Introduction
The current report evaluates the financial position of Ford Motor Company, USA. The report will utilize a number of financial ratios in order to understand the profitability, cash flow, earnings, and financial risks associated with Ford Motor Company. The assessment will rely on the organization’s financial statements for the last four years. The period will cover the 2012 and 2016 financial years. The report will attempt to deliver a transparent overview of Ford Motor’s viability as an investment destination for a motor company interested in acquiring it.
Ford Motor Corporation: Background Information
Ford Motor Company is what is considered the staple of the American motor vehicle manufacturing industry. The organization was founded in 1903 at Dearborn, Michigan. It is noted that this was not Ford’s first interaction with motor vehicles. The company was associated with a Detroit automobile company that was later organized into the Henry Ford Automobile Company. The new entity was later bought by Henry Leland in 1902 (Jargosch & Jurich 2014). The company was renamed Cadillac. Ford Motor Company was formally incorporated in 1903. During its incorporation, the company had about twelve investors. Amongst them, the investors held 1000 shares. The company’s first production was the Ford Model A. When the first car went up for sale, the organization had only $223 in the local bank account. The firm would then go ahead to produce over 1750 units in the financial year 1903-1904 (Jargosch & Jurich 2014). The Model A vehicle was priced at $750. The success of this brand led to the introduction of Models K and S. However, these models experienced limited success in the market. They did not perform as envisaged by the investors.
The next model was Ford T. During the first year, the company produced in excess of 18,000 vehicles. The interesting thing is that most of the car parts were produced on order in a rented facility (Jargosch & Jurich 2014). The model T was to become one of the most successful vehicles ever produced by the company. It held this title until 1927. Between the first year of production and 1927, the company had produced over 15.5 million cars. The production made Ford Motor Company one of the most successful vehicle manufacturers in the world (Jargosch & Jurich 2014).
Henry Ford handed over the management of the company to his son, Edsel. The handover took place in 1919. The sales of the vehicles were still booming. The increased growth in sales volume was even though General Motors and Chrysler had entered the market with newer models that offered more features than those found in Ford models (Jargosch & Jurich 2014). Eventually, as a result of the new innovations, Ford started to lose its share in the automobile manufacturing business. In order to cater for the decline in sales, Ford bought the bankrupted Lincoln Motor Company. The Lincoln vehicles were to become Ford Motor Company’s luxury cars.
Ford introduced the V8 engine model in 1932. The introduction was an attempt to shelter the firm from fledgling sales. However, by 1933, the organisation had been overtaken by Chrysler in sales turnover. The competition notwithstanding, Ford still managed to deliver its 25-millionth vehicle by 1937. In 1941, the company started the production of military hardware. The new business was the firm’s contribution to the war effort. Most of its machines were used in the 2nd World War (Jargosch & Jurich 2014).
Ford introduced the iconic Thunderbird model in 1954. The Thunderbird drew a lot of attention to the automotive producer, which led to oversubscription of its shares in 1956. By 1960, the company was ready to introduce the Ford Falcon, which was followed in 1964 by the Ford Mustang (Jargosch & Jurich 2014). The Mustang proved to be a successful model. It prompted Ford Motor to introduce a manufacturing plant in Europe.
According to Jargosch and Jurich (2014), the 1970s can be viewed as a successful period for Ford Motor Company. However, there were some quality and safety issues reported in the Ford Pinto model. The quality concerns reflected negatively on the enterprise (Jargosch & Jurich 2014). However, the firm weathered several economic crises, including the oil crisis that affected many American automobile manufacturers. In addition, the company was able to acquire Mazda Company, which was considered as a success story in the 1980s. Interestingly, the 1980s are also considered as some of Ford Motors’ successful years. The company was able to introduce several models into the market, including the Ford Taurus and Aeroster (Jargosch & Jurich 2014). The two models were considered to have a radical design. They were widely accepted by the mass market. In 1988, the company’s global sales had reached 5.3 billion dollars (Jargosch & Jurich 2014). Around the same time, the organisation bought Aston Martin and Jaguar. By this time, the company was selling its vehicles in as far away countries as China, where it had established over 150 dealerships. The1990s and 2000s saw the firm acquiring significant shareholding in such motor companies as Land Rover, Aston Martin, and Jaguar. It also acquired substantial shares in Volvo, which was bought in 2010 (Jargosch & Jurich 2014).
Ford Motor Company: Financial Analysis
Overview
To most people, it may appear that a successful company is just a matter of improving the numbers. However, the truth is that the analysis of financial ratios and other details, such as sales, profit margins, cash flows, and risks, tells the real story about the health of an enterprise (Batten, Mackay & Wagner 2013). Some organisations may present exemplary financial reports while hiding a big hole in their operations. Below is a detailed analysis of Ford Motor Company’s financial statements. The company is one of the success stories coming from the United States of America.
Profitability Ratios
Profitability is viewed within financial circles as the ability of an organisation to use its resources to deliver revenues that are in excess of the expenses (Bensoussan & Fleisher 2012). It can also be viewed as the organisation’s capacity to deliver profits from its business operations. Profitability is one of the important measures in the analysis of organisational performance. In most cases, it is based on the financial statements (Tracy 2012). The other tools are liquidity or solvency, efficiency, as well as market prospects.
Profitability ratios will be used as measures of Ford Motor’s financial health. The ratios are used to demonstrate how successful the management of the company has been in the generation of profits (Tracy 2012). To understand Ford Motor’s profitability, this report will evaluate the company’s return on capital. The operating profit margins for the last four years will also be reviewed.
Gross Profit Margin
Gross profit margin is computed by dividing gross profit with sales. The figure is then reported as a percentage.
Thus, gross profit margin = gross profit/sales x 100.
The table below illustrates Ford Motor Company’s gross profit margin:
Table 1: Ford Motor Company’s gross profit margin: 2012-2015. Source: Ford Motor Company (n.d).
The above figures demonstrate that Ford Motor Company has reported a steady financial performance within the four years under review. The highest growth was recorded in 2015. During this financial year, the company reported a gross profit margin of 17.06%. The lowest profit margins were reported in 2014 at 14.21%. The low performance may be attributed to the company’s reorganisation, which made the profit margins dip slightly below the reported profit margins for 2013 (Ford Motor Company n.d). However, the organisation recovered in 2015, which is an indication of its resilience.
Net Profit Margin
The net profit margin ratio will be used to measure the profitability of Ford Motor Company. The net profit margin is arrived at by deducting the operating expenses and taxes from the profit (Batten, Mackay & Wagner 2013).
Thus:
Net Profit Margin = net profit before interests and taxation/ sales x 100.
The table below illustrates Ford Motor Company’s net profit margin:
Table 2: Net profit margin for Ford Motor Company: 2012-2015. Source: Ford Motor Company (n.d).
The table above shows that Ford Motor’s net profit has been on a steady growth since 2012. The only exception is 2014, where there is a significant dip in net profits. However, as observed earlier, this was a year when Ford Motor was involved in a reorganisation strategy, which may have affected its bottom line. In spite of this, the company reported a significant growth in 2015, posting a 4.92% in net profits (Ford Motor Company n.d). The figure represents the highest performance within the period under review.
Efficiency Ratios: Receivable Turnover
According to Geiger (2011), the receivable turnover ratio is associated with the efficiency of an organisation to collect payment for goods sold on credit. The ratio takes into consideration only credit sales. It does not include cash sales. If the cash sales are included, the ratio will be distorted and its value and significance lost (Bensoussan & Fleisher 2012; Brigham & Daves 2012). Accounts receivable for Ford Motors represents the indirect free loans that the organisation offers to its customers. As such, it is important to establish how expensive the loans are for the organisation (Batten, Mackay & Wagner 2013).
The success of Ford Motors is dependent on how the entity deals with its receivables. Consequently, the receivable turnover ratio will be used to measure and monitor how the company handles its receivables (Batten, Mackay & Wagner 2013). To this end, a lower figure of the uncollected money reflects a higher ratio. However, should the company have more money awaiting receipt, the ratio will be low. Consequently, the receivable ratio is a good indicator of Ford Motor’s management of debts and credit (Batten, Mackay & Wagner 2013). The receivable turnover is computed using the formula illustrated below:
Receivable turnover = average receivable/ Sales x 365 (days).
The table below is a representation of Ford Motor’s receivable turnover for the period 2013-2015:
Table 3: Ford Motor’s receivable turnover: 2013-2015. Source: Ford Motor Company (n.d).
The table above indicates that Ford Motor Company did not have any outstanding receivables or unpaid money in the three years under review (Ford Motor Company n.d). Consequently, it can be concluded that the organisation’s debt and credit management is efficient. Such efficiency is desirable when an acquisition is being considered.
Financial Risk Ratios
There are several financial ratios commonly used by analysts and investors to evaluate the financial risks of an organisation. They include the debt-to-capital ratio, the interest coverage ratio, and the debt/equity ratio (Healy & Palepu 2012). Financial risk ratios will be used to measure Ford Motor’s capital structure, including its risks in relation to debt levels. Analysts indicate that the organisation’s ability to manage the outstanding debt is crucial to the enterprise’s financial health and consequent operating ability. The risk threats may emanate from the company’s expansion. Such an expansion may be funded with the help of financial leverage (Healy & Palepu 2012). The ratio may also include the financial risks that may not be under the gearing ratio. For instance, Ford Motors may have invested in other companies. Such risks are unlikely to be captured in the gearing ratios.
The financial risk ratios are used in this report to evaluate Ford Motor Company’s capital structure. The report also evaluates the current risks as viewed against the company’s debt. Poor management of the debts significantly affects the enterprise’s profitability. In some cases, it may also affect the ability of the firm to operate efficiently (Healy & Palepu 2012). The financial leverage and capital structure will be used to analyse how Ford Motor Company utilises the capital and debts that are usually obtained from banks. In essence, the financial leverage will be used to enhance and increase the sales volumes (Wahlen, Baginski & Bradshaw 2014). Increased sales also reflect increased profits. In most cases, financial leverage is used to replenish ageing production technology (Corelli 2015).
Gearing Ratios
According to Geiger (2011), the gearing ratio is used to compare an organisation’s equity to borrowed funds. In this report, the ratio is applied in order to assess how Ford Motors can survive an economic downturn. Such a downturn has taken place in the past. The gearing ratio is arrived at by dividing the long term debt with Equity. The figure is then given as a percentage.
The gearing ratio for Ford Motor Company is 45.32%. A gearing ratio that is below 50% is indicative of efficient management of debts (Wahlen, Baginski & Bradshaw 2014). The statistics given above indicate that Ford Motor has been managing its debts efficiently. As such, the company is able to deliver value to its shareholders (Ford Motor Company n.d). It is to be noted that Ford Motor Company did not have any outstanding receivables for the years 2015 and 2014 (refer to Table 2 above). What this means is that investors would be attracted to the organisation as it efficiently manages its gearing ratios.
The cash interest cover or coverage ratio indicates how easily an organisation can meet its interest expenses in relation to the outstanding debt. The ratio is arrived at by dividing the enterprise’s earnings before the deduction of interest and taxes (EBT) by the organisation’s interest expenses in the same operating period (Wahlen, Baginski & Bradshaw 2014). As such, for Ford Motor Company to demonstrate its capacity to meet its interest obligations, the cover ratio has to be higher than 1:1. The ratio is calculated using the formula below:
Cash interest cover = profit before tax and interest/ interest.
However, a perusal of Ford Motor Company does not reveal any interest obligations. What this means is that the company takes few or no debts. Consequently, the firm is able to meet its short-term debts cover.
Liquidity Ratios
In this report, the liquidity ratio will be used as an assessment ratio for Ford Motor’s ability to meet its short-term liabilities. It will be used to analyse Ford Motor Company’s ability to pay its short-term debts. The ratio is arrived at by comparing the organisation’s liquid assets to the short-term debts. A high coverage is preferred. It means that a company has the capacity to meet its short-term debts and manage its current operation (Brigham & Daves 2012). On the other hand, a company with low ratios is likely to be viewed negatively by investors. The reason is that such a firm is likely to be facing financial difficulties. As a consequence, such a company runs the risk of defaulting on its debt obligations (Puntaier 2010). To this end, the current ratio will be applied to assess Ford Motor Company’s ability to service its short-term debts within a period of 12 months.
The current ratio for Ford Motor Company is 1.20. The ratio demonstrates that Ford Motor Company has comfortable short-term debt coverage. A ratio that stands within the range of 1:1 is viewed as being balanced. As a result, such a figure is desirable to any investor interested in acquiring Ford Motor Company. The company has demonstrated its ability to manage its debts, both short and long-term (Ford Motor Company n.d).
Operating Cash Flow to Current Liabilities
The ratio is used as an alternative measure to a company’s current ratio. It is noted that the current ratio evaluates current assets against current debts. However, the cash flow to current liabilities assesses the cash inflow from ongoing operations (Tracy 2012). It is important to observe that in this scenario, the current liabilities are often paid in cash. Consequently, the ratio offers crucial information on Ford Motor’s ability to make enough money from its operations to service its debt obligations. However, it is important to note that some current assets are easily converted into cash. As such, the ratio is significant to an investor because it demonstrates how financially healthy the organisation is as compared to the current ratio (Geiger 2011).
Ford Company’s operating cash flow to current liabilities stands at 1.20. The above ratio reflects the ability of Ford Motor to meet its debt obligations. A ratio of 1:1 or higher is preferred (Ford Motor Company n.d).
Investor Ratios
Investor ratios are used to appraise investment opportunities. The ratios relate the number of shares and their values to the profit and dividends reported by a company. They are also related to other assets (Robinson et al. 2015). The ratios measures the profit garnered for every share over a given period. It takes into account retained earnings as opposed to distributed dividends (Geiger 2011). The ratios offer a guide to the organisation’s ability to sustain a dividend payment.
In this evaluation report, the dividend per share will be viewed as the dividend sum total paid by Ford Motor Company in a given financial year. It is noted that many organisations pay dividend once or twice a year. Ford Motor Company issues dividend notices every quarter of the year. The company’s ability to pay dividends is viewed as a healthy sign of the entity’s financial standing. The quarterly issue of dividend notices is an indication of Ford Motor Company’s profitability (Geiger 2011). In light of this, it becomes apparent that the firm should be viewed as a profitable investment portfolio. Consequently, it can be acquired by the investor.
Dividend Cover
The dividend cover is also referred to as dividend coverage. It is a ratio of the company’s net income and the dividend that is paid to the investors. According to Puntaier (2010), the dividend cover ratio is expressed as the net profit that the organisation can attribute to the ordinary stockholder divided by the sum of the dividend. It is also noted that the dividend cover is used to demonstrate how Ford Motor can cover the dividend payment. In the financial analysis, a coverage that is less than 1.5 is viewed as a serious threat to an investment. The reason is that such a figure is most likely to have a negative impact on the dividend payment reported by the firm (Geiger 2011). However, any ratio that is above 2 is desired because it demonstrates that the company is able to pay dividends.
The dividend cover is calculated using the formula given below:
Dividend cover ratio = profit after tax – the dividend for irredeemable preference shares/ dividend paid for ordinary shareholders.
Conclusion
In this report, the author critically reviewed Ford Motor Company’s annual reports and financial statements. The aim of the analysis was to evaluate the financial health and viability of this iconic American automobile manufacturer. The document is targeted at potential investors wishing to acquire Ford Motor Company. The report reviewed reports for the financial years 2012-2015. The document provides detailed conclusions and recommendations that demonstrate the efficiency, profitability, liquidity, and financial risks associated with Ford Motors as an investment vehicle. The ratios that were analysed show that Ford Motor Company is a financially healthy automobile entity. Consequently, it is a viable investment destination. The significant ratios demonstrate that Ford Motor Company has reported steady profits over the period under review. The firm is expected to continue delivering healthy profits to investors. Ford Motor Company is one of the pioneer firms in the automobile industry. Over time, it has acquired other motor companies in its mission to consolidate and expand its range of products. The acquisitions were also meant to expand the market share of the firm. As such, it can be concluded that the company has the potential to offer solid profits and steady growth to its investors.
References
Batten, J, Mackay, P & Wagner, N (eds) 2013, Advances in financial risk management: corporate, intermediaries, and portfolios, AIAA, London.
Bensoussan, B & Fleisher, C 2012, Analysis without paralysis: 12 tools to make better strategic decisions, 2nd edn, FT Press, New York.
Brigham, E & Daves, P 2012, Intermediate financial management, 11th edn, South-Western College Pub., Boston.
Corelli, A 2015, Understanding financial risk management, Routledge, New York.
Ford Motor Company n.d, Ford Motor Company 2015 annual report: delivering profitable growth for all, Web.
Geiger, F 2011, The yield curve and financial risk premia: implications for monetary policy, Springer-Verlag, Berlin.
Healy, P & Palepu, K 2012, Business analysis valuation: using financial statements, 5th edn, Cengage Learning, Boston.
Jargosch, R & Jurich, J 2014, Ford Motor Company patent landscape analysis: January 1, 1994 to December 31, 2013, IPGenix LLC, London.
Puntaier, E 2010, Capital structure and profitability: Samp;p 500 Enterprises in the light of the 2008 financial crisis, Diplomica Verlag, Berlin.
Robinson, T, Henry, E, Pirie, W & Broihahn, M 2015, International financial statement analysis, 3rd edn, Wiley, London.
Tracy, A 2012, Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet, 2nd edn, Bidi Capital Pty Ltd., London.
Wahlen, J, Baginski, S & Bradshaw, M 2014, Financial reporting, financial statement analysis, and valuation, 8th edn, South-Western College Pub., London.
Appendix
Appendix 1: Ford Motor Company’s income statement: 2012-2016
Source: Ford Motor Company (n.d).
Appendix 2: Ford Motor Company’s cash flow statement: 2014-2016
Appendix 3: Ford Motor Company’s balance sheet
Source: Ford Motor Company (n.d).
Appendix 4: Financial Ratios
- Gearing ratio = long term debt/ Equity x 100.
Thus;
Ford Motor’s gearing ratio for the year 2015 is as follows:
Gearing ratio = 13,222/ 29,170 x 100 = 45.32%.
- Current ratio = current assets/ current liabilities.
Ford Motor’s current ratio = 108,461/ 90,281 = 1.20.
- Operating Cash Flow to Current Liabilities = net cash flow from the operation/ Current liabilities.
Ford Motor’s Operating Cash Flow to Current Liabilities = 108,461/ 90,281 =1.20.