Thesis on "Ford Motor Company Built Its Success"

Thesis 6 pages (1623 words) Sources: 3 Style: APA

[EXCERPT] . . . .

Ford Motor Company built its success by revolutionizing automobile product. Henry Ford developed the assembly line, marking a new era in industrial production. He also paid his workers a then-unheard of $5 a day (Ford Motor Company, 2009). Unfortunately for Ford, that model has changed little since the Model T. days. The company's production capabilities have been eclipsed for foreign automakers, its workforce is overpaid, and the company's once innovative products have long lagged the competition in terms of quality and consumer resonance. Ford's stock price now sits at $3.72, giving the company a market cap of less than $9 billion (MSN Moneycentral, 2009). While competitors Chrysler and GM have received bailout funding from the federal government, Ford has thus far refused (NPR, 2009).

Yet, the company's position is not all bad. Ford had revenues of $146 billion last year. They operate globally, and have improved market share in Europe over the past year. Their market share in North America is 14.2%, finishing with three months of increases at the end of the year. However, sales slumped 32%, meaning that the increase in market share merely reflects abysmal competitor performance.

The objective of this paper is to analyze Ford's financial position. The company clearly remains one of the largest, most influential firms in the United States. Its market share may be lower than it has been historically, but Ford has an iconic brand, millions of customers and a strong competitive position in a difficult industry. The objective of this analysis will be to determine Ford's financial performance vs. their peers in the automotive industry. If the media reports are to be believed, their performance has been terrible for years. A look at the numbers will reveal whether or not that is true.

Financial Analysis

Ford Motor Company has performed poorly in the past five years. The company's internal measures have deteriorated significantly. Ford has also underperformed the industry on many key measures. The only bright spots for Ford are the liquidity measures, which indicate that despite a high degree of leverage, Ford remains relatively solvent. The "Industry" measures were sourced from MSN Moneycentral and Reuters, each having slightly different calculations. No source could produce reliable measures of the some industry ratios. Many of Ford's ratios were impossible to calculate. The company has lost money in many years, so had no returns (or negative returns). In addition, Ford does not report interest expense, which makes those ratios impossible to calculate. Lastly, in some years, Ford's equity was negative, so ratios relating to the amount of equity cannot be calculated.

In terms of the lone bright spot, Ford has a poor balance sheet but over the past five years has managed to outperform the industry on several liquidity/solvency measures. Ford's current and quick ratios are healthy, with the current ratio ranging from 1.75 to 1.51 over the past five years; the quick ratio from 1.68 to 1.41. Both of these dramatically outweigh the industry average. However, even this apparent strong liquidity hints at an operational problem. Ford's current and quick ratios are the result of incredibly high levels of accounts receivable. The receivables turnover is 1.47, compared with an industry average of 8.1. If Ford's inventory turn was equivalent to the industry average, if would have a current ratio for 2008 of 0.62, significantly lower than the industry average. So while Ford's liquidity ratios are admirable, this success is only the result of catastrophic failure elsewhere.

While Ford's accounts receivable turnover is abysmal, its inventory turnover is more than double the industry average. This is one of the few areas where Ford consistently outperforms the industry. The company has managed to contain inventory levels, which gives it greater financial flexibility. Their lower inventory levels may be one of the reasons why they feel they do not require a bailout while GM and Chrysler do. With respect to asset turnover, Ford's performance is notably weaker than that of the industry overall, and has been for the past five years. Ford has generally improved its turnover ratios over the past five years, in particular the inventory turnover and the fixed asset turnover.

Four and five years ago, Ford's income statement and balanced sheet resembled those of a functioning, if not healthy, company. The past three years, however, Ford's financials have deteriorated significantly. Gross margins have declined from 16.3% five years ago to just 6.4% last year. The company actually had an operating margin five years ago; it loses money on an operating basis now. While Ford returned on assets, albeit barely, and had a return on equity of 17.4% five years ago, in the past three years Ford has lost money. The calculation of the return on equity is absurd -- the company last year lost money on negative equity. The double negative actually yields what appears to be a positive return on equity. The industry still makes money, even if the profits are slim. So Ford has not only seen significant deterioration of profitability and an erosion of equity, but underperforms their industry peers on both counts.

Ford is highly leveraged. Even five years ago, the company had a high debt ratio at 0.94. Over the past five years, a substantial increase in long-term debt (from 44% to 71%) has resulted in the debt ratio increasing from 94% to 108%. This degree of leverage is far too high for the company to operate comfortably. Long-term debt to total capital is over 100% for two of the past three years. In those two years, Ford's equity had a negative value. For a company that has been around nearly 100 years to have zero equity is indicative of substantial, prolonged financial weakness and operational ineffectiveness. Ford's debt-to-equity ratio, when last it had equity, was 48.62. The industry average is 1.46. Clearly, Ford is in a weak financial position relative to its auto industry peers.

It is worth noting that Ford's collection period is very high. This reflects the company's high level of accounts receivable. With an average collection period of 244 days, these assets are in danger of being reclassified as "long-term." Ford needs to either reclassify some of these receivables or otherwise reign in the collection period, because it skews their balance sheet and represents inefficient use of income.

Overall, there is little to recommend about Ford's financial performance. They are no longer returning anything to their shareholders, they have too much debt and there are no signs that anything is getting better. They have control over their inventory, but that is the only bright spot in Ford's financial statements.

Conclusion

Ford Motor Company may not feel that it needs a bailout, but it needs something. They are in terrible financial condition. Ford has an unhealthy degree of leverage. The company's debt load constricts its ability to make other changes, and reduces its efficiency. As a consequence of three straight years of losses, decades of declining market share and high debt levels, Ford no longer has any equity. At $3.72 per share, the company's equity is actually overvalued vis-a-vis its intrinsic value. Alarming is the fact that the only measures where Ford has respectable ratios are the liquidity ratios; these only appear healthy because Ford turns over receivables at a pace 1/8th of the industry average. The company's liquidity net of receivables is significantly poorer than the industry.

Not only does Ford underperform the industry by almost every measure, but the company's performance over the past five years has deteriorated significantly. Most ratio measures five years ago were relatively normal -- to look at Ford's financials you would think the company was a going concern. Five years of declining sales, declining margins, declining returns, increasing debt and decreasing equity have the company looking in dire straits. Ford's financial performance in the past five years… READ MORE

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