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Debt Classifications
Bombardier’s liability accounts raise an interesting question. These are questions provoked only because the ratios indicate some serious deficiencies.
Why is long-term debt (representing a third of all liabilities) so large in comparison to the property, plant, and equipment asset account? There are not many other assets on the balance sheet where this debt could be applied.
Advances and progress billings in excess of related costs are correctly a current liability, but how well is management using their buyer’s advances to finance production costs? Not very well if accounts payable are so high in relation to the asset account of inventories.
Similarly, fractional ownership deferred revenues are listed as a current liability because these are for aircraft not yet delivered. Again, this is revenue which should improve the picture of financing production, a figure that is not very impressive.
The Notations
An investor having a head full of question marks as is the case with the poor Balance Sheet filed by Bombardier, is advised to spend time going over the notes or explanations filed with the financial statements in the annual report. They can give considerable insight. Looking between the lines can tip an investor to the real purpose behind some of the lengthy dialogue in these notes.
Looking at the Bombardier Annual Report there is some more information that needs to be uncovered to satisfy the purpose of this analysis. Current assets list an account for invested collateral. This is a new account on their statement, which appears because of a newly negotiated Letters of Credit Facility. In other areas of the notes, you will find a list of restrictions placed on Bombardier regarding the conditions of granting the facility. Two of these are particularly important. One is that the company is restricted from paying a dividend. The other is that the corporation is restricted in its ability to incur additional debt. The latter seriously strangles financed growth.
In Summary
This tutorial illustrates how different the position of two well known companies can be. Upon completion you have moved beyond thinking in terms of “the word on the street” or “rumor has it” when discussing the financial security of companies. In many cases, it is not so clear cut. The majority of corporate financials are more muddled than these two, but the purpose of this tutorial is to prompt you to take actions that are not difficult to perform in an effort to make well-informed investment decisions.