Ford Motor Company Analysis Essay
Ford Motor Company Analysis
Ford Motor Company is an American automobile manufacturer founded and headquartered in Dearborn, Michigan but incorporated in the state of Delaware. The company was started by Henry Ford in 1903 and is historically famous for the creation and implementation of the assembly line in manufacturing processes. Ford’s mission is to produce and sell automobiles – cars, trucks, SUVs, etc – from the ones initially designed and engineered by Henry Ford all the way through the newer versions created in the last few years. (Profitable Growth for All, 2012)
In 2011, the company performed strongly – producing revenues of $134,264,000,000 and net income of $20,213,000,000. Financial data has been gathered from the 2011 annual report and 10-K forms filed with the SEC for further analysis. Appendix A contains these reports and appendix B contains select financial ratios calculated in the analysis. The ratios are divided into six major categories: short-term liquidity, capital structure and solvency, return on invested capital, asset turnover, operating performance and profitability, and financial market measures. All six combine to provide an overall picture of financial health for the company. The below analysis provides evidence that, although Ford’s public stock may be overvalued, the company itself is in good financial health.
Ford is one of the world’s largest producers of cars and trucks but also engages in other business sectors, particularly vehicle financing, through subsidiaries. The major segments of the automotive production and sales portion include Ford North America, Ford South America, Ford Europe, and Ford Asia Pacific-Africa. Ford Motor Credit Company is the predominant financing subsidiary of the firm. (Profitable Growth for All, 2012) As of 2011, Ford Motor Company’s vehicle brands included Ford and Lincoln; between the two lines, the company sold over 5.5 million vehicles through almost 12,000 dealerships around the world. (Profitable Growth for All, 2012) Since vehicles are durable goods, Ford and the entire automotive industry is highly affected by general economic conditions. Given the 2008 financial crises and its lasting effects, the sale of durable goods has been relatively low in recent years.
In addition to economic factors, Ford must also contend with competitors worldwide. The automotive industry is highly competitive and ever growing in terms of brands and the various vehicles offered by each. The high level of competition within the automotive industry, particularly in mature markets like the United States, has led to a very competitive pricing environment. Competitive pricing in automotive sales tends to surface in the form of price discounts, marketing incentives, and financing incentives to attract customers to a particular brand since vehicles do not tend to be highly differentiated products. In terms of brand recognition, Ford is well known as one of few American car makers still thriving and is probably best known for its pick-up trucks and sports cars, particularly the Mustang.
Findings and Assumptions
Select financial ratios have been calculated based on Ford Motor Company’s financial statements from 2011 and can be found in Appendix B. The financial statements used for calculations are contained in Appendix A. Based on the calculations, analysis of short-term liquidity, capital structure and long-term liquidity, return on invested capital, asset turnover, operating performance and profitability, and financial market measures are included here.
Ford’s short-term liquidity looks promising. The current ratio of 1.16 is good; it shows that the company can pay its short-term obligations 1.16 times. Typically, a current ratio over 1 is considered healthy, though higher is definitely better. (Wahlen et al, 2008) At first glance, Ford’s cash ratio of 0.52 seems a bit weak. It shows that, although the company can meet its short-term debts per the current ratio, it only has enough cash on hand to meet 52% of its short-term obligations. The financial statements included tend to combine cash and marketable securities into a category labeled “cash and cash equivalents”. If the cash ratio is recalculated using this value instead of simply cash than the ratio improves to 1.10, which shows much stronger liquidity capabilities.
Long-term solvency for Ford Motor Company also appears to be strong. The company’s times interest earned ratio of 1.96 means that it can cover its interest charges on current debt issues almost two times over. This is a good sign that bankruptcy is not eminent and the company is solvent in the long-run. A higher debt to equity ratio means a company gets a larger portion of its financing from creditors than shareholders, though higher is a subjective measure and depends on the industry. (Wahlen et al, 2008) Automotive manufacturers tend to have debt to equity ratios above 2 because the industry is capital intensive. (Debt/equity ratio, 2014) Ford’s debt to equity ratio in 2011 was 10.89, far higher than the industry standard, potentially due to the circumstances of the time. The financial crisis of 2008 resulted in major financial bailouts across the automotive industry. These large levels of debt to the government would increase the debt to equity ratios of all companies that accepted the money.
In addition to both short and long term solvency, a company’s return on invested capital should be analyzed when determining its financial health. Ford’s return on assets from 2011 is 11.3%. This number seems strong on its own but the best information comes from comparing it to either competitors or previous years in the same company since return on assets varies drastically across industries. (Wahlen et al, 2008)) In 2010, Ford’s return on assets was only 4%. This increase is a significant improvement since the two ratios show that, in 2011, $100,000 of assets would generate $11,300 in income while the same assets in 2010 would have only generated $4,000 in income. Ford’s return on equity in 2011 was 134%, a hugely impressive ratio! This calculation shows that $100,000 in shareholder equity would generate $134,000 in income. Considering the ROE in 2010 was negative, this is an extreme improvement in profitability for the company.
In 2010, Ford’s asset and inventory turnover ratios were excellent. The total asset turnover of 74.9% shows that the company is effectively deploying their assets and has been able to generate $74,900 profit for every $100,000 in assets. This is not surprising considering the high return on assets analyzed earlier. Days sales in inventory for Ford in 2011 was only 19 days – meaning the company could convert inventory to sales in less than 3 weeks. Like return on assets, the acceptable level of inventory convertability varies drastically from one industry to another. (Wahlen et al, 2008) In recent years, automotive companies have averaged over 60 days for this inventory ratio. Ford’s 2013 days sales in inventory was almost 90 days and increased by 26% to over 100 days in January of 2014. These increased numbers are likely a result of the slow economic recovery and consequential decrease in car sales. (Young, 2014)
Operating performance and profitability ratios, including fixed asset turnover ratio and operating performance ratio, also show financial strength for Ford Motor Company. The fixed asset turnover ratio of 5.62 shows that the company is able to generate significant revenues from fixed assets, i.e. property, plant, and equipment. Ford’s operating performance ratio of 15.06 also shows that the company is performing strongly.
Ford’s price-earnings ratio of 3.15 means the company’s stock was trading at 3 times the earnings value as of December 31, 2011. This shows that investors were willing to pay 3 times its worth to own Ford stock, signifying that earnings growth was expected. The market-to-book ratio of 4.23 means that the market value of the stock is 4.23 times the book value of the same stock. In other words, Ford’s stock was overvalued in excess of 4 times its book value. Crucial Factors
Many crucial factors play a role in analyzing a company’s financial situation. Some of these factors are internal – such as management, particularly changes in management, and the business model. Other factors are external – examples include governmental action, competitors, and the overall economic state. The above analysis of Ford Motor Company incorporated numerous crucial factors when interpreting the selected ratios and their piece in the overall financial health of the company.
Overall, Ford Motor Company seems to be in good financial health as of the end of 2011. Both short and long term solvency are strong, particularly when marketable securities are included in the cash ratio calculation. Ford’s capital structure is heavily tilted towards creditors, though this is likely due to the governmental bailout and lack of investors in the slowly recovering stock market. Return on assets and return on equity are both impressive, particularly when compared to data from the previous year. In 2011, Ford had excellent asset and inventory turnover statistics. Unfortunately, these have since declined – most likely due to the decrease in automotive sales in today’s slowly recovering economy. Operating performance and profitability standards both show financial strength and good performance, though the financial market measures indicate that investors may be more ambitious than they should be about the performance strength.
(2012). Profitable growth for all: Ford motor company 2011 annual report. Retrieved from Ford Motor Company website: http://corporate.ford.com/doc/2011 Ford Motor Company AR_LR.pdf Debt/equity ratio. In (2014). Investopedia. Retrieved from http://www.investopedia.com/terms/d/debtequityratio.asp United States Securities and Exchange Commission, (2012).Ford motor company 10-k . Retrieved from Ford Motor Company website: http://phx.corporate-ir.net/phoenix.zhtml?c=87772&p=irol-SECText&TEXT=aHR0cDovL2Fwa S50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTgwODI3MDYmRFNFUT0wJlNFUT0wJlNRREVTQz1TRUNUSU9OX0VOVElSRSZzdWJzaWQ9NTc= Wahlen, J., Baginski, S., & Bradshaw, M. (2008).Financial reporting, financial statement analysis, and valuation. (7th ed.). Mason, OH: South Western CENGAGE Learning. Young, A. (2014, Feb 13). Us new auto inventories highest since ’09; gm, volkswagen top list; kia, hyundai up most; toyota stock at ‘healthiest’ level. International Business Times, Retrieved from http://www.ibtimes.com/us-new-auto-inventories-highest-09-gm-volkswagen-top-list-kia-hyundai-most-toyota-stock-healthiest