Ford Motor Financial Ratio Analysis
A well formulated financial ratio analysis report helps investors to quantify a company’s financial strengths and weaknesses and potential risks and opportunities and identify the company’s financial position. Using financial ratio analysis as a tool in conjunction with other business evaluation processes, and other company factors, is beneficial for the investors (Brealey, Meyers & Marcus, 2009). The following report will provide the investor with a clear picture of the company’s current status as well as future projection in order to demonstrate investment opportunities.
Specifically, this report examined xxx Company’s financial ratios and other factors using a trend table over the past five years. Return on assets (ROA) measures company earnings in relation to other resources such as shareholder’s capital plus short and long-term loans (Brealey et al. , 2009). Return on assets also reports the profits a company generates for each dollar in assets and measures the intensity of the business’s assets. Specifically, lower per dollar profits results an increase of asset intensity for the company.
Ford is asset intensive because this company mortgaged its assets in 2006 in order to raise $24. 5 billion. Additionally, money has been reinvested into the company, which has generated earnings. In 2009 Ford also requested a one billion dollar line-of-credit from the government and a $5 billion loan from the Department of Energy in order to develop both hybrid and battery powered vehicles and retool plants to produce smaller cars. Compared to the industry index, Ford is 0. 7% higher than the industry average in this area.
In fact, Ford was in a better financial position than GM or Chrysler and did not need bailout money nor did Ford want their competitors to gain the upper hand (Ford Motor,2010) Return on equity measures a company’s profitability by revealing on the balance sheet how much profit a company generates using the money shareholders have invested. A high return on equity ratio indicates high profit returns for investors. This ratio demonstrates to investors how effectively their money is reinvested as capital (Brealey et al. , 2009).
Ford demonstrated a reasonable turn around on equity in 2009 and was slight higher than the industry standard in this area. Return on investment (ROI) measures the efficiency of an investment compared to other similar investments. Return on investment is a useful metric tool because of its simplicity. For example, if an investment does not have a positive ROI, it is not considered a good investment. This ratio compares where the company generates profits and utilizes assets. A high ROI indicates that assets are used effectively (Brealey et al. 2009). Ford experienced a major increase in ROI in2009 compared to the previous four years from 2005 to 2008. Ford’s 2009 ROI was slightly higher than the norm for the industry. Additionally, the Cash for Clunkers Bill, a government sponsored program, increased Ford’s in the United States (Ford Motor, 2010). A higher gross margin above other companies or the industry as a whole indicates that the company is operating efficiently because the higher the percentage, the more the company retains on each dollar of sales, contributing to its other costs.
The gross margin is a company’s total sales revenue minus cost of goods sold divided by total sales revenue and is expressed as a percentage (Brealey et al. , 2009). Ford’s consistency in this ratio demonstrates the company’s stability. The company is also consistently ahead of the industry, further indicating Ford’s high efficiency rate. The operating profit margin is expressed as a ratio that measures the proportion of a company’s revenue that is left over after paying for variable expenses such as the raw materials and salaries.
The operating profit margin is considered the company’s price strategy and operating efficiency because a company must be able to pay for fixed cost such as interest on debts. This ratio also provides management more flexibility when setting prices during times of financial hardship (Brealey et al. , 2009). Ford was able to turn things around in 2009 in this area and the company also faired above the industry average. The net profit margin is the final amount a company makes for every dollar generated in revenue.
This ratio measures how much out of every dollar in sales a company earns. The net profit margin is a useful ratio when comparing similar industries. A higher profit margin shown on the balance sheet indicates better control over costs compared to competitors (Brealey et al. , 2009). However, there are cases of lower net profit margin numbers being a sign of a company’s pricing war with its competitors. Ford yielded a slightly higher than the industry average net profit margin in 2009. A quick ratio is also known as the quick asset ratio or the acid-test ratio.
The quick ratio is a liquidity indicator used by determining which company assets can be immediately converted into cash divided by the company’s liabilities (Brealey et al. , 2009). The quick ratio excludes inventory and other current assets which are more difficult to turn into cash. Therefore, a high ratio means a more liquid position, which tells how much cash the company can come up with in a short time. A current ratio is a liquidity ratio that measures a company’s ability in order to pay short-term obligations.
The current ratio is used to determine the company’s ability to pay back its short-term liabilities such as debts using short-term assets such as cash, inventory, and receivables. The higher the current ratio the more capable the company is in paying their obligations. For example, a ratio under 1 indicates that the company is not in good financial health and would be unable to pay debts. Too high of a number, like a 3 or 4, means that there is too much cash on hand that is not being reinvested (Brealey et al. , 2009). In 2009, Ford has a current ratio of 0. 8, which means that there was negative working capital.
However, compared to the industry norm, Ford fell slightly below industry average, issuing some concern. The working capital ratio indicates whether a company has enough short-term assets to cover its short-term debts. This ratio reveals the financial condition of a business more so than other calculations because it results in information that may project financial difficulties. In Ford’s case, turnover was not quick enough not to keep working capital reserves in the event of financial hardship (Brealey et al. , 2009).. The debt/equity ratio depends on the industry in which the company operates.
Capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, other industries such as personal computer companies have a debt/equity ratio of under 0. 5. However, any company over 40% of its debt to equity ratio warrants observation because the debt to equity ratio measures the amount a company is able to borrow over long periods. Ford’s debt/equity ratio was approximately 6. 5% in 2009, which as good in comparison to the previous four years. Long-term debt to asset ratio offers helpful information concerning the company’s assets and long-term debt.
In 2009, Ford carried such a low percentage in this particular ratio that they experienced more leverage. Most of the industry falls under the degree of leverage held by the Ford Motor Company. Interest coverage ratio determines how easily a company pays its interest on outstanding debt. This ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) of one period by the company’s interest expenses of the same period. The lower the ratio, the higher the company’s debt burden (Brealey et al. , 2009). This ratio also shows the investor a clear picture of the company’s short-term financial abilities.
Currently, Ford does not have any difficulties generating the cash to pay its interest obligations. Factors such as hiring employees to support auto plants in the United States and lowering its debt ratio contributed to Ford Motor’s financial efficiency in 2010. Additionally, Ford recently announced the return of the investment grade rating in 2012. An investment grade rating is a company’s ability to borrow money at lower interest rates. Examining the second performance of the 2009 financial report, Ford retired $7 billion of debt and lowered their annual interest costs by $470 million, leaving only $27. billion in debt. The company is also expected to make a profit in 2010 by reinvesting $135 million dollars into the Michigan factory. This investment will create 2,000 new jobs in the area. This competitive contract with the United Auto Worker union will help Ford Motor bring back more jobs to its factories in the future. The union contract will also allow Ford to hire workers at $14 per hour, which is about half the hourly rate of current workers and an additional contract had been signed to change worker rules and benefits so the plant can operate more efficiently.
Currently, the gas-electric hybrid transmission components were brought in from Japan and although other components continue to be assembled in other countries, Ford has indicated that bring this work back to its own plants will ensure better standards (Ford Motor, 2010). Ford has also promised to continue developing higher quality and reliable cars in order to remain competitive with foreign automakers. Lowering the salaries of the employees will also increase operation profit margins.
Once the working capital ratio is reduced turnover rates will increase and allow for more working capital to be placed in reserve in case of financial hardship. Additionally, the operating profit margin will increase, contributing to smarter pricing strategies and operating efficiency, both areas that are key issues as indicated in Ford’s statement requiring investor’s attention (Ford Motor, 2010) Another key initiative for Ford and the auto industry as a whole is to develop fuel-efficient hybrid vehicles.
Fuel efficiency is a global goal and President Obama has committed funding toward refining the technology using university research. Management has claimed that high labor costs increases operating costs because of the union; therefore, Ford has a high operation margin, which has increased the sale price of the car. By having a new contract with the union master for lowing employee salary, Ford cars can be more competitive price wise. Based on this analysis of Ford, now would be a prime time to invest in this company. The American auto industry’s struggle is not close to an end; however, there will be a revival of American auto industry.
Although the numbers have yet to turn around on the balance sheets, over the next few years Ford is once again on its way to becoming one of the leaders in the auto industry. Now is the best time to invest in Ford stocks for three reasons. First, with current and future fuel issues, import cars will become more expensive. Second, the low price, high quality, better warranties, and fuel efficiency of American made cars allows Ford cars to be more affordable. Third, all stocks are at the lowest price point in recent history and the growth margin is higher than ever.
Furthermore, Ford has released its financial burden of paying American pensions with the new union contract. The once automotive giants will be able to invest more money toward the advancement in new technologies. Trend table of industrial average financial ratio for the previous five years in comparison Ford Motor Co. (DE) Ratios 12/31/2005 12/31/2006 12/31/2007 12/31/200 12/31/2009 Return on Equity (%)22. 65 7. 9 5. 08 -70. 04 9. 07 Return on Assets (%)1. 19 0. 29 0. 1 -1. 7 1. 9 Return on Investment8. 13 5. 62 5. 87 2. 23 11. 24 Gross Margin 0. 021 0. 021 0. 023 0. 02 0. 026 Operating Margin (%) 6. 22 4. 94 5. 56 2. 07 10. 42 Net Profit Margin (%) 2. 03 0. 3 -0. 6 -3. 362. 04 Quick Ratio 0. 29 0. 35. 35 0. 22 0. 2 Current Ratio 0. 47 0. 52 0. 51 0. 37 0. 33 Working Capital/Total Assets-0. 22-0. 18 -0. 16 -0. 23 -0. 8 Total Debt to Equity 8. 61 13 25. 67 18. 3 6. 05 Long Term Debt to Assets0. 35 0. 38 0. 41 0. 44 0. 35 Interest Coverage 1. 69 1. 18 1. 11 0. 3 1. 76 The five year financial ratio analysis shows the historical data of Ford Financials| | Last 12 Months| 5 Year Growth| Sales| 413. 8 Bil| 7. 5%| Income| 14. 7 Bil| 6. 6%| Dividend Rate| 1. 21| 15. 95%| | | | Fundamental Data| Debt/Equity Ratio| 0. 71| Gross Margin| 24. 76%| Net Profit Margin| 3. 68%| Total Shares Outstanding| 3. 7 Bil| Market Capitalization| 186. 7 Bil| Earnings/Share| 3. 81| 2009 Investment Returns %| Company| Industry| S&P 500| Return On Equity| 22. 9| 20. 8| 22. 1| Return On Assets| 9. 1| 8. 4| 7. 9| Return On Capital| 14. 5| 13. 1| 10. 5| Return On Equity (5-Year Avg. )| 21. 0| 18. 9| 16. 5| Return On Assets (5-Year Avg. )| 8. 7| 7. 9| 7. 7| Return On Capital (5-Year Avg. )| 13. 6| 12. 2| 10. 4| Management Efficiency| Company| Industry| S&P 500| Income/Employee| 7,260| 8,521| 99,372| Revenue/Employee| 197,057| 272,117| 891,235| Receivable Turnover| 108. 2| 354. 5| 14. 5| Inventory Turnover| 8. 8| 8. 5| 10. 7| Asset Turnover| 2. 5| 2. 4| 0. 8|
Financial Condition| Company| Industry| S&P 500| Debt/Equity Ratio| 0. 71| 0. 68| 1. 14| Current Ratio| 0. 8| 1. 1| 1. 4| Quick Ratio| 0. 3| 0. 4| 1. 2| Interest Coverage| 13. 0| 21. 9| 33. 8| Leverage Ratio| 2. 6| 2. 5| 3. 7| Book Value/Share| 17. 75| 18. 16| 22. 28| Profit Margins %| Company| Industry| S&P 500| Gross Margin| 24. 8| 25. 2| 39. 4| Pre-Tax Margin| 5. 5| 5. 4| 16. 4| Net Profit Margin| 3. 7| 3. 6| 12. 0| 5Yr Gross Margin (5-Year Avg. )| 24. 0| 24. 4| 38. 3| 5Yr PreTax Margin (5-Year Avg. )| 5. 4| 5. 2| 15. 8| 5Yr Net Profit Margin (5-Year Avg. )| 3. 6| 3. 4| 11. 2| Sales (Qtr vs year ago qtr)| 5. 90| 6. 0| 15. 00| Net Income (YTD vs YTD)| 9. 70| 16. 10| 71. 70| Net Income (Qtr vs year ago qtr)| 9. 70| 17. 30| 90. 80| Sales (5-Year Annual Avg. )| 7. 50| 7. 53| 8. 86| Net Income (5-Year Annual Avg. )| 6. 58| 6. 28| 8. 43| Dividends (5-Year Annual Avg. )| 15. 95| 15. 67| 4. 89| References Brealey, R. A. , Meyers, S. C. , & Marcus, A. J. (2009). Fundamentals of Corporate Finance (6th ed). New York: McGraw-Hill. Ford Motor Company. (2010). Retrieved from http://www. ford. com The North America Automotive Sectors. (2006). A Company and Industry Analysis. Industry Report – Automotive. Retrieved from http://industry. mergent. com