Financial Ratio Analysis Report of Ford Motor Company

Ford Motor Company Financial Ratios

The analysis of these ratios shows how Ford stands as a company for the past five years. Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For long-term investing with great rewards, companies that have high return on equity ratios can provide the biggest payoffs. This ratio also tells investors how effectively their capital is being reinvested, so it is a good gauge of management's money handling skills. Ford is showing a considerable turn around in this area this past year, which could easily be due to changes in management.

They are also reasonably following the industry in this area. Return on assets (ROA) tells how much profit a company generates for each dollar in assets. It measures the asset intensity of a business. The lower the profit per dollar of assets, the more asset-intensive the business is. Ford is asset-intensive, because it requires big, expensive equipment to generate profit. This means more money must be reinvested into the company to continue to generate earnings. Even though their lower number is described in asset-intensity, Ford is consistently falling a few percentage points below the industry average in this area.

This could be a consideration against the company. Return of investments (ROI) ratio measures the combined effects of profit margins and total asset turnover. This ratio compares the way a company generates profits, and the way it uses its assets to generate sales. If assets are used effectively, ROI will be high. According to Ford's numbers, this has been an area of gradual improvement over the past few years, after a drastic drop from 2000 to 2001. This is the norm for the industry, as well. Employee pricing promotions will be a big consideration in this area for this year. Gross margin tends to remain stable over time.

However, this ratio is still crucial to evaluate, because fluctuations can be a sign of fraud or irregular financials. A higher gross margin than other companies in the industry also shows more efficiency. Ford's consistency in this ratio speaks well of the company's stability. The fact that the company is consistently ahead of the industry also speaks highly of Ford's efficiency rate. Operating margin also measures management's efficiency. It does so by comparing the quality of a company's operations to others in the industry. A higher operating margin tends to mean lower fixed costs and better gross margin.

This gives management more flexibility when setting prices, which is particularly important during times of financial hardship. This is another area where Ford is slowing turning things around. It is no surprise, though, that the company is also fairing above industry averages in this area. Net profit margin is how much profit a company makes for every dollar it generates in revenue. Usually, the higher the company's net profit margin, the better. However, there are cases of lower net profit margin numbers being a sign of a company's pricing strategy or a price war.

This is the first definite sign of Ford's numbers returning to the profitability of 2000. While the company is fairing slightly lower than the industry average in this area, it is hardly significant enough to warrant much of a warning. Quick ratio is the hardest measuring stick of a company's liquidity and strength. It looks at a company's assets, finds what can be immediately converted to cash, and divides that by the company's liabilities. This tells how much cash a company can come up with in a matter of hours or days. Current ratio is a similar test to quick ratio, but it calculates how many dollars in assets are likely to be converted to cash within one year in order to pay debts that come due during that same year.

Too high a number, like a 3 or 4, means that there is too much cash on hand that is not being reinvested. A number below 1, like that of Ford's, means that there is a negative working capital. This is acceptable if the inventory can immediately be converted to cash. However, in both quick and current ratios, Ford is falling enough below industry averages for it to issue some concern.

The working capital ratio reveals more about the financial condition of a business than other calculations. It makes it easy to foresee any financial difficulties that may arise. In Ford's case, the turn over is not quick enough not to keep some sort of working capital reserve in case of financial hardship. The industry average falls quickly behind this theory with less than a percentage point difference for the past five years. Debt to equity ratio measures how much money a company should be able to borrow over long periods of time.

The normal level of debt varies, but any company over 40 to 50% should be looked at more carefully in case there are liquid problems. Ford is in good shape around 8% this past year in comparison to the 25% of 2002. This is yet another area where Ford is merely following industry averages. Long term debt to asset ratio can provide useful information regarding the degree to which that company finances its assets with long tem debt. It can serve as an alternative for evaluating financial leverage. Ford carries such a low percentage in this particular ratio, there is more leverage.

Most of the industry falls under the degree of leverage here. Interest coverage ratio is a measurement of the number of times a company could make its interest payments with its earnings before interest and taxes. The lower the ratio a company has, the higher the company's debt burden. This ratio gives stockholders a clear picture of the short-term financial abilities. Currently, Ford is not having difficulties generating the cash to pay its interest obligations, but they are not nearly as secure as the rest of the industry for the past couple years.

The biggest factor, beside ratios, that needs to be considered in evaluating Ford right now is the overpowering foreign market. Toyota is a prime example, as they are pushing their way to the number three spot in the United States auto industry. The overwhelming price hikes in healthcare of the years has slowly and surely crippled the American automotive industry in their efforts to meet the pensions of all their past employees. This is not an issue for foreign companies, who have national healthcare systems in place. Unless things turn around, this deficit will bury the US automotive industry.

The key new initiative for Ford, as well as the rest of the industry, is in developing hybrid vehicles. Fuel efficiency is a goal of the country as a whole, and President Bush has committed a considerable amount of money towards this research. However, the slow down in congress has not produced the money required to do the research and development for the big three in the car industry. The few hybrid vehicles that exist are hardly an answer, nor are they paying for themselves in the grand scheme of things yet. From this analysis of Ford, now would not be a prime time to invest in this company.

Contrary to the optimism of the annual report, the American auto industry's struggle is not over. While the numbers have begun to turn around slightly over the past couple years, Ford still has a long way to go. The research and development alone that is required to boost the automotive industry into its own is still years away from implementation. While the financial ratios do not warrant bailing ship for those that have already invested in this struggling industry, current and future fuel issues will make it harder and harder for any of the big three to be successful. Furthermore, the financial burden of paying American pensions handcuffs the once automotive giants from filtering more money towards advancement.

References

  • Brealey, Meyers & Marcus. (2003). Fundamentals of Corporate Finance (4th ed). NewYork: McGraw-Hill. Ford Web site, retrieved on September 8, 2005, from: http://www. ford. com
  • The North America Automotive Sectors. (2004, November). A Company and Industry Analysis. Industry Report - Automotive, 1-26. Retrieved September 9, 2005, from http://industry. mergent. com.