Thesis on "Financial Analysis Both General Motors and Ford"

/>This is probably something that the management has taken into consideration, because the subsequent years, 2006 and 2007, show better balanced values, although a decreasing trend that led to a value of 0.86 for the current ratio in 2007, which is a bit too much under the value that is generally recommended for a safe current ratio.

Ford, on the other hand, seems to take an middle approach, with a current ratio value of 2.32 in 2007, better than the current ratio value for General Motors in 2007, which is below 1.

On the other hand, the quick acid test will show us similar conclusions, but instead of the current assets, we will decrease the value of the inventory from that. While the Ford quick ratio stays almost the same as the current ratio (2.06 compared to 2.32 a decrease of 11%), General Motor's decreased by almost 40%. This shows that while Ford produces to sell, General Motor produces to stock and that the value of the inventory in the total current asset is significant.

III. Asset turnover ratios

The inventory turnover ratio can be used to calculate the ratio between the cost of goods sold and the average inventory, but can also be expressed as the volume of sales divided by the volume of inventory. In general, a low turnover means that the company has too high levels of inventory and that it is not generating enough sales as compared to these levels of inventory. However, it usually also depends on what the industry averages are, since each industry has its own particularities and a low inventory turnover may actually be among the characteristics of the industry.

The inventory turnover ratio has not only decreased for General Motors from 2005 to 2007 by over 10.8%, but it has also been significantly lower than the reported inventory turnover ratio for Ford, which was 13.1 in 2007. The conclusions following the inventory ratio analysis are simple: the company is producing much more than it can sell, which is risky both because of the additional costs that stocking involves and because the prices for cars could decrease over the next period of time.

The receivables turnover ratio is also a specific asset turnover ratio aimed at analyzing the efficiency with which the company uses credit and collects debts. The ratio is calculated by dividing the net credit sales value to the net average accounts receivables. Usually, if the ratio is too low, then it is likely that the company is not collecting for the goods it sells in a timely manner and that this policy should be reassessed.

The ratio for General Motors has significantly increased over the past three years, with the value in 2007 being with 93.3% higher than the one in 2005. This shows that the company management has decided to reassess its collection policy and that this was tightened in view of a shorter collection period. It is surprising to see the GM receivable turnover ratio so much higher than the value for Ford in 2007. On one hand, this may show a concern for Ford. On the other, we also need to consider the fact that, as previously shown, Ford has a much lower inventory than GM and these low inventory values may be a reason for which the company is also encouraging a credit line and financial conditions to encourage purchase.

The total asset turnover ratio compares the turnover to the total assets and the higher it is, the higher the turnover generated by the total assets of a company. GM's total assets turnover ratio has gradually increased over the last year, the value in 2007 being with 175% higher than the value in 2005. This is somewhat in line with what we have previously discussed when analyzing the return on total assets and shows an ascending trend in both these ratios, equivalent to a more efficient use of the total assets of the company in generating turnover. On the other hand, if we compare these figures to Ford's, the value for GM's total asset turnover ratio is almost twice as large as Ford's, showing a more efficient use of total assets.

The fixed asset turnover shows the ratio between the total sales and the net fixed assets value. In a way, it completes the ratio previously discussed and shows how much of the money invested in fixed assets, and thus blocked, generates sales for the company and, thus, revenues. In the case of General Motors, this has followed an ascending trend over the past three years, from 2005 to 2007, which is a positive sign, proving the other ratio evaluations: the company manages to use its fixed assets efficiently and gain more and more, from year to year, in terms of the sales generated by the company's total fixed assets.

On the other hand, it is also a better ratio value than Ford's, which, in 2007, is still at the level that General Motors was at in 2005. From this perspective, as well from all cases of asset management, General Motors seems to be performing significantly better than Ford.

IV. Profitability ratios

The basic earning power ratio compares the earnings and assets of the company. The basic earning power ratio has fluctuated in General Motor's case from 0.10 in 2005 to a lower value of 0.08 in 2006, with a 20% decrease, and a successive increase to 0.15 in 2007, thus a 87.5% increase from 2006. Compared to Ford, the values of the basic earning power ratio for General Motors are significantly higher: Ford's value was only 0.01 in 2007.

The return on total assets is another profitability ratio we can use which compares the earnings before interest and taxes with the total net assets and will show the effectiveness with which a company is using its asset in order to generate earnings for the organization. The evolution of the return on total assets value at General Motors followed a descending trend from 2005 to 2006, when it reached the value of 0.03, but it grew again in 2007 to 0.64, which is a much more reasonable value, especially if we compare this to the… READ MORE