Is BAE Systems plc Dependent On Debt?

Are debt levels at BAE Systems plc (LON: BA) becoming unaffordable and detrimental to the company’s future prospects?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BAE Systems

A Tough Week For BAE

As all Foolish investors know, a sudden drop in a company’s share price can present a golden opportunity to buy in and increase the prospect of long-term gains.

Of course, shares normally don’t fall without reason and BAE’s (LSE: BA) (NASDAQOTH: BAESY.US) 10% fall this week was no exception. Indeed, the company reported that profits in 2013 fell by around two-thirds, mainly as a result of a significant impairment charge. Furthermore, the company lowered guidance for 2014, stating that earnings per share (EPS) would be around 5% – 10% lower than in 2013.

With this in mind, is BAE still financially sound and worth picking up on a long-term view? Or is it dependent on debt and too risky to add to a Foolish portfolio?

Excessive Debt Levels?

With a debt to equity ratio of 86%, BAE’s financial gearing is moderately high. Certainly, its balance sheet could accommodate more debt but, with interest rates set to increase over the next few years, it would be prudent for BAE to not gear up the balance sheet too much more than it is at present.

Indeed, with every £1 of net assets being matched by £0.85 of debt, BAE’s capital structure is aimed at improving returns to shareholders via a higher degree of risk. However, the risk of the company being unable to make interest payments on its debt appears to be slim. The two-thirds fall in profit was due to an impairment charge, which is a one-off item. Even with the charge included, BAE was still able to pay the interest on its debt 1.8 times, a level that appears adequate and is also likely to improve as 2014’s profits are forecast to be far higher than those of 2013.

Looking Ahead

As mentioned, BAE has reduced guidance for 2014’s bottom-line. However, even the reduced figure should provide the company with substantially more headroom when making interest payments than it had in 2013.

Furthermore, BAE is still expected to deliver earnings growth in 2014 and, trading on a price to earnings (P/E) ratio of 9.4, it looks good value at the current price of around £4. This, allied to its financial soundness, means that BAE could yet be prove to be a relatively strong performer during the rest of the year. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter owns shares in BAE.

More on Investing Articles

Investing Articles

If I’d put £10,000 into Meta stock at the start of 2024, here’s what I’d have now

Our writer looks at the year-to-date performance of Meta stock and considers whether he'd consider buying this magnificent tech share.

Read more »

Hand arranging wood block stacking as step stair on paper pink background
Investing Articles

Investing £5 a day in this dividend giant can make me a £14,067 annual second income!

This FTSE 100 high-yield star can make me a major second income, supported by a strong business outlook and an…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Taylor Wimpey shares yield a fabulous 6.41%, but is the dividend safe?

Harvey Jones has enjoyed plenty of growth and income after buying Taylor Wimpey shares last year. But is today's high…

Read more »

Yellow number one sitting on blue background
Investing Articles

1 FTSE lithium stock I think could be ready to rocket

Jon Smith explains why the lithium price could be due a rally, and why shares of one related FTSE stock…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
US Stock

This growth stock that Warren Buffett owns just hit 52-week lows. Should I buy?

Jon Smith flags up a high-profile US stock that the great Warren Buffett bought back in 2020 but which has…

Read more »

White female supervisor working at an oil rig
Investing Articles

Could the UK general election be bad news for this FTSE 250 energy producer?

The country is due to vote in the general election on 4 July. Our writer looks at the possible implications…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should we buy cheap FTSE 100 shares now, before it’s too late?

The FTSE 100 is up 5% so far in 2024 and hit an all-time high in May. That means the…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Here’s why I think the Lloyds share price could hit a 5-year high in 2024

It's up 13.5% so far in 2024, and reaching new highs. But where might the Lloyds Bank share price go…

Read more »