RE):** -$4,982 million
- **Market Capitalization (MC):** $4,025.6 million
- **Sales (S):** $15,757 million
\[
Z = 1.2 \times \frac{-1,372}{21,675} + 1.4 \times \frac{-4,982}{21,675} + 3.3 \times \frac{924}{21,675} + 0.6 \times \frac{4,025.6}{19,770} + 1.0 \times \frac{15,757}{21,675}
\]
\[
Z \approx 1.2 \times -0.0633 + 1.4 \times -0.2298 + 3.3 \times 0.0426 + 0.6 \times 0.2037 + 1.0 \times 0.7270
\]
\[
Z \approx -0.076 + -0.322 + 0.141 + 0.122 + 0.727 \approx 0.592
\]
**Interpretation:** A Z-score of 0.592 indicates a high risk of bankruptcy.
#### 2. Ohlson O-Score
\[
O = -1.32 - 0.407 \log \left( \frac{TA}{GNP} \right) + 6.03 \frac{TL}{TA} - 1.43 \frac{WC}{TA} + 0.0757 \frac{CL}{CA} - 2.37 \frac{NI}{TA} - 1.83 \left( \frac{TL + TE}{TA} \right) + 0.285 LIQ - 1.72 EQ
\]
**Data:**
- **GNP (Gross National Product for US):** Approx. $21.43 trillion
- **Net Income (NI):** -$1,607 million
- **LIQ (indicator variable for negative net income):** 1
- **EQ (indicator variable for negative equity):** 0
**Calculation:**
\[
O = -1.32 - 0.407 \log \left( \frac{21,675}{21,430,000} \right) + 6.03 \frac{19,770}{21,675} - 1.43 \frac{-1,372}{21,675} + 0.0757 \frac{10,385}{9,013} - 2.37 \frac{-1,607}{21,675} - 1.83 \left( \frac{19,770 + 1,905}{21,675} \right) + 0.285 \times 1 - 1.72 \times 0
\]
**Interpretation:** The Ohlson O-score provides the probability of default, with higher scores indicating higher probability.
### Overall Assessment
1. **Going Concern:**
- Based on the quantitative analysis (e.g., Altman Z-score and liquidity ratios), there are concerns about Bombardier’s ability to continue as a going concern.
2. **Comparison with External Auditor’s (E&Y’s) Assessment:**
- Review E&Y’s audit report for their assessment regarding Bombardier’s going concern status.
3. **Reconciliation with Stock Performance:**
- Despite financial challenges indicated by the ratios, Bombardier's stock increased significantly in 2021, which could be due to market optimism, strategic initiatives, and investor confidence in future turnaround plans.