Abstract

This essay analyses the economic performance of BAE Systems, one of the world’s largest defence and aerospace companies, by examining the impact of technological advancements, political factors, and interest rate fluctuations on its growth. It highlights BAE Systems’ strategic investments in research and development, particularly in digital intelligence and sustainable technologies, which have strengthened its market position and increased its sales revenue from £20.86 billion in 2020 to £25.28 billion in 2023. The paper also explores the influence of geopolitical events, such as the Russia-Ukraine conflict and the AUKUS alliance, which have driven significant growth in international defence orders, resulting in record-high backlogs and rising share prices. Furthermore, the analysis demonstrates that despite the Bank of England’s interest rate hikes from 0.5% in 2021 to 5.25% in 2023, BAE Systems has maintained financial stability, supported by a declining debt-to-asset ratio, a strong interest coverage ratio, and improved profitability margins. Overall, the findings indicate that technological innovation, political alliances, and rising global defence demand have enabled BAE Systems to achieve sustainable growth and strengthen its competitive advantage in the international defence market.

Introduction

The company I selected for this essay is BAE SYSTEMS. It is one of the largest defence companies that deals with manufacturing and rendering services related to arms and ammunition and information technology solutions. A global company that established a benchmark in the defence market in different countries – the UK, the US, Saudi Arabia, and Australia. This essay will discuss the performance of the company considering specific factors and further will explain how the interest rates were affected during the pandemic. The essay will assess the impact of the two factors using trend and Financial analysis.

Factors Affecting Performance:

Technological Factors

BAE SYSTEMS is the merger of The General Electric Company, plc (GEC) and British Aerospace plc (27th April 1999). Their main vision is to be dominant in international defence, aerospace, and security. In addition to that the company has an extensive network from warfare systems to intelligence gathering to armoured vehicles (BAE Systems). The two external influences that affect the company are the Political and legal factors and the Technological aspects. Constant innovation and the development of technology are essential for a defence company to build compatibility and efficiency of the products. Over the past few years, the company has invested in research and development and collaborated with other companies to bring digital intelligence. In the year 2020, the company aimed to invest in technology which would increase the sustainability of products as well as reduce the environmental impact of it (Annual Report, Bae System). The company was involved in the production of F-35 Lightning II aircraft in the year 2020 and achieved the full rate production in the year 2021 to 151 (Annual Report 2021, BAE SYSTEMS)(Appendix 1:Figure1)

For sustenance in the competitive market, companies should constantly innovate and improve their products (Hasan Ayaydin and Ibrahim Karaaslan,2014).  In the last 3 years, it has invested almost 1.6 billion in technology and research and development to maintain the diverging capabilities. Currently, the firm commenced to bridge between the cyber domains and the military domains to share critical information and ease decision-making. It clearly states in the annual report that it aims to develop its technologies with emerging difficulties. Their advancement in technological aspects has significantly affected their revenue and made them the seventh-largest defence contractor by revenue. The sales revenue of the business rose from 20,862 million to 25,284 million in just the last four years from 2020-23 (Five Year Summary, BAE SYSTEM) (Appendix2: Figure2).

Their significant increase in their revenue led to a wider scope in the defence market. The share price of the company rose from 631.40 in 2020 to the present-day value of 1351.50 (Yahoo Finance)(Appendix3:Figure3).

 Due to the strong demand for defence in the country, their market strategies, and the increased profitability of the company. An increase in the share prices and the earnings per share has created a wider demand for the stocks in the market attracting the investors to make more investments to the company.

Political Factors

Political and Legal factors influence a company, Bae Systems being a multinational company operating in different countries like the UK, the US, Australia and internationally must comply with complex rules and regulations, and different tax policies. Being their services directly relevant to the defence sectors of the economy and the government the company must satisfy its stakeholders. The common problem associated with dealing with international orders in a defence market would be handling sensitive information. The company has started with lobbying activities to communicate the information to the government and the policymakers. In addition to that, the geopolitical tensions and the Russian-Ukraine war have led to an increase in the profitability of the company by increasing the orders. To strengthen support for Ukraine the company has signed agreements to aid the army with supply of the arms, training, and repairs. The company in the first agreement gave its consent to support and work in cooperation with the Armed Forces Ukraine to get aware of their requirements. Moreover, it acceded with the supply of 105mm Lights guns from within Ukraine and created a framework in the second agreement(BAE SYSTEMS,31 Aug 2023). It had set a record of £21.1 billion in new orders in the first half of the year 2023 for submarines and fighter aircraft boosting its order backlog of £66.2 billion. According to the article in Financial Times, the company has become the second-best performer in the blue-chip FTSE 100 due to the shares of the company rising dramatically to 70 per cent since the start of 2022 (Sylvia Pfeifer, August 2023). Moreover, the company is dramatically progressing in the international markets as the European nations increase their spending on defence, which has led to a rise in orders, one of them was the German nation ordering for Eurofighter Typhoon Aircraft (Sylvia Pfeifer, February 2022). Furthermore, the AUKUS Alliance, a trilateral alliance between the countries Australia, the UK and the US could benefit  BAE SYSTEMS as this and ASC Pty Ltd were chosen to manufacture submarines for the future, enhancing the relations. The AUKUS Alliance has increased their opportunities and enabled them to soar into other markets as well. According to the Economic Times, Australia intends to give 4.6 billion Australian dollars for production of the nuclear-powered submarines (Economic Times, March 2024) Major acquisitions in the past have also boosted the company’s performance and international relations, for example, acquiring the Tenix Defence Company in Australia in 2008 made them the biggest Australian Defence Company in Australia.  Furthermore,  the preliminary results of 2023 of the company highlighted that the portfolio of the company improved as they have been receiving contracts from the Czech Republic, US Army Ammunition Plant and more(Preliminary results of 2023, Bae Systems).Looking at the financial aspect of the company the overall sales operating in different markets are $848 billion, $68 billion, $330 billion, $148 billion, and $265 billion in the US and Canada, the UK, Europe, the Middle East, and Asia Pacific respectively (Annual Report 2023,BAE SYSTEMS) (Appendix 4:Figure4).

Effect of Interest Rates

Coming to the interest rates in the UK, there has been a hike in the interest rate from 0.5% in 2021 to the present day 5.25%. Increasing interest rates by the Bank Of England is a counter policy to curb down the rising inflation in the economy. Businesses with debts and start-ups are more likely to be impacted by the rise in interest rates, as their cash outflow increases in terms of paying higher interest rates with low disposable income. On the other hand, there hasn’t been a significant impact of interest rates on BAE SYSTEMS company. The debt-to-asset ratio in the past three years was, 71%, 63%, and 66%, in the years 2021,2022,2023 respectively. The debts to assets ratio compares the total debts owed by the company against the total assets owned. Although the rate was high in the beginning the company is coping to decrease it further, which is a positive sign for the development. The interest expense of a company rose from £314,000 in 2021 to £339,000 in 2023 (Yahoo Finance,2024) (Appendix 5: Figure 5) due to the change in the interest rates. The average interest coverage ratio of the company is around 7.1 which states that the company can pay its interest expenses on the debts (Finbox.com,2024). The earnings per share also rose to £61.3 at the year-end of 2023 from £55.2 in 2021, which indicates that the rise in interest rates hasn’t affected much while other factors influencing. The profitability margin of the company has also increased over the years to 8.05% (Yahoo, Finance) (Appendix 6: Figure 6).

The decline in the debts to assets ratio, average interest coverage ratio and increase in profitability incline the company towards growth. The company experiences growth as there has been significant spending on defence by different nations. Comparing different ratios and their reach in the international defence market and the rise in market capital indicates that the company is progressing significantly.

Conclusion

In a nutshell, the performance of the company has been developing significantly. The breakthroughs for the company were the technological advancement that they developed to meet the requirements and investment in Research and Development. Furthermore, the increased spending in the defence market boosted its performance effectively. It is evident from analysing the financial ratios, stocks and dividends earned on it the company has revamped its sales and productivity and gained market exposure.

References

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