Ford Motor Company Analysis - Research Paper Example

Ford Motor Company (Thorough Analysis) of Ford Motor Company Background Ford Motor Company is a multinational automotive manufacturer based in America. Its headquarters are in Dearborn, Michigan in the suburb of Detroit. The firm was established by Henry Ford and integrated in 1903. The firm markets its automotives under the brands Lincoln and Ford. It also owns shares in the Japanese Mazda and UK’s Aston Martin. This is a business that is owned by the Ford family even though they own a small share. An enormous manufacturing base of cars and large scale administration was initiated by the company by use of a clearly developed manufacturing series exemplified by a non-stationary line of assembly. By 1914 the methods came to be known as Fordism. In 2008, Tata Motors of India bought Ford’s earlier UK’s branches Land Rover and Jaguar. Starting 1999 to 2010 Ford had in its ownership the Swedish automaker Volvo (Wallace, 2003). Financial Ratios Analysis liquidity ratios 2010 2011 current ratios 0.855917595 0.955290702 Acid test Ratios 0.474514453 0.586053149 Activity ratios     Total Asset turnover 0.783024768 0.76403436 Inventory Turnover 17.65269562 19.2077614 No. of days Sales In A/R 0.001305108 0.576388481 No of Days Sales in inventory 0.000155202 0.052062288 Profitability ratios     Gross profit Margin 0.190013493 0.168195562 Operating Profit Margin 0.050847589 0.1484031 Net profit Margin -0.005218915 0.110285916 Earnings Per share -0.176362683 3.938155136 Return on Assets -0.00408654 0.084262229 Return on common Equity 1.048286604 0.997146838 Debt Ratios     Debt Ratios 1.003898304 0.915496669 Times Interest earned 1.162061118 1.959151433 Market Ratios     Price per earning ratio 0.001834862 0.001824818 Dividend yield 0 153 Dividend Payout Ratios 0 0.27919708 See the attached excel spreadsheet Liquidity Ratios The liquidity ratios calculated for the year 2010 and 2011 are shown in the table above. The calculations are on the excel spreadsheet attached. Liquidity ratios show the firm’s ability to settle short term liabilities out of the liquid cash. The type of liquidity ratios calculated include; current ratio and acid test ratio. The liquidity ratios must equal to 1 or more than 1. If it is 1.00 then it implies the short-term debts are fully settled with the liquid cash. If they are less than 1.00 then it shows that the available cash cannot settle the arising short term liabilities. From the calculations Ford Motor Company has a current ratio of 0.86 in 2010 which improved to 0.96 in 2011. Though there was an improvement in the current ratio, it is still less than one which shows the company’s dilemma in dealing with its short term debts. The available cash is not enough to settle the short term liabilities (Zane, Kane & Marcus, 2004). The acid test ratio as depicted from the calculations is also worth of discussion. In both years the acid test ratio was less than 1 which might be detrimental to the Ford Motor Firm. Though an improvement was noted from 0.47 to 0.59, the ratio was still below the threshold. Activity Ratios Activity ratios depict the degree of effectiveness of a company in using the resources available in a manner that can promote the growth of the company. The activity ratios derived above are total asset turnover which dropped from 0.78 to 0.76. This is an indication that the assets of the company were not utilized in a way that could realize enough returns. On the other hand the inventory turnover increased from 17.65 times to 19.20 times. This shows that the inventory of the firm was utilized effectively in raising good returns on the sales on the firm. Number of days in sales of A/R increased from 0.0013 to 0.58. This depicts that the collection period for the receivables increased from 2010 towards 2011. This is too risky for the firm as the company can end up being indebted by its customers. Lastly in regard to the number of days in sales of inventory also increased from 0.0001 to 0.05 which shows the number of days it takes for the replenishment of the inventory increased greatly. The inventory seems to be moving slow which affects the volume of sales by the firm. In return, the sales revenues are jeopardized in the process of slow movement of inventory Profitability ratios Profitability ratios depict the firm’s ability to make use of its assets and regulate its expenses to obtain considerable returns for the company. This is normally the ultimate goal of most starting firms-to generate profits. The ratios calculated include; gross profit margin which is derived before the firm realizes the expenses from its operation. On the other hand, the net profit margin is derived after including the expenses incurred by the Ford Motors. The gross profit margin for 2010 equaled 19% which went down to 16% in 2011 indicating a reduction in profitability of the company. The net profit margin was -0.5% which increased to 11% in 2011. This is an indication that Ford Motors was able to control its expenses in 2011 compared to the way it administered in 2010. Besides, the net operating profit increased from 5 % to 14.8% where a similar explanation applies. The EPS, ROA and the ROE also recorded an increase. From these observations, it is clear that the company is able to control its expenses more easily compared to the cost of sales by the company. Debt Ratios Debt ratios depict the sources of financing for the company. The debt ratio reduced from 1.00 to 0.92. This has a meaning that the company reduced its dependence on debts to equity from the firm. The volume of debts reduced in year 2011. On the other hand the interest earned ratio also increased from1.16 in year 2010 to 1.96 in year 2011. This shows the firms’ interest payment from the previous debts is still mounting with time. The interest earned ratio is a good gadget for determining the firm’s capability to fulfill its debt obligations. If the value is less than 1, it is an indication that the company is accumulating enough liquid cash in its EBIT operations to fulfill the obligations in regard to interest payment. From the calculations, it is apparent that the company has enough funds to meet its interest obligations in year 2010. In 2011 the interest earned ratio went below 1 which shows that the company is at risk of fulfilling its interest obligations. Market Ratios Market ratios of the company reveal the company’s ability to have its shares perform well at the stock exchange market. This is the measure of the shareholders expectation from the company. In the calculations, the dividend yield and the dividend payout ratio recorded an increase from figure 0 to substantial values in 2011. This is because the firm was not able to make profits in 2010 due various reasons attributed to efficiency of the management. Therefore the shareholders were not able to receive any dividends at the end of the year. Dividends can only be announced if the company makes profits. Losses do not attract dividends at the end of the year. Besides the price per earning ratio reduced slightly in 2011 as opposed to 2010 which much higher. It is an indication of a falling value in the price of shares quoted on the stock exchange by the company. Hence Ford must review its management strategies to help in developing or improving the share value of the company’s stock (Angelico & Nikbakht, 2000). Quality of earnings From the discussions and calculations above, it is apparent that the qualities of earnings for the company are at risk with the varying value of shares in the market. The main aim in spotlighting the impact of Ford’s financial performance in the short run is to promote its financial stability in the long run. Matters connected to profitability are worth of discussion in evaluating the quality of its earnings. In the entire period of operation, the financial outcomes for the company have progressed in a disappointing way in the perception of the investors and analysts of finance who assess its financial progress. Considering the extremely high costs of production, and the long duration for establishment of the products inclusive of the inferior way of managing resources in the company, the financial performance has continued to deteriorate. Thus the sales of its products have been unable to realize tangible profits for the company under the stewardship of its CEO Alfred Trotman. The company has expectation that it will revive and experience a turnaround from its dismal performance in earnings. In respect to the most current results of finance, the company has realized a market capitalization of US $ 27.83 billion while its shares were sold off at US$ 8.64 having earnings per share of 0.19. This seems to be paying off for the company (Hawkins & Cohen, 2011). Being the second biggest US automaker and the fifth biggest in the whole globe, the company produced about 5.532 million vehicles and had in its employment over 219 000 workers in about 90 plants. The company realized a net profit of US$ 6.6 billion which decreased to US$ 3.36 billion in 2009. Meanwhile the company lowered its payments on interests by US $ 1 billion to help in cutting on the expenses. Review of articles about the company In the article Ford Motor Company Business Plan, the company is revealing plans for viability of the company and the industry desires to transform the company into a better total quality vehicle for safer and greener environment. In the document, the company has plans to restore the confidence in its commitment to raise accountability and change in the whole community. This involves its plans to fulfill its tax obligations as it has always did in the past, restructuring its management and business to meet the customers needs at the same time obtaining good returns from its operation. In the process the company aims to improve on its innovation of products in away that can result into automobiles that are able to use fuel efficiently and creating good relationship with the suppliers and labour force. Besides, the company intends to scrutinize its competitors in a bid to restore their performance. With the present economic downturn, the company is experiencing hard times in making strategies that can embrace the rate of inflation and other international risks. The company hopes to acquire employees with skills and abilities to innovate for the betterment of the firm. This will be done through accessing loans in a diversified nature to cater for the Arbitrage pricing policy. Such that risks in one area can be nullified by returns from other hemisphere. Despite credit becoming frozen at one point a strong relationship by the company with its main dealers and suppliers will be effective in turning around the company (FMC, 2012). From the second article, 2013 Ford Edge Hybrid, the company reveals some of the model automobiles it intends to add to its existing stock in an effort to promote the growth of the company. The company also brings out the swot analysis of the company to depict its strength, weaknesses, opportunities and threats potential to the company. The vision and mission statement of the company is guiding factor of the company. From the situation analysis, the reader can find the following information about the company in terms of its abilities and potential threats. The strength includes, having a broader availability geographically and its brand reputation is not good among the customers. Besides, it has a solid quality products portfolio which promotes its perpetuity. Moreover its community, investor and customer relation is profound to an extent of creating customer loyalty to some of its brand of products. The weaknesses of the firm include; recall of products, diminishing operating income and share in the market segments. Besides, the firm holds very huge debts which reduce its ability to make returns. There are several opportunities available to the firm such as business chances overseas, large capability in the rising markets, and increase in innovation for hybrid products. The potential threats include; the increasing economic downturn, intense rivalry, increasing manpower expenses and lower production in the market. This is very risky for the company in terms of customer confidence and sales returns effects (Ford, 2012). References Bodie, Zane; Alex Kane and Alan J. Marcus (2004). Essentials of Investments, 5th ed. McGraw- Hill Irwin. pp. 459 David F. Hawkins, Jacob Cohen, (2011), Ford Motor Co.: Quality of Earnings Growth Analysis (A), Harvard Business School Ford Motor Company (FMC, 2012), FORD MOTOR COMPANY BUSINESS PLAN, Senate Banking Committee Ford (2012), 2013 Ford Edge Hybrid, retrieved online on 16th July, 2012 from http://www.slideshare.net/crmowbray/ford-marketing-plan-2013 Groppelli, Angelico A. & Ehsan Nikbakht (2000). Finance, 4th ed. Barrons Educational Series, Inc. pp. 433 Wallace, Max. (2003). The American axis: Henry Ford, Charles Lindbergh, and the rise of the Third Reich. New York: St. Martin’s Press Read More