CA6490
### Analysis of Bombardier’s 2019 Financial Performance
To perform a comprehensive analysis of Bombardier’s financial health for the fiscal year ending December 31, 2019, let's calculate the necessary financial ratios and perform a multivariate analysis using the 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:** $15,800 million (sum of Aviation and Transportation revenues)
- **Cost of Goods Sold (COGS):** $12,986 million
\[ \text{Gross Margin} = \frac{15,800 - 12,986}{15,800} \approx 17.8\% \]
**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:** \(\frac{2,245 + 1,988}{2} = 2,116.5 \text{ million}\)
\[ \text{Accounts Receivable Turnover} = \frac{15,800}{2,116.5} \approx 7.47 \]
**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:** \(\frac{4,929 + 4,703}{2} = 4,816 \text{ million}\)
\[ \text{Inventory Turnover} = \frac{12,986}{4,816} \approx 2.70 \]
**PP&E Turnover:**
\[ \text{PP&E Turnover} = \frac{\text{Revenue}}{\text{Net PP&E}} \]
- **Net PP&E:** $2,508 million
\[ \text{PP&E Turnover} = \frac{15,800}{2,508} \approx 6.30 \]
#### 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 17.8% indicates moderate profitability. The company generates a reasonable margin on its sales.
- **Asset Turnover Ratios:** Accounts receivable turnover of 7.47, inventory turnover of 2.70, and PP&E turnover of 6.30 suggest efficient use of assets to generate revenue.
- **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, as the company may struggle to meet short-term obligations.
### Multivariate Analysis (2019)
#### 1. Altman Z-Score (Original Model)
\[ Z = 1.2 \times \frac{\text{WC}}{\text{TA}} + 1.4 \times \frac{\text{RE}}{\text{TA}} + 3.3 \times \frac{\text{EBIT}}{\text{TA}} + 0.6 \times \frac{\text{MC}}{\text{TL}} + 1.0 \times \frac{\text{S}}{\text{TA}} \]
**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):** $15,800 million
\[ Z = 1.2 \times \frac{-1,372}{21,675} + 1.4 \times \frac{-4,982}{21,675} + 3.3 \times \frac{924}{21,675} + 0.6 \times \frac{4,025.6}{19,770} + 1.0 \times \frac{15,800}{21,675} \]
\[ Z \approx 1.2 \times -0.0633 + 1.4 \times -0.2298 + 3.3 \times 0.0426 + 0.6 \times 0.2037 + 1.0 \times 0.7286 \]
\[ Z \approx -0.076 + -0.322 + 0.141 + 0.122 + 0.729 \approx 0.594 \]
**Interpretation:** A Z-score of 0.594 indicates a high risk of bankruptcy.
#### 2. Ohlson O-Score
\[ O = -1.32 - 0.407 \log \left( \frac{\text{TA}}{\text{GNP}} \right) + 6.03 \frac{\text{TL}}{\text{TA}} - 1.43 \frac{\text{WC}}{\text{TA}} + 0.0757 \frac{\text{CL}}{\text{CA}} - 2.37 \frac{\text{NI}}{\text{TA}} - 1.83 \left( \frac{\text{TL} + \text{TE}}{\text{TA}} \right) + 0.285 \times \text{LIQ} - 1.72 \times \text{EQ} \]
**Data:**
- **GNP (Gross National Product for US):** Approx. $21.43 trillion (USD)
- **Net Income (NI):** -$1,607 million
- **LIQ (indicator variable for negative net income):** 1
- **EQ (indicator variable for negative equity):** 0 (equity is positive)
\[ O = -1.32 - 0.407 \log \left( \frac{21,675}{21,430,000} \right) + 6.03 \frac{19,770}{21,675} - 1.43 \frac{-1,372}{21,675} + 0.0757 \frac{10,385}{9,013} - 2.37 \frac{-1,607}{21,675} - 1.83 \left( \frac{19,770 + 1,905}{21,675} \right) + 0.285 \times 1 - 1.72 \times 0 \]
\[ O = -1.32 - 0.407 \log (0.00101) + 6.03 \times 0.9126 - 1.43 \times -0.0633 + 0.0757 \times 1.152 - 2.37 \times -0.0741 - 1.83 \times 0.997 \]
### 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 due to high leverage, poor liquidity ratios, and low profitability indicators.
2. **Comparison with External Auditor’s (E&Y’s) Assessment:**
- External auditors typically evaluate whether there are substantial doubts about the company's ability to continue as a going concern. If Ernst & Young (E&Y) concluded that Bombardier could continue as a going