Balance Sheet Analysis on Boeing Stock: 3 Highlights You Should Know

Source: Boeing.

Aerospace giant Boeing (BA 0.01%) has made the most of the multi-trillion-dollar opportunity in the commercial aerospace field, riding its wave of orders for its newer aircraft models and seeing its share price double from late 2012 to early this year. Yet even though the company's stock has fallen back somewhat from its record-high levels earlier this year, Boeing still finds itself in a strong position fundamentally, and its balance sheet is one of the clearest indications that Boeing has a strong foundation on which to build future growth.

Vying with rival Airbus (EADSY -0.28%) for position between the two most popular manufacturers of commercial aircraft, Boeing has amassed a huge number of orders in recent years with new aircraft like the 787 Dreamliner, the 737 MAX, and the 777X. With so much demand, Boeing has years' worth of production backlogs to make up before it can deliver on all of its commitments. As a result, Boeing's balance sheet has some peculiar attributes that most companies don't, and three particular items especially stand out. Let's take a close look at Boeing's balance sheet to see three key facts in understanding the company's financial health.

A look at Boeing

Source: S&P Capital IQ.

1. Backlogs mean a lot for Boeing's balance sheet
Two items on Boeing's balance sheet clearly indicate the huge rise in order flow that the aerospace giant has seen lately. On one hand, when Boeing collects money as part of its order process, it can't treat that cash as revenue until it actually delivers on the order. As a result, Boeing posts unearned revenue on its balance sheet that it later earns on delivery and treats as then-current revenue at that later time. On the other hand, in order to prepare for the production process, Boeing has to build up huge amounts of inventory in parts and partially completed planes. Once delivered, those materials all exit the inventory line.

Since 2006, unearned revenue has almost doubled, with a particularly fast pace of growth from 2011 forward. At the same time, though, inventory levels have shot through the roof, rising almost sixfold from just over $8 billion eight years ago.

BA Inventories (Annual) data by YCharts

As orders start to turn into deliveries, growth in these numbers should moderate or even come down once the pace of production starts to outrun new orders. Yet since they reflect future demand, investors shouldn't be in any hurry to get these numbers to fall as long as overall earnings and sales stay strong.

2. Boeing has avoided the lure of debt
Many companies have fallen prey to the lure of low interest rates in adding leverage to their balance sheets. By allowing moves like larger stock buybacks, some companies have boosted earnings growth by reducing share counts, with debt financing directly responsible for raising the funds necessary to implement share repurchase plans.

Boeing, though, remains in the enviable position of having more cash on its balance sheet than long-term debt. The company also does a good job of cash management, with accounts payable of more than $11 billion equating to the longest length of days payable outstanding in years as of June 30. Also, with long term debt to equity at just over 50%, Boeing has the capacity to use more debt in the future if it decides that an opportunity warrants the risk.

Source: Wikimedia Commons.

3. Boeing is getting its pension liabilities under control
Boeing has taken great strides in holding back rises in labor costs like pension liabilities. After ballooning from $8.2 billion in 2007 to $27.2 billion just two years ago, Boeing has cut almost $11 billion off peak pension liabilities.

Boeing has also taken longer-term steps to minimize pension liability. In January, Boeing cut a deal with 33,000 members of its Machinists union to replace old pension plans with a defined contribution plan, fixing Boeing's costs upfront and leaving it unexposed to market fluctuations in future. A couple months later, Boeing announced a similar pension freeze for 68,000 nonunion staff, including managers and executives, with them also getting a 401(k)-like plan in its place. Workers will continue to get employer contributions in lieu of the money that Boeing paid into its pension funds to cover future liabilities, but it'll be up to employees to make sure it's enough for their long-term needs.

Boeing: Staying in balance
Boeing's prospects look strong, and its balance sheet gives the aircraft maker some strategic options that many companies lack. If it's prudent with its finances, Boeing has the potential to grow even more important in the overall world economy in the years to come.