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Analysis of Boeing Company’s Capital Structure

Boeing’s Capital Structure description

It should be claimed that the company has been leveraging its capital structure even further for a long period by continuing the practice of a share buyback, which has been accompanied by the constant, equity-reducing pension liabilities regulations that finance the firm’s pension benefits. Then, this considerably leveraged approach is still balanced by acceptable liquidity, as well as by substantial cash flows (Wei, 2018). Nevertheless, there is no space for debt-financed further business activities if necessary. It might be suggested that the ongoing significant stock performance of Boeing can get worse in the aftermath when recent projected results within the scope of finances provide a too optimistic picture of the company’s future.

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Here, it should be emphasized that the firm is to be perceived as a highly-leveraged one, given the fact that its debts exceed its equities. However, such an approach is quite common among large-capitalized corporations as debt may usually be a less cost-taking option than equity because of the deductibility of taxes of interest payments.

Hence, huge firms frequently possess lower costs of their capital, given the financial flows that are gained easily, which provides a plethora of advantages over smaller enterprises. At this point, it may even be stated that Boeing’s debt ratios are sustainable, given the measurement of interest payments against the earnings of this corporation (Market Watch, 2020). In this regard, it is perfect when EBIT covers net interest by three times as a minimum.

For Boeing, this condition is met, which allows assuming that interest is adequately covered. High-interest coverages are considered a reliable and secure practice – this emphasizes the reason why most investors perceive large-capitalized – like Boeing – as an appropriate option to invest in. Thus, the peculiarities of the firm’s capital structure may be considered optimal.

Boeing’s capital structure issues

Despite the described above pros of Boeing’s capital structure, there are still some important issues to take into account, according to the current numbers. It should be admitted that “BA is forecast to become profitable over the next 3 years, which is considered faster growth than the savings rate (2%)” (Simply Wall St., 2020, para. 4).

What is more, the company is predicted to be profitable over the next three-year period – this is a higher rate in comparison with average market growth. However, negative shareholder equity that is inherent in the corporation might be understood as a more insignificant indicator than the high level of debt. Then, the firm’s operating cash flow is negative as well, which indicates the fact that debts are not adequately covered (Benzinga Insights, 2020) – even keeping in mind Boeing’s capital structure approach.

Overall, the company’s significant cash coverages imply that – even though its debt level is high, Boeing is capable of utilizing the borrowings to obtain cash flows. It can mean that currently, the firm has an optimal policy regarding its capital structure, taking into account the point that it also meets the short-term commitments. The provided rationale allows suggesting that Boeing is not need to move toward a new capital-structure strategy to optimize the ongoing situation. In the long run, it will remain profitable, and the present issues may be characterized as temporary. The company seems to face these issues and face the related risks intentionally, given its highly-leveraged approach.

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References

Benzinga Insights. (2020). What does Boeing’s debt look like? Yahoo! finance. Web.

Market Watch. (2020). Boeing Co. Web.

Simply Wall St. (2020). Boeing. Web.

Wei, J. (2018). Boeing: Any potential turbulence from its highly leveraged capital structure? Seeking Alpha. Web.

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StudyCorgi. (2022, May 17). Analysis of Boeing Company’s Capital Structure. Retrieved from https://studycorgi.com/boeing-companys-capital-structure/

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StudyCorgi. 2022. "Analysis of Boeing Company’s Capital Structure." May 17, 2022. https://studycorgi.com/boeing-companys-capital-structure/.

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StudyCorgi. (2022) 'Analysis of Boeing Company’s Capital Structure'. 17 May.

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