This document analyzes and compares the financial positions of BAE Systems and Rolls Royce based on their 2012 annual reports. It finds that while both companies operate in the UK aerospace and defense industry, Rolls Royce was more profitable in 2012, with higher gross margins, return on capital employed, and earnings per share. However, BAE Systems offered a higher dividend yield. Overall, Rolls Royce saw higher growth and increasing share prices compared to declining profits at BAE Systems.

1. Analysis of Financial Positions of
BAE Systems and Rolls Royce
University of BradfordDONE BY:
UOB NOStudent name
12032303Aanchal Saxena
11033589Arwa AlDhali
12032275Charmi Dutia
11033592Muna Al Rashdi
11030090Zainab Al-Amri
11033594Sara Al Rawahi

2. Aero-Space & Defense Industry in the
United Kingdom
 Represents two of the main markets : Aerospace and Defense
 Aerospace, involves the sale, production and service of commercial aircrafts
 Defense which is reliant on the nation’s requirement for military weapons and systems which are
designed to operate in the air or on land or in sea.
 This industry also includes the production of general aircrafts used frequently for business purposes and
also space vehicles which are usually satellites for both commercial and military use
 In the United Kingdom, the Aerospace industry maintains the position as the second or third largest
national aerospace industry in the world.
 The two main domestic companies with a large existence in the British Aerospace & Defense industry
are BAE Systems PLC and Rolls-Royce PLC.

3. Ian King
Chief Executive
Sir Richard Olver
Chairman

4. Background:
 world’s largest multinational aerospace, defense and security company functioning worldwide with its
headquarters in London, UK
 founded in the year 1999 through a £7.7 billion merger of the two companies which were: British Aerospace
(BAe) and Marconi Electronics Systems (MES)
 BAESY has a workforce of 88,200 (31st Dec 2012) talented employees around the globe
 95% of the total sales of the company is military related(2008)
The Products & Services offered by the company are :
1. Cyber and Intelligence
2. Military and Technical Services
3. Defense
4. Security
5. Electronics and Systems Integration
6. IT and informations Systems
7. Consultancy services

5. Operating Segments of BAE
1. Electronic Systems: electronic activities which includes electro optical sensors, electronic
warfare in the USA and UK
2. Cyber and Intelligence: company’s commercial and financial security activities based in the
USA intelligence and security systems
3. Platforms and Services (USA): Land and Weaponries business headquartered in the Unites
States of America
4. Platform and services (UK): maritime and air activities and certain shared activities based in
the United Kingdom
5. Platform and Services (international): company’s business in the countries of Australia, India
and Saudi Arabia etc.

6. Capital Structure of BAE Systems
Equity
28%
Debt
72%
Equity
Debt
 The group financed its operations
through a mixture of equity funding
and debt financing, which includes
bank and capital market borrowing. As
of December 2012, the capital of the
company was £13,312 million which
comprises total equity of £3,774 million
and debt of £9,538 million

7. Ian Davis
Chairman
John Rishton
Chief Executive

8. Background:
 Global provider of integrated power systems and services to the civil aerospace, defense aerospace,
marine and energy markets Head Quartered in London
Rolls-Royce Group PLC found in the year 1906 by Henry Royce and Charles Rolls in Manchester, England
It is the world’s third-largest maker of aircraft engines, and also has major businesses in the marine
propulsion and energy sectors
RR group has a workforce of 40,000 talented employees around the globe
The Major Businesses of the Company are:
1. Civil Aerospace
2. Defense Aerospace
3. Energy
4. Marine

9. Capital Structure of Rolls-Royce
56%
44%
Equity
Debt
 Rolls-Royce finances its operations
through a mixture of equity funding
and debt financing, which includes
bank and capital market borrowing. As
of 31st December 2012, the total
capital of the company was
£10,921million which comprises total
equity of £6,105million and debt of £
4,816million

10. RATIO ANALYSIS OF :
v
s

11. Profitability Ratios
 Rolls Royce Holdings has higher gross
profit margin than BAE Systems. Thus, it
has higher profitability .
 Rolls Royce Holdings has higher
Operating Profit ratio than BAE Systems
which means that it is more profitable
from its operations.
 Rolls Royce Holdings has higher
percentage of ROCE than BAE Systems
which means that it does a better job of
converting the capital invested in the
business into profit.
Gross Profit Margin Operatinfg Profit
Margin
Return on Capital
Employed
9.30%
9.86%
10.24%
22.57%
11.29%
24.70%
BAE Systems Rolls-Royce

12. Activity Ratios
Net Asset Turnover (in times)
0.44
1.99
BAE Systems Rolls Royce  Rolls Royce Holdings has higher Net
asset turnover ratio than BAE Systems.
This indicates that Rolls Royce Holdings
is more efficient at utilizing its assets to
generate sales (revenue).

13. Liquidity Ratios
Quick Ratio(in times) Current Ratio(in times)
0.7
0.7
0.95
1.33
BAE Systems Rolls Royce  Rolls Royce Holdings Company has
higher current ratio than BAE Systems.
Therefore, it is more liquid or its ability to
meet its current liabilities is higher than
BAE Systems.
 Rolls Royce Holdings has higher quick
ratio than BAE which means that it is
more liquid and better able to ride out
any reduction in its business.

14. Efficiency Ratios
Inventory Holding
Period (in days)
Accounts
Payables Period
(in days)
Accounts
Receivables
Period (in days)
15.5
191.7
63.09
105.6
247.5
123.62
BAE Systems Rolls Royce  BAE Systems has lower Inventory holding
period than Rolls Royce Holdings. This indicates
that BAE Systems is more efficient in utilizing its
inventory. In other words it is faster in turning its
inventory into cash
 Rolls Royce Holdings has higher Accounts
payables payment period than BAE Systems.
This allows RRH to get the maximum
advantage of credit purchase. It means that it
keeps more cash on hand.
 BAE Systems has lower collection period than
Rolls Royce Holdings. This means that BAE
Systems is faster in collecting its receivable
(what is owed to it).

15. Market Performance Ratios (1)
Earnings Per share ( £)
0.33
1.23
BAE Systems Rolls Royce  Rolls Royce Holdings has higher Earnings
Per Share than BAE Systems. It means that
each ordinary share earns 123.23 pence
of the profit in compered to BAE Systems
which earns 33.1 pence of the profit. This
makes RR more profitable.

16. Market Performance Ratios (2)
Price Earnings Ratio (in times)
10.17
7.1
BAE Systems Rolls Royce  BAE Systems has higher PE ratio than Rolls
Royce Holdings. It indicates that investors
of BAE Systems pay more for each
element of current net income; thus its
share is more expensive than Rolls Royce
Holdings which has lower PE ratio.
 On 31st dec 2012 the Closing share price
of BAE systems was 336.9 pence and Rolls
Royce was 873.5 pence

17. Market Performance Ratios (3)
Dividend Yeild Per share
5.70%
2.23%
BAE Systems Rolls Royce  BAE Systems has higher Dividend yield
than Rolls Royce Holdings which
means that investors of BAE Systems
will have higher returns on their shares.
Therefore, BAE Systems offers more
attractive yield compared to Rolls
Royce Holdings.

18. Market Performance Ratios (4)
Dividend Cover (in times)
1.7
6.2
BAE Systems Rolls Royce  BAE Systems Dividend cover is 1.69 ~ 1.7
times, the stock market benchmark is
between 1.5 to 2.5 times, therefore it is
safer because there is greater scope to
continue to pay the dividends even if its
profits decline. However, Rolls Royce
Holdings has a Dividend cover of 6.319
times which means that the dividend
yield is low and investors are not
receiving their fair share of the
company’s profit.

19. Market Perception Based on 2012
results (1)
 Rolls Royce looks more attractive for investors rather than BAE because it has higher EPS.
 Moreover, its shares were cheaper than BAE in 2012 as it has lower PE which makes it more attractive
for investors.
 However, BAE seemed to be more attractive than Rolls Royce in terms of offering a dividend yield of
5.7% and a dividend cover of 1.7 times.
 Even though Rolls Royce gave a high dividend cover but its more than 4times which masks investors
or shareholders, and since it has been dissected earlier, making it less attractive to invest in their
company.
 Profit growth
 BAE System decreased its profit
 Rolls Royce increased its profit

20. Market Perception Based on 2012
Results (2)
 A share price of 873.5 pence was the closing price of Rolls Royce as 31 December 2012. In contrast, BAE
systems, has closing price of share price of 336.9 pence. it can be recognized that Rolls Royce
generates higher growth in most financial areas which attract investors.
 it is difficult to assess which one is the most attractive to investors because it is to be determined by the
stakeholder's particular needs and the situational requirement.

21. Improvements Comparisons
Rolls RoyceBAE systems
 The growth in income has increased
from £11,124 million in 2011 to £12,161 in 2012
 Returns on sales also increased from 10.7% in
2011 to 12.2% in 2012 which led to huge profits.
 Profits increased from £848 million in 2011
to £2,295 in 2012 because of the productivity
improvement and higher volume
 Sales decrease in 2012 compared
to 2011 from £19,154 million
to £17,834
 Decreases on the net profits
from £1260 million in 2011 to £1079
million in 2012
 Operating profit has increased
from £1580 million in 2011 to £1640
million in 2012

22. Conclusion
 We conclude by saying that the year 2012, overall was not a very profitable year in terms of the
Aerospace Defense Industry.
 BAE group which is reliant on the defense sector for 95% of its sales suffered losses due to reduced
military spending, principally in the United States (U.S.) and Europe.
 Due to these reasons BAE Systems debt capital is now 72% of the total capital
 Despite of that BAE still continues to give a higher dividend yield to its customers.
 Rolls Royce on the other hand continues to be profitable due to increased productivity and also
had a 9% increase in its income levels .
 And slowly its shares are growing to be more expensive than those of the BAE.

23. References:
 BAE Systems, (2012) Annual Report. [online] Available at : http://bae-systems-investor-relations-
v2.production.investis.com/~/media/Files/B/BAE-Systems- Investor-Relations-V2/Annual%20Reports/BAE-
annual-report-final.pdf. [Accessed on 12 Jan 2014].
 BAE. (2013). 2012 Results. [online] available form http://bae-systems-investor-relations-
v2.production.investis.com/2012-results.aspx [accessed on 20 January 2014]
 Crosby, M. (2013) BAE Systems Blame Weak Global Demand For Drop In Profits. [online] available form
http://www.dcicontracts.com/DCIblog/2013/02/21/bae-systems-blame-weak-global-demand-for-
drop-in-profits/ [accessed on 20 January 2014]
 Robertson, M.(2013) Additional Financial Information. [online] available form http://www.rolls-
royce.com/Images/additional_financial_information_tcm92-44012.pdf [accessed on 20 January 2014]
 Rolls Royce, (2012) Annual Report.[online] Available http://www.rolls-royce.com/Images/
rolls_royce_annual_report_2012_tcm92-44211.pdf [Accessed on 12 Jan 2014].
 Rolls-Royce (2013) 2012 Full Year Results. [online] available form http://www.rolls-
royce.com/news/press_releases/2013/140213_2012_full_year_results.jsp [accessed on 20 January 2014]