Defence Archives

In this article, Emanuele BAROLI (ESSEC Business School, Master in Finance (MiF), 2025–2027) explains how to value Aerospace & Defence (A&D) companies by combining the right multiples with a clear view of backlog quality and contract risk. The aim is a practical lens you can apply to comps (comparables), models, and deal work.

What “Aerospace & Defence” is (and how public companies are usually organized)

A&D is the cluster of businesses that design, certify, manufacture and support aircraft and spacecraft, military platforms and mission systems, plus the electronics, software and services that make them work in the field. Public companies tend to report along economically distinct pillars—platforms, defence electronics/sensors, space, and services—with some firms also disclosing a cyber arm. This segmentation matters because revenue recognition (delivery vs over-time), margin stability and cash conversion differ meaningfully across these buckets.

Two concrete blueprints help set the map. Boeing organizes reporting into Commercial Airplanes (BCA), Defense, Space & Security (BDS) and Global Services (BGS). Its notes clarify that most BCA revenue is recognized at the point of aircraft delivery, whereas a substantial portion of BDS and some BGS contracts are long-term and recognized over time.

Leonardo discloses six sectors—Helicopters, Defence Electronics & Security, Cyber & Security Solutions, Aircraft, Aerostructures and Space—and reports orders, backlog, revenues and EBITA by sector, a structure that lends itself naturally to “sum-of-the-parts (SOTP)” and mix analysis.

The multiples: why EV/EBIT is the workhorse in A&D

In A&D, EV/EBIT typically describes the economics better than EV/EBITDA (Enterprise Value / Earnings Before Interest, Taxes, Depreciation and Amortization). The reason is accounting, not fashion. Under IFRS (International Financial Reporting Standards), development costs that meet recognition criteria are often capitalized and then amortized, (qualifying development expenditure is recognised as an intangible asset and is therefore amortised rather than depreciated: depreciation is reserved for tangible property, plant and equipment, whereas amortisation is the systematic allocation of the cost of intangibles (such as capitalised development) over their useful lives). While under US GAAP (United States Generally Accepted Accounting Principles), development is more frequently expensed. Amortization is an economic cost of prior engineering and industrialization. EBITDA ignores it; EBIT does not. Comparing peers with different R&D capitalization policies on EV/EBITDA makes heavy capitalizers look artificially “cheap.”

Example:

In the 2024 financial year, Leonardo reports revenues of €17,763 million, EBITDA of €2,219 million and EBIT of €1,271 million. In management terms, EBITDA is obtained by adding back depreciation and amortisation to EBIT, which implies depreciation and amortisation of about €948 million (2,219 − 1,271). In formula form, EBITDA = EBIT + Depreciation + Amortisation = 1,271 + 948 ≈ 2,219. All figures are in millions of euros, with minor differences due to rounding. EBIT already includes the economic cost of depreciation and amortisation (including, for example, the amortisation of capitalised development costs), while EBITDA adds it back and therefore does not “see” this cost, which is why EV/EBIT often provides a more meaningful economic comparison than EV/EBITDA when analysing A&D companies like Leonardo.

A pocket example makes the point. Suppose revenue is 1,000 and cash operating costs are 800: EBITDA equals 200. Add 40 of industrial D&A and 100 of amortized, capitalized R&D: EBIT is 60. An 8× EV/EBITDA screen implies EV of 1,600; a 12× EV/EBIT anchor implies 720. The optics diverge because EBITDA suppresses an economically meaningful charge. In practice, anchor on EV/EBIT; if you must use EBITDA for market convention, normalize it by re-expensing capitalized R&D or by separating “maintenance-like” D&A from program amortization.

Always cross-check with EV/FCF (or FCF yield). In long-cycle industries, the acid test is whether booked economics pass through working capital and reach free cash once advances unwind, inventories build for rate ramps, milestones slip and remediation spending intrudes. EV/FCF disciplines any narrative derived from headline EBIT.

Backlog: quantity is the headline; quality drives value

Backlog is tomorrow’s revenue promise—but investors price what kind of promise it is. Start from a clean definition. Boeing defines total backlog as unsatisfied or partially satisfied performance obligations for which collection is probable and no customer-controlled contingencies remain; it excludes options, announced deals without definitive contracts, orders customers can unilaterally terminate, and unfunded government amounts.

Scale and coverage provide context, not answers. At 31 December 2024, Boeing reported $521.3bn of total backlog, comprising $498.8bn contractual and $22.5bn unobligated, while cautioning that delivery delays, production disruptions or “entry-into-service (EIS)” slippage can reduce backlog.

Leonardo closed 2024 with book-to-bill of ~1.2×, backlog above €44bn and roughly 2.5 years of production coverage—solid starting points if the mix is funded and executable.

Quality is the determinant. Judge the funded share (appropriated vs contingent), the margin mix by program, concentration by customer or platform, and—critically—executability against industrial capacity, certification gates and supplier health. A smaller, well-funded, high-margin and diversified backlog with credible executability justifies stronger multiples than a larger book that is lightly funded, concentrated or operationally brittle.

Revenue and Backlog diversification.

Source: Leonardo S.p.A. — FY 2024 Preliminary Results Presentation (PDF).

The chart shows the percentage distribution of Leonardo’s backlog in relation to its product portfolio, highlighting the weight of the various business lines and geographical areas.

Leonardo DRS Backlog.

Source: Leonardo DRS — Q3 2024 results article (StockStory).

Over time, the chart shows new orders increasingly outpacing those delivered: after an initial phase of balance (stable backlog), from late 2022 incoming orders rise and expand the order book. The jump between Q3 and Q4 2023 points to one or more major contracts, while in 2024 the order flow remains strong enough to keep the backlog at high levels.

Contract risk: the paper your revenue sits on

Two nominally similar contracts can encode very different economics. Firm-fixed-price development places cost risk squarely on the contractor; technical uncertainty and learning-curve effects can generate catch-up losses and re-time cash. Cost-type contracts reimburse allowable costs plus a fee, limiting downside but capping upside and typically improving visibility. Milestone/performance-based structures align incentives but increase timing volatility. IDIQ/framework arrangements set a ceiling but do not become firm until orders are called.

For valuation, portfolio contract mix is a prior on both the dispersion of outcomes and the discount you apply: heavy fixed-price development warrants more conservative multiples and scenario ranges; cost-type and service-heavy portfolios support tighter distributions of cash outcomes.

Execution and supply chain: where backlog becomes (or does not become) cash

A&D manufacturing is materials- and certification-intensive. Boeing highlights reliance on aluminium, titanium and composites, and the prevalence of sole-source components whose qualification can take a year or more; failure of suppliers to meet standards or schedules can affect quality, deliveries and program profitability.

Airworthiness oversight also constrains timing: in 2024 the FAA communicated it would not approve 737 production-rate increases beyond 38/month or additional lines until quality and safety standards are met.

In models, these realities alter revenue phasing, inventory (often rising when rates slip), the sustainability of customer advances, and, where remediation is required, the cadence of capex and engineering spend. The practical consequence is straightforward: multiples are a consequence of cash reliability. EV/EBIT (or normalized EBITDA) captures the economic load; backlog quality and contract mix explain whether those economics are repeatable; factory and supply chain determine the when of revenue and free cash.

Typical business mix—why it matters for valuation

Commercial platforms (e.g., BCA) recognize revenue largely at delivery, with program accounting and rate decisions driving cash swings; 2024 disclosures explicitly tie BCA results to deliveries, rate disruptions and quality actions.

Defence and space portfolios (e.g., BDS; Leonardo Defence Electronics & Space) contain more over-time revenue and often greater visibility when cost-type work dominates, yet fixed-price development can be painful, as the program notes above illustrate.

Services/MRO and training (e.g., BGS; Leonardo’s cyber and service activities) usually provide steadier margins and higher cash conversion, acting as stabilizers in a SOTP.

A compact playbook you can actually use

Start with EV/EBIT—or, if you must use EBITDA, normalize for capitalized development. Then check EV/FCF to interrogate cash conversion through advances, inventory and milestone timing.

Qualify the order book before you underwrite it: insist on firm definitions (exclude options and unilateral cancellations), isolate the funded share, examine program-level margins and concentration, and test executability against rate plans, certification gates and supplier health. Boeing’s split between contractual ($498.8bn) and unobligated ($22.5bn) backlog is a clean template; Leonardo’s book-to-bill (~1.2×) and ~2.5-year coverage are strong if the mix converts.

Read the contract. Fixed-price development deserves a discount for volatility; cost-type merits a premium for visibility; IDIQ ceilings are not orders until called. Boeing’s fixed-price development programs provide a cautionary case. Underwrite execution with a materials and supplier map (Al/Ti/composites; sole-source exposure) and with regulatory gates (FAA/EASA) that can cap rates irrespective of demand.

Why should I be interested in this post?

As an ESSEC finance student focused on valuation and transactions, you will frequently compare A&D peers and screen targets. This guide helps you avoid EBITDA traps, read backlog quality, and translate contract structures into realistic cash and multiple assumptions that travel well into comps, equity research, and M&A models.