Ratio Analysis Ford Chapter

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Ford Motor Company is headquartered in Detroit and operates globally. The company competes primarily in cars and light trucks. The company was founded in 1903 and today is one of the Big Three of U.S. automakers. The industry has globalized rapidly over the past few decades, and Ford now operates plants around the world. The company rose to prominence not only as an early automobile maker but the developer of the assembly line, and a leader in industrial production techniques. These allowed Ford to sell more cars than its competitors early, allowing it to establish itself as a market leader. The company today sells two main lines -- Ford and Lincoln (Ford.com, 2015). The industry is also in a state of flux with respect to technological change. Electric cars, and greater fuel efficiency are driving one segment of the market, while other segments still rely on light trucks and larger vehicles to meet their needs -- the automobile market is much more specialized than in the "any color you want as long as it's black" days. The financial statements can provide some valuable insight as to how Ford is performing in this challenging modern automotive market.

Financial Analysis

Ford has a market capitalization of $63.22 billion, which is a reasonable figure considering that the company was on the brink of collapse in 2008, and its two major U.S. competitors needed bailouts just to survive ( MSN Moneycentral, 2015). The company earned total global revenue of $144 billion in FY 2014, which represents a slight decline from 2013 levels, but an improvement over the several year prior. The net income, however, was relatively low. At $3.187 billion, Ford earned less than half of what it earned in 2013 ($7.182 billion) and this was the poorest net income level since 2009 (MSN Moneycentral, 2015). Ford's revenue is almost entirely from the automotive division. It earned just $1.9 billion in pre-tax profit from its financing division due to low rates and the need to use financing as a loss leader.

The industry's biggest market by units sold is China, with 24 million units. This is followed by the U.S., with 16.8 million units. Europe combines for 18.6 million units, and the industry sells a total of 87.9 million units in 2014. Sales have recovered strongly in the U.S. In the past few years, and China has exhibited consistent growth for the past several years. Ford's share of this is 6.3 million units, or a global market share of 7.16%. The company has a 14.6% share in the U.S., good for 2.457 million units. This figure is lower than it was in 2013. Ford's market share in China is 4.5%, or 1.116 million units. The company has a similar share to the U.S. In both Canada and Britain, but otherwise has a smaller share in other markets (Ford 2014 Form 10-k).

Conclusions

Ford has done reasonably well in the four years since its peers were bailed out. The company saw its revenues slip slightly in 2014, but the cash flow from operations increased, even where the net income did not. This indicates that Ford's underlying performance remained strong, even when the income statement said it was a down year. Ford remains solvent, though it has arguably too much debt, and the large amount of cash it has on the balance sheet could be put to better use to earn a better return on equity for shareholders, as Ford is below the industry average on that regard The company still has high unfunded pension obligations but it has the cash to pay for those now, and these are now a relatively small portion of the company's total liabilities.

Overall, Ford's financial situation is stable, and it has a multi-year track record of earning profits. The company may not be the dominant force that it once was, but it remains a strong competitor, with a healthy balance sheet, decent margins and ever-improving cash flow from operations, all encouraging signs. There are no major red flags in the company's financial statements, with the biggest issue being inefficiency from too much cash, and the fact that the company has what most would consider to be a debt/equity ratio that is far too high for most manufacturing companies.

Financial Ratios

There are a number of ratios by which Ford can be examined. The first are the liquidity ratios, which can inform about a company's ability to meet its pending financial obligations for the coming year. The current ratio is the current assets divided by the current liabilities.

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Ford's current ratio is 2.01, which is a healthy ratio is any industry, indicating that the company has double the current assets on hand to meet its needs. Most of this is in cash or receivables -- the cash ratio is a very healthy 0.70. There are no worries about Ford's liquidity at this point.

The debt ratio is a measure of the long-term solvency of Ford something that has been called into question at times in recent years. A major contributor to solvency issues in the past has been the company's pension obligation. The total debt-to-equity ratio for Ford is 7.37, which is indicative of a company that has a very high level of leverage. So it has a massive pile of cash (over $50 billion) but also a large amount of debt. Almost $80 billion of the debt is in the company's long-term debt and capital lease obligations, with most of the rest coming in the form of current liabilities. The current expenses for the company's defined-benefit plans is $114 million. These plans -- the richest -- are closed to new enrollments in an attempt to manage the company's pension obligations better. Worldwide, there remains some $6.388 billion in unfunded plans, a shortfall that the company will eventually have to address. This is, however, not the biggest part of the liabilities, which relate to the company's long-term debt. Having a debt/equity ratio this high is not necessarily bad, when a company has a stable cash flow, but the level of debt, while sitting on $50 billion in cash, makes a little less sense.

Another type of financial ratio is the margins. The company's gross margin illustrates how well the company converts its inputs (cost of goods sold) into revenue. The gross margin for Ford in 2014 was 12.3%, down from 12.8% in the year before. The operating margin, which also takes into account the company's operating expenses, was 2.6%, down from 3.8% the prior year. These margin declines translate to the net margin, which was 2.2% in 2014, down from 4.9% the previous year. There are many potential explanatory factors for the margin declines, including increased prices on raw materials, and increased competition that forced Ford to cut prices in order to continue moving units.

There are also investment return ratios that can be considered. Ford's return on equity is 12.45%, roughly in line with the industry average. Its return on assets is 1.55%, which is lower than the industry average. This also implies that Ford has more leverage than its industry peers as well. The return on capital employed is 2.65%, versus an industry average of 5.48%. Overall, these figures show that Ford earns less on its business than other automakers do. In part, the mainstream positioning and the declining margins have likely contributed to this level of financial performance.

There are also the managerial efficiency ratios to consider with respect to Ford's performance. The company has an inventory turnover of 16 times, which equates to around 23 days. This is a healthy figure. It should be remembered that the Ford business model has the company sell its vehicle to the dealers, so a reasonable turnover should be expected and if vehicles move slowly this will show on the dealers' financial statements. Ford's receivables turnover -- again most of their receivables are actually from the dealers -- is 1.55 times, which is very slow. Ford is basically, with a 235 day collection period, giving the dealers time to sell the car before it collects on it. This is a very slow receivables turnover, and does indicate that cars turn over a little bit slower than the inventory turnover ratio would indicate, but Ford needs to work with its dealers to sell the vehicles so extending them credit is something that the company just needs to do. The big issue is with respect to unsold inventory -- Ford has this as a current asset so it expecting eventual payment -- what provision for bad debts / unsold merchandise does Ford have?

The return on equity for Ford is 12.45% (MSN Moneycentral, 2015). The return on assets is 1.55%. The ROE figure is roughly in line with the industry norm, but the ROA figure is about half the industry average (Ibid). Thus, Ford has underperformed. Arguably, the firms in this industry have different degrees of.....

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