A financial analysis of Ford Motor Company’s (Ford) statements will identify their solvency in today’s automobile market. Elements such as liquidity, leverage, profitability, and activity ratios will demonstrate Ford’s financial health and stability. A further assessment of their technological advantages, global strategies, and benchmarking analysis will indicate the future prognosis of this company. Business Analysis Part III: Ford Motor Company Ford Motor Company: Strategic Initiative Liquidity Ratios Managers frequently use liquidity ratios to measure a company’s financial status.
Banks and/or creditors particularly find interest in this analysis because liquidity ratios measure a company's ability to convert assets to cash to pay short-term debts, debt that a company will be able to pay within one year. According to the Federal Deposit Insurance Guidelines (2012), “Liquidity represents the ability to fund assets and meet obligations as they become due. Liquidity is essential in all banks to compensate for expected and unexpected balance sheet fluctuations and provide funds for growth.
Liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet obligations as they become due. Because liquidity is critical to the ongoing viability of any bank, liquidity management is among the most important activities that a bank conducts. ” Therefore, banks monitor the liquidity assets of organizations for funding purposes. The equation to determine a liquidity ratio is the company's current assets (cash, accounts receivables, notes receivables, inventory, etc. ) divided by the company’s current liabilities (accounts payable, notes payable, accrued taxes, accrued salaries, etc.
). A review of Ford Motor Company’s (Ford’s) September 2011 Balance Sheet revealed the following information about the company’s liquidity: Current ratio = Current assets /Current liabilities Current ratio = $129,555,000/$60,365,000 = $2. 1 [Current assets for every $1 of current liabilities] Acid-test ratio = Cash +Accounts receivable + Marketable securities /Current liabilities Acid-test ratio = $16,460,000 + $76,825,000 + $29,058,000/$60,365,000 = 2. 0 [0. 5 – 1. 0 is usually considered satisfactory, but bordering on cash flow problems] Ford’s current ratio test reveals that the company has $2.
1 current assets for every $1 of current liabilities, and that an acid-test ratio of 2. 0 reveals that Ford has a cash flow problem and they might have to consider more costly long-term funding options. Further analysis will compare Ford’s current ratio to General Motor Company’s current ratio (“,” 2012). Leverage Ratio An organization’s debt ratio will show how much debt a company has and how much a company relies on bank loans or other borrowed funds. The debt ratio will also reveal a company’s ability to pay off short-term debt. A mutual fund manager will find a company with high debt to be more of an investment risk.
A review of Ford’s September 2011 Balance Sheet revealed the following information about the company’s debt and ability to pay short-term debt: Debt to owners’ equity ratio = Total liabilities/Owners’ equity = $156,758,000/$5,982,000 =2,620% Ford’s debt to owners’ equity ratio of 2,620% appeared extraordinary; however, upon calculation after calculation, this appears to be the correct assessment. Upon comparison of Ford’s total liabilities ($156,758,000) to their Owner’s equity ($5,982,000), the span is vast. Ford has a tremendous amount of debt, and not as much equity in relation to the amount of debt.
Further analysis will compare Ford’s debt ratio to General Motor Company’s debt ratio to identify any trends in the automobile industry (“,” 2012). According to (eHow, 2012) , a Comparison of the Total Debt Ratio to the Total Debt Ratio of a competing firm will identify which company is more leveraged (uses more debt versus assets). More leverage (a higher ratio) usually means magnified expected earnings for the investor. Profitability Ratio Profitability (performance) ratios are used to assess a company’s ability to create equity as compared to its debt and other appropriate expenses created during a particular time frame.
A favorable analysis of profitability ratios will reveal that a company’s value is higher than a competitor’s value. A review of Ford’s 2010 Income Statement revealed the following information about the company’s profitability: Basic earnings per share = Net income after taxes/Number of common stock shares outstanding Basic earnings per share = $6. 56B/$3. 45B = $1. 90 per share Return on sales = Net income/Net sales Return on sales = $6. 56B/$128. 95B = 5% Return on equity = Net income after tax/Total owner’s equity Return on equity = $6. 56B/$5,982,000 = 109% Ford earned $1. 90 per share ending 2010.
The company showed a 5% return on sales. A comparison of General Motors Company will show Ford’s performance when comparing this percentage. High risks in business either equates to high profits or high losses. Ford’s company’s return on equity of 109% shows that their risks proved to be profitable in the automobile industry in 2010 (“,” 2012). Activity Ratio Activity ratios identify how effectively management is turning over inventory. One activity ratio is the inventory turnover. The inventory turnover ratio is shown by dividing the costs of goods sold by the average inventory.
The result will show stakeholders how quickly a company would be able to turn its assets into cash. A look at Ford’s September 2011 balance sheet and 2010 Income Statement shows the following about their inventory turnover (“,” 2010): Inventory turnover = Costs of goods sold/Average inventory Inventory turnover = $99. 45B/$5. 92B = 16. 8 times Financial Health of Company in Comparison to General Motors Ford vs. General Motors A review of General Motors (GM) 2010 Balance Sheet revealed the following information about the company’s liquidity: Current ratio = Current assets /Current liabilities
Current ratio = $53. 05B/$101. 74B = $0. 52 [Current assets for every $1 of current liabilities] Acid-test ratio = Cash +Accounts receivable + Marketable securities /Current liabilities Acid-test ratio = $22. 3B + $8. 7B + no record /$101. 74 = 0. 3 [0. 5 – 1. 0 is usually considered satisfactory, but bordering on cash flow problems] GM’s 2010 current ratio test revealed that the company had $0. 52 current assets for every $1 of current liabilities, and that an acid-test ratio of 0. 3 revealed that GM’s cash flow assessment was favorable (“,” 2012).
A review of GM’s 2010 Balance Sheet revealed the following information about the company’s debt and ability to pay short-term debt: Debt to owners’ equity ratio = Total liabilities/Owners’ equity $101. 74B/$37. 16B = 274% GM’s debt to owners’ equity ratio of 274% shows that they have more debt to equity (“,” 2012). A review of GM’s 2010 Income Statement revealed the following information about the company’s profitability: Basic earnings per share = Net income after taxes/Number of common stock shares outstanding Basic earnings per share = $6.
17B/$1. 5B = $4. 11 per share Return on sales = Net income/Net sales Return on sales = $6. 17B/$135. 59B = 4% Return on equity = Net income after tax/Total owner’s equity Return on equity = $6. 17B/$37. 16B = 16% GM earned $4. 11 per share ending 2010. The company showed a 4% return on sales and 16% return on equity (“,” 2012). These ratio comparisons are a small snippet in the grand scheme of which company, Ford or GM, is more marketable. However, one can begin to form opinions about the outlooks, or let us say upswings of the future of a company.
According to (The Automotive Lyceum, 2010) “In summary, Ford today is where GM expected to be if it not were for the financial calamity in 2008 and 2009. The company is profitable but sitting on billions and billions of dollars of debt. Baring another serious financial downturn, only time and/or shareholder dilution will fix its debt load. But the company has secured the Ford family control over the company and that was the reason behind taking on the debt in 2006. The company is also trading at a substantial premium and is benefiting from the post-crash rally regardless of its fundamentals (i.
e. , debt) and market conditions. As far as New GM goes, all the restructuring of the old company in the years leading to bankruptcy appears to have super charged the company. Again, assuming there are no significant shocks to the economic recovery in the US and the company continues to execute product consumer want, the future is looking very bright. A large caveat is its performance in China where the company has had very impressive growth. What happens if or when the Chinese government pulls the stimulus that has been spurring the industry's impressive numbers?
The only other caveat to the sustainability of both companies is their unfunded pension liabilities. Both companies still must address that one liability. ” This statement proves to be true today upon research review. Technological Advantages In the 1970’s, American automobiles were outsold by foreign competitors such as Honda and Toyota manufacturers. In 1999, Ford acquired the Volvo model to compete with foreign markets and to expand globally. In addition, Ford launched a re-engineering business process plan called “Ford 2000.
” The goal of Ford 2000 was to reduce properties, cut out idleness, and implement information technological practices to link Ford centers globally (Ahmed, 2008). Throughout the 90’s, Ford developed a cost-effective Global Enterprise Network Integration (GENI) to connect all of its locations. At the same time, Ford starting building its public website. By the end of the 90’s, Ford increased its services and also created a bank-to-bank server to allow suppliers secured admission to Ford’s Intranet (Ahmed, 2008).
Ford’s improved strategies and communications through technology enabled them to create the “Automotive Network Exchange,” which improved unified communications through the Internet to enable suppliers to provide common technology for all manufacturers. A final chapter in Ford’s re-engineering process was creating a model that replicated Dell computers to improve their supply chain management and delivery processes (Ahmed, 2008). In 2001, Ford opened Ford Information Technology Services India (FITSI) operations in India.
FITSI serves as the epicenter for Ford's IT projects in India and throughout the Asia Pacific region. The center in India delivers high-quality solutions in business software, Computer Aided Engineering (CAD/CAM) and call center/e-mail processing, and e-commerce solutions to connect Ford with their consumers, dealers, and suppliers (“,” 2012). Not only has Ford improved the way they communicate with their stakeholders by improving their technological advantage, they have also used these methods and others to improve their global competitiveness. Global Strategies