Financial Ratio Analysis

After analyzing the financial data of both Lockheed Martin and Northrup Grumman I would conclude that Northrup Grumman is in slightly healthier financial condition in 2013 out of these two companies. This conclusion is based on a number of different financial ratios calculated from the figures in each company’s annual report. These include liquidity ratios, solvency ratios, funds management ratios, and profitability ratios. Comparison of these ratios between each company show Northrup Grumman having slightly better numbers and an advantage in some key ratios such as the Current Ratio, Acid-Test, and Profit Margin. The spreadsheet used to calculate these ratios is attached and will be referenced to through the analysis discussion.

        The first data analyzed was looking at a couple liquidity ratios for each company. These ratios included the Current Ratio and Acid-Test, also known as the Quick Ratio. As shown in the spreadsheet, both of these values showed Northrup Grumman as having slightly better ratios. This means that Northrup Grumman has more readily available funds and better protection against liquidity problems. They also have greater quick assets to pay off current liabilities immediately if needed.

        The second set of data was taking a look at the solvency ratios. In this set Lockheed Martin has a slight edge in Times Interest Earned; however Northrup Grumman has quite the advantage in Times-Fixed-Charges-Earned and Debt-to-Equity. Times Interest Earned shows how well a company is positioned to pay interest on long term debt, with both companies having fairly even figures for that ratio. Debt-to-Equity is an important solvency ratio as it shows the relationship between debt capital and ownership capital. Northrup Grumman has a much better ratio here as this ratio shows most of Lockheed Martin’s capital is from debt rather than ownership.

        The next set is looking at funds management ratios. This deals with how a company manages its investment in accounts receivable, inventories, and fixed assets. This category was split about even between the two companies, with Northrup Grumman taking two and Lockheed Martin taking three of the five ratios calculated. The main differences found in this category were the average accounts payable period and inventory turnover. In these two categories Lockheed Martin had much lower values than Northrup Grumman. This shows that Lockheed is able to pay off their bills at a quicker rate and have a higher inventory turnover rate, which could be a positive or negative depending on your company’s business model.