BAE Systems plc (LON:BA.): Should The Recent Earnings Drop Worry You?

Assessing BAE Systems plc's (LON:BA.) past track record of performance is a valuable exercise for investors. It enables us to reflect on whether the company has met or exceed expectations, which is a great indicator for future performance. Today I will assess BA.'s recent performance announced on 31 December 2017 and evaluate these figures to its longer term trend and industry movements. Check out our latest analysis for BAE Systems

Despite a decline, did BA. underperform the long-term trend and the industry?

BA.'s trailing twelve-month earnings (from 31 December 2017) of UK£854.00m has declined by -6.46% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -0.24%, indicating the rate at which BA. is growing has slowed down. Why could this be happening? Let's examine what's transpiring with margins and if the entire industry is feeling the heat.

Revenue growth over the last few years, has been positive, yet earnings growth has been falling. This implies that BAE Systems has been growing expenses, which is harming margins and earnings, and is not a sustainable practice. Viewing growth from a sector-level, the UK aerospace & defense industry has been growing its average earnings by double-digit 22.48% over the past year, . This is a turnaround from a volatile drop of -2.12% in the past few years. This growth is a median of profitable companies of 7 Aerospace & Defense companies in GB including Ultra Electronics Holdings, QinetiQ Group and Avon Rubber. This shows that, in the recent industry expansion, BAE Systems has not been able to leverage it as much as its average peer.

In terms of returns from investment, BAE Systems has not invested its equity funds well, leading to a 18.48% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 4.60% is below the GB Aerospace & Defense industry of 6.28%, indicating BAE Systems's are utilized less efficiently. However, its return on capital (ROC), which also accounts for BAE Systems’s debt level, has increased over the past 3 years from 8.77% to 9.93%.

What does this mean?

Though BAE Systems's past data is helpful, it is only one aspect of my investment thesis. Companies that are profitable, but have capricious earnings, can have many factors affecting its business. You should continue to research BAE Systems to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for BA.’s future growth? Take a look at our free research report of analyst consensus for BA.’s outlook.
2. Financial Health: Is BA.’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.